1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________ .
COMMISSION FILE NUMBER 1-13796
GRAY COMMUNICATIONS SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0285030
------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 PEACHTREE ROAD, NE, ATLANTA, GEORGIA 30319
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
(404) 504-9828
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- -------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
--------------------------------------- ----------------------------------------
6,832,042 SHARES AS OF NOVEMBER 12, 1999 8,590,044 SHARES AS OF NOVEMBER 12, 1999
2
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed consolidated balance sheets - September 30, 1999 (Unaudited), 3
and December 31, 1998
Condensed consolidated statements of operations (Unaudited) - 5
Three months ended September 30, 1999 and 1998;
Nine months ended September 30, 1999 and 1998
Condensed consolidated statement of stockholders' equity (Unaudited) - 6
Nine months ended September 30, 1999
Condensed consolidated statements of cash flows (Unaudited) - 7
Nine months ended September 30, 1999 and 1998
Notes to condensed consolidated financial statements (Unaudited) - 8
September 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 3,870,013 $ 1,886,723
Trade accounts receivable, less allowance for doubtful accounts
of $1,276,000 and $1,212,000, respectively 21,913,912 22,859,119
Recoverable income taxes 1,700,510 1,725,535
Inventories 988,416 1,191,284
Current portion of program broadcast rights 4,442,966 3,226,359
Other current assets 933,842 741,007
------------ ------------
Total current assets 33,849,659 31,630,027
PROPERTY AND EQUIPMENT:
Land 2,456,020 2,196,021
Buildings and improvements 13,708,245 12,812,112
Equipment 72,628,771 65,226,835
------------ ------------
88,793,036 80,234,968
Allowance for depreciation (36,993,099) (28,463,460)
------------ ------------
51,799,937 51,771,508
OTHER ASSETS:
Deferred loan costs 7,709,336 8,235,432
Goodwill and other intangibles:
Licenses and network affiliation agreements 341,262,298 346,433,820
Goodwill 38,046,906 28,766,950
Consulting and noncompete agreements 1,993,077 814,202
Other 4,633,445 1,322,483
------------ ------------
393,645,062 385,572,887
------------ ------------
$479,294,658 $468,974,422
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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4
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
CURRENT LIABILITIES:
Trade accounts payable (includes $0 and $880,000 payable
to Bull Run Corporation, respectively) $ 1,153,816 $ 2,540,770
Employee compensation and benefits 4,106,543 5,195,777
Accrued expenses 2,734,732 1,903,226
Accrued interest 9,199,560 5,608,134
Current portion of program broadcast obligations 4,374,690 3,070,598
Deferred revenue 3,374,110 2,632,564
Current portion of long-term debt 380,000 430,000
------------ ------------
Total current liabilities 25,323,451 21,381,069
LONG-TERM DEBT 285,423,164 270,225,255
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 558,556 735,594
Supplemental employee benefits 1,014,474 1,128,204
Deferred income taxes 42,129,641 44,147,642
Other acquisition related liabilities 4,024,853 4,653,788
------------ ------------
47,727,524 50,665,228
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized 20,000,000 shares;
issued and outstanding 1,350 shares, respectively
($13,500,000 aggregate liquidation value) 13,500,000 13,500,000
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 10,683,709 10,683,709
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 5,273,046 shares, respectively 66,891,074 66,792,385
Retained earnings 39,652,656 45,737,601
------------ ------------
130,727,439 136,713,695
Treasury Stock at cost, Class A Common, 1,129,532 shares,
respectively (8,578,682) (8,578,682)
Treasury Stock at cost, Class B Common, 121,945 and 135,080
shares, respectively (1,328,238) (1,432,143)
------------ ------------
120,820,519 126,702,870
------------ ------------
$479,294,658 $468,974,422
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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5
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
OPERATING REVENUES
Broadcasting (net of agency commissions) $21,553,777 $22,346,463 $65,859,769 $64,547,517
Publishing 9,686,360 7,378,818 27,244,021 21,295,267
Paging 2,289,759 2,119,635 6,847,345 6,044,508
----------- ----------- ----------- -----------
33,529,896 31,844,916 99,951,135 91,887,292
EXPENSES
Broadcasting 13,846,243 13,447,709 40,519,290 38,227,117
Publishing 7,260,176 6,022,912 20,970,246 17,463,852
Paging 1,567,138 1,498,855 4,805,266 4,081,955
Corporate and administrative 869,655 810,902 2,556,805 2,127,831
Depreciation and amortization 5,697,081 5,044,603 16,816,445 12,887,910
----------- ----------- ----------- -----------
29,240,293 26,824,981 85,668,052 74,788,665
----------- ----------- ----------- -----------
4,289,603 5,019,935 14,283,083 17,098,627
Gain on exchange of television station -0- 72,646,041 -0- 72,646,041
Valuation adjustments of goodwill and other assets -0- (2,073,913) -0- (2,073,913)
Miscellaneous income (expense), net 103,914 (35,300) 560,275 (349,576)
----------- ----------- ----------- -----------
4,393,517 75,556,763 14,843,358 87,321,179
Interest expense 7,115,829 6,624,799 20,890,500 18,591,538
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,722,312) 68,931,964 (6,047,142) 68,729,641
Income tax expense (benefit) (754,585) 27,102,280 (1,438,585) 27,545,657
----------- ----------- ----------- -----------
NET INCOME (LOSS) (1,967,727) 41,829,684 (4,608,557) 41,183,984
Preferred Dividends 252,498 345,682 757,500 1,063,678
----------- ----------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $(2,220,225) $41,484,002 $(5,366,057) $40,120,306
=========== =========== =========== ===========
AVERAGE OUTSTANDING COMMON SHARES:
Basic 11,978,583 11,931,029 11,966,642 11,909,660
Stock compensation awards -0- 595,362 -0- 521,346
----------- ----------- ----------- -----------
Diluted 11,978,583 12,526,391 11,966,642 12,431,006
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON
SHARE:
Net income (loss) available to common
stockholders $ (0.19) $ 3.48 $ (0.45) $ 3.37
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) available to common
stockholders $ (0.19) $ 3.31 $ (0.45) $ 3.23
=========== =========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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, 1998 1,350 $ 13,500,000 7,961,574 $10,683,709 5,273,046 $66,792,385 $45,737,601
Net loss for the
nine months ended
September 30, 1999 (4,608,557)
Common stock dividends ($.06
per share) (718,888)
Preferred stock dividends (757,500)
Issuance of treasury stock:
401(k) plan 98,689
Purchase of Class B
Common Stock
---------- ------------ ---------- ----------- --------- ----------- -----------
Balance at September 30, 1999 1,350 $ 13,500,000 7,961,574 $10,683,709 5,273,046 $66,891,074 $39,652,656
========== ============ ========== =========== ========= =========== ===========
Class A Class B
Treasury Stock Treasury Stock
------------------------- -----------------------
Shares Amount Shares Amount Total
--------- ----------- -------- ----------- ------------
Balance at December 31, 1998 (1,129,532) $(8,578,682) (135,080) $(1,432,143) $126,702,870
Net loss for the
nine months ended
September 30, 1999 (4,608,557)
Common stock dividends ($.06
per share) (718,888)
Preferred stock dividends (757,500)
Issuance of treasury stock:
401 (k) plan 33,135 360,909 459,598
Purchase of Class B
Common Stock (20,000) (257,004) (257,004)
---------- ----------- -------- ----------- ------------
Balance at September 30, 1999 (1,129,532) $(8,578,682) (121,945) $(1,328,238) $120,820,519
========== =========== ======== =========== ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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7
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
----------- --------------
OPERATING ACTIVITIES
Net loss (4,608,557) $ 41,183,984
Items which did not use (provide) cash:
Depreciation 8,768,827 6,873,709
Amortization of intangible assets 8,047,618 6,014,201
Amortization of deferred loan costs 871,471 821,528
Amortization of program broadcast rights 3,643,787 3,011,826
Payments for program broadcast rights (3,622,283) (2,963,487)
Supplemental employee benefits (113,730) (220,994)
Common Stock contributed to 401(k) Plan 459,598 359,532
Deferred income taxes (2,018,001) 26,521,675
(Gain) on disposal of television station -0- (72,646,041)
Valuation adjustments of goodwill and other assets -0- 2,073,913
(Gain) loss on disposal of assets (363,430) 406,957
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 1,451,921 1,023,569
Accounts payable and other current liabilities 2,194,421 7,216,473
------------ --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,711,642 19,676,845
INVESTING ACTIVITIES
Acquisition of television businesses -0- (120,597,438)
Exchange of television station -0- 76,508,009
Purchase of newspaper business (16,512,231) -0-
Purchase of FCC license -0- (837,160)
Purchases of property and equipment (6,418,041) (7,316,945)
Deferred acquisition costs (2,752,310) -0-
Payments on purchase liabilities (786,840) (337,779)
Proceeds from asset sales 1,646,503 182,721
Other (707,073) (664,345)
------------ --------------
NET CASH USED IN INVESTING ACTIVITIES (25,529,992) (53,062,937)
FINANCING ACTIVITIES
Dividends paid (1,743,889) (1,076,164)
Common Stock transactions -0- 384,111
Purchase of treasury stock - preferred -0- (2,609,384)
Purchase of treasury stock - common (257,004) (311,063)
Sale of treasury stock -0- 1,299,255
Proceeds from borrowings of long-term debt 36,200,000 71,570,000
Payments on long-term debt (21,052,092) (35,502,750)
Deferred loan costs (345,375) (800,436)
------------ --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,801,640 32,953,569
------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,983,290 (432,523)
Cash and cash equivalents at beginning of period 1,886,723 2,367,300
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,870,013 $ 1,934,777
============ ==============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Gray Communications Systems, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Certain amounts reported for the prior year have been reclassified to
conform to the 1999 format.
NOTE B--BUSINESS ACQUISITIONS
On October 1, 1999, the Company completed its acquisition of all the
outstanding capital stock of KWTX Broadcasting Company ("KWTX") and Brazos
Broadcasting Company ("Brazos"), as well as the assets of KXII Broadcasters
Ltd. ("KXII"). The Company acquired the capital stock of KWTX and Brazos in
merger transactions with the shareholders of KWTX and Brazos receiving a
combination of cash and the Company's class B common stock for their shares.
The Company acquired the assets of KXII in an all cash transaction. These
transactions are referred to herein as the "Texas Acquisitions."
KWTX operates CBS affiliate KWTX-TV located in Waco, Texas and Brazos
operates KBTX-TV, a satellite station of KWTX-TV located in Bryan, Texas, each
serving the Waco-Temple-Bryan, Texas television market. KXII operates KXII-TV,
which is the CBS affiliate serving Sherman, Texas and Ada, Oklahoma.
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. The Company funded
the acquisitions by issuing 3,435,774 shares of the Company's class B common
stock to the sellers, borrowing an additional $94.4 million under its amended
bank loan agreement and using cash on hand of approximately $2.5 million. The
Company paid Bull Run Corporation ("Bull Run"), a principal shareholder of the
Company, a fee of $1.39 million for advisory services performed for the Company
in connection with the Texas Acquisitions (excluding a $300,000 fee in
connection with the Company's amended bank loan agreement detailed in Note C).
This fee was paid in full as of the acquisition date and included in the fee
portion of the aggregate consideration for the Texas Acquisitions described
above.
NOTE C--LONG-TERM DEBT
As of September 30, 1999, the Company's bank loan agreement provided
$200.0 million of committed credit and $100.0 million of uncommitted credit.
The Company could borrow the $100.0 million in uncommitted available credit
only after approval of the bank consortium. At September 30, 1999, the balance
outstanding and the balance available under the $200.0 million committed
portion of the bank loan agreement were $125.0 million and $75.0 million,
respectively, and the interest rate on the balance outstanding was 7.45%.
On October 1, 1999 and in connection with the Texas Acquisitions, the
Company amended its bank loan agreement. The primary modifications to the loan
agreement effected by the amendment were an increase in committed available
credit and an increase in interest rates. Under the amended loan agreement,
committed available credit increased from $200.0 million to $300.0 million.
Prior to the amendment, the loan agreement consisted of a $100.0 million
revolving commitment (the "Revolving Commitment") and a $100.0 million term
loan commitment ("Term Loan A Commitment"). The increase in committed available
credit was effected by the addition of a second $100.0 million term loan
commitment ("Term Loan B Commitment").
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE C--LONG-TERM DEBT (CONTINUED)
Under the amended loan agreement, the Company, at its option, can
borrow funds at an interest rate equal to the London Interbank Offered Rate
("LIBOR") plus a premium or at an interest rate equal to the lender's prime
rate ("Prime") plus a premium. As a result of the amended loan agreement, the
interest rates payable by the Company for funds borrowed under the Revolving
Commitment and Term Loan A Commitment increased as follows: the premium over
Prime increased from a range of 0.0% to 0.5% to a range of 0.0% to 1.75% and
the premium over LIBOR increased from a range of 0.75% to 2.25% to a range of
1.25% to 3.0%. Under the new Term Loan B Commitment, funds can be borrowed at
Prime plus 1.75% to 2.0% and/or LIBOR plus 3.0% to 3.25%. The premium above
Prime and/or LIBOR payable by the Company will be determined by the Company's
operating leverage ratio that is calculated quarterly.
Immediately after completing the Texas Acquisitions, the Company had
$231.0 million outstanding under the amended bank loan agreement with $69.0
million of credit commitments remaining available. As of October 1, 1999, the
Company is incurring interest at a rate of Prime plus 1.5% and/or LIBOR plus
2.75% for funds borrowed under the Revolving Commitment and the Term Loan A
Commitment. For funds borrowed under the Term Loan B Commitment, the Company is
incurring interest at Prime plus 2.0% and/or LIBOR plus 3.25%.
The maturity schedule for the Revolving Commitment and the Term Loan A
Commitment did not change as a result of the amendment to the loan agreement.
The principal amount outstanding under the newly established Term Loan B
Commitment will become fixed, and no further borrowings can be made thereunder,
on March 30, 2001 and must be paid as follows: 1.0% in 2001, 1.0% in 2002, 1.0%
in 2003, 1.0% in 2004 and 96.0% in 2005.
In connection with the amendment to the loan agreement, the Company
incurred approximately $2.6 million in additional financing costs, of which
$2.3 million had been paid as of the date of the amendment. Included in these
financing costs is a $300,000 fee that the Company will pay to Bull Run for
services performed in connection with arranging the $100.0 million Term Loan B
Commitment. The $300,000 fee that the Company will pay to Bull Run is in
addition to the $1.39 million acquisition fee paid to Bull Run that is detailed
in Note B. These financing costs have been and will be funded through
borrowings under the amended bank loan agreement.
The Company entered into an interest rate swap agreement with a bank
to effectively convert $40.0 million of its floating rate debt under the bank
loan agreement to a fixed rate basis at a notional rate of 6.155%. The interest
rate swap agreement was effective on October 6, 1999 and will terminate on
October 6, 2001. However, the bank providing the interest rate swap agreement
may at its option extend the termination date to October 1, 2002.
NOTE D--INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting,
publishing and paging. The broadcasting segment operates 10 television stations
located in the southeastern and mid-western United States at September 30, 1999
(excluding the three television stations acquired in the Texas Acquisitions on
October 1, 1999). The publishing segment operates four daily newspapers in
three different markets, and an area weekly advertising only publication in
Georgia. The paging operations are located in Florida, Georgia and Alabama. The
following tables present certain financial information concerning the Company's
three operating segments:
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE D--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
1999 1998 1999 1998
---------- -------- ---------- --------
(IN THOUSANDS)
Operating revenues:
Broadcasting $ 21,554 $ 22,346 $ 65,860 $ 64,548
Publishing 9,686 7,379 27,244 21,295
Paging 2,290 2,120 6,847 6,044
-------- -------- -------- --------
$ 33,530 $ 31,845 $ 99,951 $ 91,887
======== ======== ======== ========
Operating income:
Broadcasting $ 2,551 $ 4,259 $ 9,939 $ 14,439
Publishing 1,555 656 3,878 2,142
Paging 184 105 467 518
-------- -------- -------- --------
Total operating income 4,290 5,020 14,284 17,099
Gain on exchange of television station -0- 72,646 -0- 72,646
Valuation adjustments of goodwill and other assets -0- (2,074) -0- (2,074)
Miscellaneous income and (expense), net 104 (35) 560 (349)
Interest expense 7,116 6,625 20,891 18,592
-------- -------- -------- --------
Income (loss) before income taxes $ (2,722) $ 68,932 $ (6,047) $ 68,730
======== ======== ======== ========
Operating income is total operating revenues less operating expenses,
excluding gain on exchange of television station, valuation adjustments of
goodwill and other assets, miscellaneous income and expense (net) and interest.
Corporate and administrative expenses are allocated to operating income based
on net segment revenues.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
1999 1998 1999 1998
---------- -------- ---------- --------
(IN THOUSANDS)
Media Cash Flow:
Broadcasting $ 7,835 $ 9,088 $ 25,716 $ 26,634
Publishing 2,443 1,375 6,344 3,888
Paging 728 629 2,064 1,986
-------- -------- -------- --------
$ 11,006 $ 11,092 $ 34,124 $ 32,508
======== ======== ======== ========
Media Cash Flow reconciliation:
Operating income $ 4,290 $ 5,020 $ 14,284 $ 17,099
Add:
Amortization of program broadcast
rights 1,243 1,113 3,644 3,012
Depreciation and amortization 5,697 5,045 16,816 12,888
Corporate overhead 870 811 2,557 2,128
Non-cash compensation and
contributions to the Company's
401(k) plan, paid in common stock 98 112 445 344
Less:
Payments for program broadcast
obligations (1,192) (1,009) (3,622) (2,963)
-------- -------- -------- --------
Media Cash Flow $ 11,006 $ 11,092 $ 34,124 $ 32,508
======== ======== ======== ========
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GRAY COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE D--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
"Media Cash Flow" is defined as operating income, plus depreciation
and amortization (including amortization of program broadcast rights), non-cash
compensation and corporate overhead, less payments for program broadcast
obligations. The Company has included Media Cash Flow data because such data is
commonly used as a measure of performance for media companies and are also used
by investors to measure a company's ability to service debt. Media Cash Flow is
not, and should not be used as, an indicator or alternative to operating
income, net income or cash flow as reflected in the Company's 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
The following analysis of the financial condition and results of
operations of Gray Communications Systems, Inc. (the "Company") should be read
in conjunction with the Company's unaudited Condensed Consolidated Financial
Statements and notes thereto included elsewhere herein.
On March 1, 1999, the Company acquired substantially all of the assets
of The Goshen News (the "Goshen Acquisition") for aggregate cash consideration
of approximately $16.7 million. The Goshen News is a 17,000 circulation
afternoon newspaper serving Goshen, Indiana and surrounding areas. The Company
financed the acquisition through its bank loan agreement.
On July 31, 1998, the Company completed the purchase of all of the
outstanding capital stock of Busse Broadcasting Corporation ("Busse"). The
purchase price was $126.6 million, less the accreted value of Busse's 11 5/8%
Senior Secured Notes due 2000. The purchase price of the capital stock
consisted of the contractual purchase price of $112.0 million, associated
transaction costs of $3.9 million, acquisition costs associated with Busse's
11 5/8% Senior Secured Notes due 2000 of $5.1 million, and Busse's cash and cash
equivalents of $5.6 million. Immediately prior to the Company's acquisition of
Busse, Cosmos Broadcasting Corporation acquired the assets of WEAU-TV ("WEAU")
from Busse and exchanged them for the assets of WALB-TV, Inc. ("WALB"), the
Company's NBC affiliate in Albany, Georgia. In exchange for the assets of WALB,
the Company received the assets of WEAU, which were valued at $66.0 million,
and approximately $12.0 million in cash for a total value of $78.0 million. The
Company recognized a pre-tax gain of approximately $72.6 million and estimated
deferred income taxes of approximately $28.3 million in connection with the
exchange of WALB. As a result of these transactions, the Company added the
following television stations to its existing broadcasting group:
KOLN-TV("KOLN"), the CBS affiliate serving the Lincoln-Hastings-Kearney,
Nebraska market; its satellite station KGIN-TV ("KGIN"), the CBS affiliate
serving Grand Island, Nebraska; and WEAU, an NBC affiliate serving the La
Crosse-Eau Claire, Wisconsin market. These transactions also satisfied the
Federal Communications Commission's (the "FCC") requirement for the Company to
divest itself of WALB.
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.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of broadcasting, publishing
and paging revenues earned by the Company's broadcasting, publishing and paging
operations for the periods indicated and the percentage contribution of each to
the Company's total revenues:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1999 1998
-------------------------- -------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
BROADCASTING
NET REVENUES:
Local $ 12,384 36.9% $ 11,285 35.5%
National 6,210 18.5 5,911 18.6
Network compensation 1,444 4.3 1,208 3.8
Political 35 0.1 2,243 7.0
Production and other 1,481 4.5 1,699 5.3
-------- -------- -------- --------
$ 21,554 64.3% $ 22,346 70.2%
======== ======== ======== ========
PUBLISHING
NET REVENUES:
Retail $ 4,259 12.7% $ 3,448 10.8%
Classified 3,347 10.0 2,410 7.6
Circulation 1,760 5.2 1,343 4.2
Other 320 1.0 178 0.6
-------- -------- -------- --------
$ 9,686 28.9% $ 7,379 23.2%
======== ======== ======== ========
PAGING
NET REVENUES:
Paging lease, sales and
service
$ 2,290 6.8% $ 2,120 6.6%
======== ======== ======== ========
TOTAL $ 33,530 100.0% $ 31,845 100.0%
======== ======== ======== ========
13
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Broadcasting, Publishing and Paging Revenues (Continued)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
1999 1998
--------------------------- --------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
BROADCASTING
NET REVENUES:
Local $ 38,286 38.3% $ 33,350 36.3%
National 18,630 18.6 18,011 19.6
Network compensation 4,282 4.3 3,781 4.1
Political 224 0.2 4,429 4.8
Production and other 4,438 4.4 4,977 5.4
-------- -------- -------- --------
$ 65,860 65.8% $ 64,548 70.2%
======== ======== ======== ========
PUBLISHING
NET REVENUES:
Retail $ 12,243 12.2% $ 9,872 10.8%
Classified 9,090 9.1 6,908 7.5
Circulation 4,998 5.1 3,962 4.3
Other 913 0.9 553 0.6
-------- -------- -------- --------
$ 27,244 27.3% $ 21,295 23.2%
======== ======== ======== ========
PAGING
NET REVENUES:
Paging lease, sales and
service $ 6,847 6.9% $ 6,044 6.6%
======== ======== ======== ========
TOTAL $ 99,951 100.0% $ 91,887 100.0%
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Total revenues for the three months ended September 30, 1999
increased $1.7 million, or 5.3%, over the same period of the prior year, to
$33.5 million from $31.8 million. This increase was primarily attributable to
the (i) revenues resulting from the acquisition of KOLN, KGIN and WEAU (the
"Busse Stations") that were purchased on July 31, 1998, (ii) revenues resulting
from the acquisition of The Goshen News on March 1, 1999, (iii) increased
revenues from existing publishing operations and (iv) increased paging
revenues. These increases were partially offset by a decrease in revenues due
to the disposition on July 31, 1998 of WALB and reduced political advertising
revenue in 1999.
Broadcasting revenues decreased $792,000, or 3.5%, over the same
period of the prior year, to $21.6 million from $22.3 million. The acquisition
of the Busse Stations accounted for an increase of $937,000. This increase was
offset by a decrease of $1.1 million in revenues resulting from the sale of
WALB and by a decrease in political advertising revenue in 1999. On a pro forma
basis, assuming the acquisition of the Busse Stations had been effective on
January 1, 1998, broadcasting revenues for the Busse Stations for the three
months ended September 30, 1999 decreased $387,000, or 8.1%, to $4.4 million
from $4.8 million, when compared to the same period of the prior year. The
decrease in revenue on a pro forma basis for the Busse Stations was due
primarily to a decrease in political advertising revenue of $357,000 in 1999.
Broadcasting revenues, excluding the results of the Busse Stations and WALB,
decreased $615,000, or 3.5%, over the same period of the prior year, to $17.2
million from $17.8 million. This decrease was due primarily to decreased
political advertising revenue of $1.5 million in 1999.
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998 (CONTINUED)
Publishing revenues increased $2.3 million, or 31.3%, over the same
period of the prior year, to $9.7 million from $7.4 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 $810,000, or 11.0%, over the same period of the
prior year, to $8.2 million from $7.4 million. The primary components of the
$810,000 increase in revenues from existing operations were increases in retail
advertising and classified advertising revenues of $172,000 and $508,000,
respectively. The Goshen News provided revenues of $1.5 million for the three
months ended September 30, 1999. On a pro forma basis, assuming that the Goshen
Acquisition had been completed on January 1, 1998, revenue for The Goshen News
increased $300,000, or 25.5%, to $1.5 million from $1.2 million, as compared to
the same period of the prior year.
Paging revenues increased $170,000, or 8.0%, over the same period of
the prior year, to $2.3 million from $2.1 million. The Company had
approximately 88,000 pagers and 86,000 pagers in service at September 30, 1999
and 1998, respectively.
Operating expenses. Operating expenses for the three months ended
September 30, 1999 increased $2.4 million, or 9.0%, over the same period of the
prior year, to $29.2 million from $26.8 million, due primarily to increased
broadcasting expenses, publishing expenses and depreciation and amortization
expense.
Broadcasting expenses increased $399,000, or 3.0%, over the three
months ended September 30, 1999, to $13.8 million from $13.4 million. The
acquisition of the Busse Stations accounted for an increase of $809,000. This
increase was partially offset by a decrease in expenses of $530,000 resulting
from the sale of WALB. On a pro forma basis, assuming the acquisition of the
Busse Stations had been effective on January 1, 1998, broadcasting expenses for
the Busse Stations for the three months ended September 30, 1999 decreased
$53,000, or 2.2%, to $2.3 million from $2.4 million. Broadcasting expenses,
excluding the results of the Busse Stations and WALB, increased $120,000, or
1.1 %, over the same period of the prior year, to $11.5 million from $11.4
million.
Publishing expenses for the three months ended September 30, 1999
increased $1.2 million, or 20.5%, from the same period of the prior year, to
$7.3 million from $6.0 million. The increase in publishing expenses was due
primarily to increased expenses from the Company's existing publishing
operations and from the expenses of The Goshen News. Expenses from the
Company's existing publishing operations increased $197,000, or 3.3%, over the
same period of the prior year, to $6.2 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 at
one of the Company's daily newspapers. The Goshen News recorded expenses of
$1.0 million for the three months ended September 30, 1999. On a pro forma
basis, assuming that the Goshen Acquisition had been completed on January 1,
1998, expenses for The Goshen News increased $120,000, or 12.6%, to $1.0
million from $924,000, 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 increased $68,000, or 4.6%, over the same period of
the prior year, to $1.6 million from $1.5 million. The increase was
attributable primarily to an increase in costs associated with expansion of the
Company's coverage area.
Corporate and administrative expenses increased $59,000, or 7.3%, to
$870,000 for the three months ended September 30, 1999 from $811,000 for the
three months ended September 30, 1998. The increase was due primarily to
increased payroll expense and other operating expenses.
Depreciation of property and equipment and amortization of intangible
assets was $5.7 million for the three months ended September 30, 1999, as
compared to $5.0 million for the same period of the prior year, an increase of
$652,000, or 12.9%. This increase was primarily the result of higher
depreciation and amortization costs related to the acquisition of the Busse
Stations and The Goshen News.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998 (CONTINUED)
Gain on exchange of television station. In 1998, the Company
recognized a pre-tax gain of approximately $72.6 million and estimated deferred
income taxes of approximately $28.3 million for the disposition of WALB.
Valuation adjustments of goodwill and other assets. The Company
recognized an expense of $2.1 million for a decrease in the value of certain
assets. The primary components of the expense was a decrease in value of
goodwill related to the Southwest Georgia Shopper, Inc. of $1.3 million and a
decrease in value of certain real estate holdings of $433,000. A portion of the
Southwest Georgia Shopper, Inc.'s operations was sold in the first quarter of
1999 for a gain of approximately $450,000 and its remaining operations were
consolidated into the operations of The Albany Herald. The Company continues to
own the real estate holdings associated with the above mentioned valuation
adjustment. The Company does not anticipate any further decreases in value for
either of these assets.
Miscellaneous income (expense). Miscellaneous income for the three
months ended September 30, 1999 was $104,000 and miscellaneous expense for the
three months ended September 30, 1998 was $35,000. The change in miscellaneous
income (expense) of $139,000 was due primarily to lower losses on disposal of
property in the current year as compared to that of the prior year.
Interest expense. Interest expense increased $491,000, or 7.4%, to
$7.1 million for the three months ended September 30, 1999 from $6.6 million
for the three months ended September 30, 1998. This increase was attributable
primarily to increased levels of debt resulting from the financing of the
acquisition of The Goshen News.
Income tax expense (benefit). Income tax benefit for the three months
ended September 30, 1999 was $755,000 and income tax expense for the three
months ended September 30, 1998 was $27.1 million. The decrease in income tax
expense of $27.9 million was due primarily to the recognition of a net loss
before tax in the current year as compared to the effect of a $72.6 million
gain on exchange of a television station in connection with the disposition of
WALB in 1998.
Net income (loss) available to common stockholders. Net loss available
to common stockholders of the Company was $2.2 million for the three months
ended September 30, 1999 as compared to net income available to common
stockholders of the Company of $41.5 million for the three months ended
September 30, 1998, a decrease of $43.7 million. The primary reason for the
decrease was the net gain of $44.3 million recorded for the disposition of WALB
in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues. Total revenues for the nine months ended September 30, 1999
increased $8.1 million, or 8.8%, over the same period of the prior year, to
$100.0 million from $91.9 million. This increase was primarily attributable to
the (i) revenues resulting from the acquisition of the Busse Stations that were
purchased on July 31, 1998, (ii) revenues resulting from the acquisition of The
Goshen News on March 1, 1999, (iii) increased revenues from existing publishing
operations and (iv) increased paging revenues. The increases were partially
offset by a decrease in revenues due to the disposition on July 31, 1998 of
WALB and decreased political advertising revenue in 1999.
Broadcasting revenues increased $1.3 million, or 2.0%, over the same
period of the prior year, to $65.9 million from $64.5 million. The revenue from
the Busse Stations increased broadcasting revenues by $10.5 million. This
increase was partially offset by a decrease of $6.8 million in revenues
resulting from the sale of WALB and by a decrease in political advertising
revenue in 1999. On a pro forma basis, assuming the acquisition of the Busse
Stations had been effective on January 1, 1998, broadcasting revenues for the
Busse Stations for the nine months ended September 30, 1999 decreased $1.0
million, or 6.8%, when compared to the same period of the prior year to $14.0
million from $15.0 million. The decrease in revenue on a pro forma basis for
the Busse Stations was due primarily to a decrease in political advertising
revenue of $858,000 in 1999. Broadcasting revenues, excluding the results of
the Busse Stations and WALB, decreased $2.4 million, or 4.5%, over the same
period of the prior year, to $51.9 million from $54.3 million. This decrease
was due primarily to decreased political advertising revenue of
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998 (CONTINUED)
$3.2 million.
Publishing revenues increased $5.9 million, or 27.9%, over the same
period of the prior year, to $27.2 million from $21.3 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 $2.5 million, or 11.6%, over the same period of
the prior year, to $23.8 million from $21.3 million. The primary components of
the $2.5 million increase in revenues from existing operations were increases
in retail advertising, classified advertising and circulation revenue of
$870,000, $1.2 million and $261,000, respectively. The Goshen News provided
revenues of $3.5 million from the date of its purchase through September 30,
1999. On a pro forma basis, assuming that the Goshen Acquisition had been
completed on January 1, 1998, revenue for The Goshen News increased $650,000,
or 18.7%, to $4.2 million from $3.5 million, as compared to the same period of
the prior year.
Paging revenues increased $802,000, or 13.3%, over the same period of
the prior year, to $6.8 million from $6.0 million. The increase was
attributable primarily to an increase in the number of pagers in service. The
Company had approximately 88,000 pagers and 86,000 pagers in service at
September 30, 1999 and 1998, respectively.
Operating expenses. Operating expenses for the nine months ended
September 30, 1999 increased $10.9 million, or 14.5%, over the same period of
the prior year, to $85.7 million from $74.8 million, due primarily to increased
broadcasting expenses, publishing expenses, paging expenses, corporate and
administrative expenses and depreciation and amortization expense.
Broadcasting expenses increased $2.3 million or 6.0%, over the nine
months ended September 30, 1999, to $40.5 million from $38.2 million. The
expenses from the Busse Stations accounted for an increase in broadcasting
expenses of $5.5 million. This increase was partially offset by a decrease in
expenses of $2.9 million resulting from the sale of WALB. On a pro forma basis,
assuming the acquisition of the Busse Stations had been effective on January 1,
1998, broadcasting expenses for the Busse Stations for the nine months ended
September 30, 1999 increased $200,000, or 3.0%, to $7.0 million from $6.8
million. Broadcasting expenses, excluding the results of the Busse Stations and
WALB, decreased $305,000, or 0.9%, to $33.5 million from $33.8 million. This
decrease was due primarily to decreases in payroll and other expenses of
$226,000 and $410,000, respectively, partially offset by an increase in
syndicated film costs of $331,000.
Publishing expenses for the nine months ended September 30, 1999
increased $3.5 million, or 20.1%, from the same period of the prior year, to
$21.0 million from $17.5 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 $1.1 million, or 6.3%, over
the same period of the prior year, to $18.6 million from $17.5 million. The
increase in expenses at the Company's existing publishing operations was due
primarily to payroll and transportation costs associated with increased
circulation at one of the Company's daily newspapers. The Goshen News recorded
expenses of $2.4 million for the nine months ended September 30, 1999. On a pro
forma basis, assuming that the Goshen Acquisition had been completed on January
1, 1998, expenses for The Goshen News increased $300,000, or 11.2%, to $3.0
million from $2.7 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 increased $723,000 or 17.7%, over the same period of
the prior year, to $4.8 million from $4.1 million. The increase was
attributable primarily to an increase in cost associated with expansion of the
Company's coverage area.
Corporate and administrative expenses increased $429,000, or 20.2%, to
$2.6 million for the nine months ended September 30, 1999 from $2.1 million for
the nine months ended September 30, 1998. The increase was due primarily to
increased payroll expense and other operating expenses.
17
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998 (CONTINUED)
Depreciation of property and equipment and amortization of intangible
assets was $16.8 million for the nine months ended September 30, 1999, as
compared to $12.9 million for the same period of the prior year, an increase of
$3.9 million, or 30.5%. This increase was primarily the result of higher
depreciation and amortization costs related to the acquisition of the Busse
Stations and The Goshen News.
Gain on exchange of television station. In 1998, the Company recognized
a pre-tax gain of approximately $72.6 million and estimated deferred income
taxes of approximately $28.3 million for the disposition of WALB.
Valuation adjustments of goodwill and other assets. The Company
recognized an expense of $2.1 million for a decrease in the value of certain
assets. The primary components of the expense was a decrease in value of
goodwill related to the Southwest Georgia Shopper, Inc. of $1.3 million and a
decrease in value of certain real estate holdings of $433,000. A portion of the
Southwest Georgia Shopper, Inc.'s operations were sold in the first quarter of
1999 for a gain of approximately $450,000 and its remaining operations were
consolidated into the operations of The Albany Herald. The Company continues to
own the real estate holdings associated with the above mentioned valuation
adjustment. The Company does not anticipate any further decreases in value for
either of these assets.
Miscellaneous income (expense). Miscellaneous income for the nine
months ended September 30, 1999 was $560,000 and miscellaneous expense for the
nine months ended September 30, 1998 was $350,000. The change in miscellaneous
income (expense) of $910,000 was due primarily to the gain of $450,000
recognized upon the sale of a portion of the Southwest Georgia Shopper, Inc. in
February 1999.
Interest expense. Interest expense increased $2.3 million, or 12.4%,
to $20.9 million for the nine months ended September 30, 1999 from $18.6
million for the nine months ended September 30, 1998. This increase was
attributable primarily to increased levels of debt resulting from the financing
of the acquisitions of the Busse Stations and The Goshen News.
Income tax expense (benefit). Income tax benefit for the nine months
ended September 30, 1999 was $1.4 million and income tax expense for the nine
months ended September 30, 1998 was $27.5 million. The decrease in income tax
expense of $28.9 million was due primarily to the recognition of a net loss
before tax in the current year as compared to the effect of a $72.6 million
gain on exchange of a television station in connection with the disposition of
WALB in 1998.
Net loss available to common stockholders. Net loss available to
common stockholders of the Company was $5.4 million for the nine months ended
September 30, 1999 as compared to net income available to common stockholders
of the Company of $40.1 million for the nine months ended September 30, 1998, a
decrease of $45.5 million. The primary reason for the decrease was due to the
net gain of 44.3 million recorded for the disposition of WALB in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $8.5 million and $10.2 million at
September 30, 1999 and December 31, 1998, respectively. The Company's cash
provided from operations was $14.7 million and $19.7 million for the nine
months ended September 30, 1999 and 1998, respectively.
The Company's cash used in investing activities was $25.5 million and
$53.1 million for the nine months ended September 30, 1999 and 1998,
respectively. The decreased usage of $27.6 million from 1998 to 1999 was
primarily due to the acquisition of The Goshen News in 1999 as compared to the
acquisition of the Busse Stations offset by the disposition of WALB in 1998.
The Company's cash provided by financing activities was $12.8 million
and $33.0 million for the nine months ended September 30, 1999 and 1998,
respectively. The decrease in cash provided by financing activities resulted
primarily from decreased borrowings on long-term debt to fund the acquisition
of The Goshen News in 1999 as
18
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
compared to the funding of acquisitions in 1998.
During the nine months ended September 30, 1999, the Company issued
33,135 shares of its class B common stock from treasury to fulfill obligations
under its employee benefit plan. The Company also purchased 20,000 shares of
its class B common stock for $257,004 during the nine months ended September
30, 1999.
The Company regularly enters into program contracts for the right to
broadcast television programs produced by others and program commitments for
the right to broadcast programs in the future. Such programming commitments are
generally made to replace expiring or canceled program rights. Payments under
such contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of both. During the nine months
ended September 30, 1999, the Company paid $3.6 million for such program
broadcast rights.
The Company and its subsidiaries file a consolidated federal income
tax return and such state or local tax returns as are required. As of September
30, 1999, the Company anticipates that it will generate taxable operating
losses for the foreseeable future.
As of September 30, 1999, the Company's bank loan agreement provided
$200.0 million of committed credit and $100.0 million of uncommitted credit.
The Company could borrow the $100.0 million in uncommitted available credit
only after approval of the bank consortium. At September 30, 1999, the balance
outstanding and the balance available under the $200.0 million committed
portion of the Senior Credit Facility were $125.0 million and $75.0 million,
respectively, and the interest rate on the balance outstanding was 7.45%.
On October 1, 1999, the Company completed its acquisition of all of the
outstanding capital stock of KWTX Broadcasting Company ("KWTX") and Brazos
Broadcasting Company ("Brazos"), as well as the assets of KXII Broadcasters Ltd.
("KXII"). The Company acquired the capital stock of KWTX and Brazos in merger
transactions with the shareholders of KWTX and Brazos receiving a combination of
cash and the Company's class B common stock for their shares. The Company
acquired the assets of KXII 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. The Company funded
the acquisitions by issuing 3,435,774 shares of the Company's class B common
stock to the sellers, borrowing an additional $94.4 million under its amended
bank loan agreement and using cash on hand of approximately $2.5 million.
On October 1, 1999 and in connection with the Texas Acquisitions, the
Company entered into an amended loan agreement with a group of lenders whose
primary agents were Bank of America, N.A., Banc of America Securities LLC, Key
Corporate Capital Inc. and First Union National Bank. The primary modifications
to the loan agreement effected by the amendment were an increase in committed
available credit and an increase in interest rates. Under the amended loan
agreement, committed available credit increased from $200.0 million to $300.0
million. Prior to the amendment, the loan agreement consisted of a $100.0
million revolving commitment (the "Revolving Commitment") and a $100.0 million
term loan commitment ("Term Loan A Commitment"). The increase in committed
available credit was effected by the addition of a second $100.0 million term
loan commitment ("Term Loan B Commitment").
Under the amended loan agreement, the Company, at its option, can
borrow funds at an interest rate equal to the London Interbank Offered Rate
("LIBOR") plus a premium or at an interest rate equal to the lender's prime
rate ("Prime") plus a premium. As a result of the amended loan agreement, the
interest rates payable by the Company for funds borrowed under the Revolving
Commitment and Term Loan A Commitment increased as follows: premium over Prime
increased from a range of 0.0% to 0.5% to a range of 0.0% to 1.75% and the
premium over
19
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
LIBOR increased from a range of 0.75% to 2.25% to a range of 1.25% to 3.0%.
Under the new Term Loan B Commitment, funds can be borrowed at Prime plus 1.75%
to 2.0% and/or LIBOR plus 3.0% to 3.25%. The premium above Prime and/or LIBOR
payable by the Company will be determined by the Company's operating leverage
ratio that is calculated quarterly.
Immediately after the completion of the Texas Acquisitions, the
Company had $231.0 million outstanding under the amended bank loan agreement
with $69.0 million remaining available. As of October 1, 1999, the Company is
incurring interest at a rate of Prime plus 1.5% and/or LIBOR plus 2.75% for
funds borrowed under the Revolving Commitment and the Term Loan A Commitment.
For funds borrowed under the Term Loan B Commitment, the Company is incurring
interest at Prime plus 2.0% and/or LIBOR plus 3.25%.
The maturity schedule for the Revolving Commitment and the Term Loan A
Commitment did not change as a result of the amendment to the loan agreement.
The principal amount outstanding under the newly established Term Loan B
Commitment will become fixed, and no further borrowings can be made thereunder,
on March 30, 2001 and must be paid as follows: 1.0% in 2001, 1.0% in 2002, 1.0%
in 2003, 1.0% in 2004 and 96.0% in 2005.
In connection with the amendment to the loan agreement, the Company
incurred approximately $2.6 million in additional financing costs of which $2.3
million had been paid as of the date of the amendment. These financing costs
were funded through borrowings under the amended bank loan agreement.
On March 1, 1999, the Company acquired substantially all of the assets
of The Goshen News for aggregate cash consideration of approximately $16.7
million. The Goshen News is a 17,000 circulation afternoon newspaper serving
Goshen, Indiana and surrounding areas. The Company financed the acquisition
through its bank loan agreement.
On January 28, 1999, Bull Run Corporation ("Bull Run"), a principal
shareholder of the Company, acquired 301,119 shares of the outstanding common
stock of Sarkes Tarzian, Inc. ("Tarzian") from the Estate of Mary Tarzian (the
"Estate") for $10.0 million. The acquired shares (the "Tarzian Shares")
represent 33.5% of the total outstanding common stock of Tarzian (both in terms
of the number of shares of common stock outstanding and in terms of voting
rights), but such investment represents 73% of the equity of Tarzian for
purposes of dividends as well as distributions in the event of any liquidation,
dissolution or other termination of Tarzian. Tarzian has filed a complaint in
the United States District Court for the Southern District of Indiana, claiming
that it had a binding and enforceable contract to purchase the Tarzian Shares
from the Estate prior to Bull Run's purchase of the shares, and requested
judgment providing that the contract be enforced. Tarzian owns and operates two
television stations and four radio stations: WRCB-TV Channel 3 in Chattanooga,
Tennessee, an NBC affiliate; KTVN-TV Channel 2 in Reno, Nevada, a CBS
affiliate; WGCL-AM and WTTS-FM in Bloomington, Indiana; and WAJI-FM and WLDE-FM
in Fort Wayne, Indiana. The Chattanooga and Reno markets rank as the 87th and
the 108th largest television markets in the United States, respectively, as
ranked by Nielsen Media Research.
The Company has an option agreement with Bull Run, whereby the Company
has the option of acquiring the Tarzian Shares from Bull Run for $10.0 million
plus related costs. The Company has the ability to extend the option period in
30 day increments at a fee of $66,700 per extension and has extended this
option period through December 31, 1999. In connection with the option
agreement, the Company granted to Bull Run warrants to purchase up to 100,000
shares of the Company's class B common stock at $13.625 per share. The warrants
vest immediately upon the Company's exercise of its option to purchase the
Tarzian Shares. The warrants expire 10 years following the date at which the
Company exercises its options.
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.
20
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Management does not believe that inflation in past years has had a
significant impact on the Company's results of operations nor is inflation
expected to have a significant effect upon the Company's business in the near
future.
IMPACT OF YEAR 2000
The problems created by systems that are unable to interpret dates
accurately after December 31, 1999 is referred to as the "Year 2000 Issue."
Many software programs have historically categorized the "year" in a two-digit
format rather than a four-digit format. As a result, those computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Year 2000 Issue creates potential risks for
the Company, including potential problems in the Company's Information
Technology ("IT") and non-IT systems. The Year 2000 Issue could cause a system
failure, miscalculations or disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company may also be exposed to risks
from third parties who fail to adequately address their own Year 2000 Issue.
The Company has implemented a multiphase program designed to address
the Year 2000 Issue. Each phase of this program and its state of completion is
described below:
Assessment: This phase of the program includes the
identification of the Company's IT and non-IT systems. After
these systems have been identified, they are evaluated to
determine whether they will correctly recognize dates after
December 31, 1999 ("Year 2000 Compliant"). If it is determined
that they are not Year 2000 Compliant, they are replaced or
modified in the Remediation phase of the program. The majority
of the Company's systems are non-proprietary.
The Company is in the process of obtaining from each system
vendor a written or oral representation as to each significant
system's status of compliance. The Company has commenced an
ongoing process of contacting suppliers and other key third
parties to assess their Year 2000 Compliance status. It appears
that all of these third parties are currently Year 2000
Compliant or they plan to be Year 2000 Compliant prior to
December 31, 1999. This phase is substantially complete and the
Company has identified the majority of the systems that need to
be replaced.
Remediation: For those systems which are not Year 2000
Compliant, a plan is derived to make the systems Year 2000
Compliant. These solutions have included modification or
replacement of existing systems. The Remediation phase is
approximately 90% complete.
Testing: Test remediated systems to assure normal function when
placed in their original operating environment and further test
for Year 2000 Compliance. The Testing phase of the program is
approximately 90% complete and the Company anticipates that it
will be completed by December 15, 1999.
Contingency: As a result of the Company's Year 2000 Compliance
program, the Company does not believe that it has significant
risk resulting from this issue. However, the Company is in the
process of developing contingency plans for the possibility that
one of its systems or one of a third party's systems may not be
Year 2000 Compliant. The Company believes that the most
reasonable likely worst case scenario is a temporary loss of
functionality at one or more of the Company's operating units.
In the unlikely event that this was to occur, the Company would
experience decreased revenue and slightly higher operating costs
at the affected location. However, due to the decentralized
nature of the Company's operations, it is not likely that all
locations would be affected by a single non-functioning system.
21
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
The Company does not presently believe that the estimated total Year
2000 project cost will exceed $750,000. Most of this cost will be realized over
the estimated useful lives of the new hardware and software; however, any third
party consulting fees would be expensed in the period the services are
rendered. To date, the Company has identified several minor systems that are
not Year 2000 Compliant and these systems are in the process of being replaced.
However, the Company has not incurred significant expenses associated with the
Year 2000 Issue. As of September 30, 1999, no IT projects have been deferred
due to the Company's efforts related to the Year 2000 Issue.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this report, the words "believes," "expects,"
"anticipates," "estimates" and similar words and expressions are generally
intended to identify forward-looking statements. Statements that describe the
Company's future strategic plans, goals, or objectives are also forward-
looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the intent, belief or
current expectations of the Company or management, are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, (i) general economic conditions in the markets in which the Company
operates, (ii) competitive pressures in the markets in which the Company
operates, (iii) the effect of future legislation or regulatory changes on the
Company's operations and (iv) other factors described from time to time in the
Company's filings with the Securities and Exchange Commission. The
forward-looking statements included in this report are made only as of the date
hereof. The Company undertakes no obligation to update such forward-looking
statements to reflect subsequent events or circumstances.
22
23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to the Company's Current Report
on Form 8-K dated October 15, 1999, for
information concerning matter's submitted to the
Company's shareholders at the Company's 1999
Annual Meeting of Shareholders on September 23,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 15,
1999, reporting (a) the completion by the Company
of its acquisition of all the outstanding capital
stock of KWTX Broadcasting Company and Brazos
Broadcasting Company, and the assets of KXII
Broadcasters Ltd. and (b) the result of its
shareholders' meeting on September 23, 1999.
23
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: November 12, 1999 By: /s/ James C. Ryan
----------------- ---------------------------
James C. Ryan,
Vice President - Finance &
Chief Financial Officer
24
5
U.S. DOLLARS
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
1
3,870,013
0
23,189,912
1,276,000
988,416
33,849,659
88,793,036
36,993,099
479,294,658
25,323,451
285,423,164
0
13,500,000
67,667,863
39,652,656
479,294,658
99,951,135
99,951,135
0
85,668,052
(560,275)
569,129
20,890,500
(6,047,142)
(1,438,585)
(4,608,557)
0
0
0
(4,608,557)
(0.45)
(0.45)
