-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVK3B9ZVE4EdczWrCSeYQLyAdiNQt9gwK2VYozLnrOdL5AaQckQ7+6+DHQp/hHBY dM2PLhtR9s6qzTg889mU7A== 0000950168-99-002050.txt : 19990805 0000950168-99-002050.hdr.sgml : 19990805 ACCESSION NUMBER: 0000950168-99-002050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAY COMMUNICATIONS SYSTEMS INC /GA/ CENTRAL INDEX KEY: 0000043196 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 580285030 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13796 FILM NUMBER: 99677472 BUSINESS ADDRESS: STREET 1: 126 N WASHINGTON ST CITY: ALBANY STATE: GA ZIP: 31701 BUSINESS PHONE: 9128889390 MAIL ADDRESS: STREET 1: 126 N WASHINGTON ST CITY: ALBANY STATE: GA ZIP: 31701 10-Q 1 GRAY COMMUNICATIONS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 Class B Common Stock (No Par Value) Value) - --------------------------------- ------------------------------- 6,832,042 shares as of 5,144,393 shares as of August 4, 1999 August 4, 1999 INDEX - ----- GRAY COMMUNICATIONS SYSTEMS, INC. PART I. FINANCIAL INFORMATION PAGE - ------- --------------------- ---- Item 1. Financial Statements Condensed consolidated balance sheets - June 30, 1999 3 (Unaudited), and December 31, 1998 Condensed consolidated statements of operations 5 (Unaudited) - Three months ended June 30, 1999 and 1998; Six months ended June 30, 1999 and 1998 Condensed consolidated statement of stockholders' 6 equity (Unaudited) - Six months ended June 30, 1999 Condensed consolidated statements of cash flows 7 (Unaudited) - Six months ended June 30, 1999 and 1998 Notes to condensed consolidated financial statements 8 (Unaudited) - June 30, 1999 Item 2. Management's Discussion and Analysis of Financial 11 Condition and Results of Operations PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES - ---------- 2 PART I. FINANCIAL INFORMATION - ------- --------------------- ITEM 1. FINANCIAL STATEMENTS GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 ----------- -------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 5,084,986 $ 1,886,723 Trade accounts receivable, less allowance for doubtful accounts of $1,239,000 and $1,212,000, respectively 22,794,918 22,859,119 Recoverable income taxes 1,586,515 1,725,535 Inventories 877,689 1,191,284 Current portion of program broadcast rights 1,206,179 3,226,359 Other current assets 1,013,609 741,007 ----------- ----------- Total current assets 32,563,896 31,630,027 PROPERTY AND EQUIPMENT: Land 2,456,020 2,196,021 Buildings and improvements 13,555,417 12,812,112 Equipment 70,878,159 65,226,835 ----------- ----------- 86,889,596 80,234,968 Allowance for depreciation (34,005,075) (28,463,460) ----------- ----------- 52,884,521 51,771,508 OTHER ASSETS: Deferred loan costs 7,691,525 8,235,432 Goodwill and other intangibles: Licenses and network affiliation agreements 342,021,586 346,433,820 Goodwill 40,836,795 28,766,950 Consulting and noncompete agreements 2,116,783 814,202 Other 2,712,607 1,322,483 ----------- ----------- 395,379,296 385,572,887 ----------- ----------- $480,827,713 $468,974,422 ============ ============ See notes to condensed consolidated financial statements. 3 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) June 30, December 31, 1999 1998 ----------- -------------- (Unaudited) CURRENT LIABILITIES: Trade accounts payable (includes $0 and $880,000 payable to Bull Run Corporation, respectively) $ 804,580 $ 2,540,770 Employee compensation and benefits 4,717,646 5,195,777 Accrued expenses 2,310,503 1,903,226 Accrued interest 5,049,157 5,608,134 Current portion of program broadcast obligations 1,027,539 3,070,598 Deferred revenue 3,247,597 2,632,564 Current portion of long-term debt 385,000 430,000 ----------- ----------- Total current liabilities 17,542,022 21,381,069 LONG-TERM DEBT 291,286,715 270,225,255 OTHER LONG-TERM LIABILITIES: Program broadcast obligations, less current portion 416,685 735,594 Supplemental employee benefits 1,052,384 1,128,204 Deferred income taxes 43,119,641 44,147,642 Other acquisition related liabilities 4,227,595 4,653,788 ----------- ----------- 48,816,305 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, 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 5,273,046 shares, respectively 66,866,468 66,792,385 Retained earnings 42,112,478 45,737,601 ----------- ----------- 133,162,655 136,713,695 Treasury Stock at cost, Class A Common Stock, 1,129,532 shares, respectively (8,578,682) (8,578,682) Treasury Stock at cost, Class B Common Stock, 128,653 and 135,080 shares, respectively (1,401,302) (1,432,143) ----------- ----------- 123,182,671 126,702,870 ----------- ----------- $480,827,713 $468,974,422 ============ ============ See notes to condensed consolidated financial statements. 4 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- --------------------- 1999 1998 1999 1998 ----------- ---------- ---------- ---------- OPERATING REVENUES Broadcasting (net of agency commissions) $23,137,952 $22,689,990 $44,305,992 $42,201,054 Publishing 9,535,608 7,379,114 17,557,661 13,916,449 Paging 2,355,609 1,991,407 4,557,586 3,924,873 ---------- ---------- ---------- ---------- 35,029,169 32,060,511 66,421,239 60,042,376 EXPENSES Broadcasting 13,684,523 12,661,021 26,673,047 24,779,408 Publishing 7,355,448 5,983,435 13,710,070 11,440,940 Paging 1,724,483 1,327,495 3,238,128 2,583,100 Corporate and administrative 940,644 656,449 1,687,150 1,316,929 Depreciation and amortization 5,663,547 4,221,723 11,119,364 7,843,307 ---------- ---------- ---------- ---------- 29,368,645 24,850,123 56,427,759 47,963,684 ---------- ---------- ---------- ---------- 5,660,524 7,210,388 9,993,480 12,078,692 Miscellaneous income (expense), net 34,613 (73,209) 456,361 (314,276) ---------- ---------- ---------- ---------- 5,695,137 7,137,179 10,449,841 11,764,416 Interest expense 7,004,508 6,039,258 13,774,671 11,966,739 ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES(1,309,371) 1,097,921 (3,324,830) (202,323) Income tax expense (benefit) (229,000) 260,814 (684,000) 443,377 ---------- ---------- ---------- ---------- NET INCOME(LOSS) (1,080,371) 837,107 (2,640,830) (645,700) Preferred Dividends 252,501 358,998 505,002 717,996 ---------- ---------- ---------- ---------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $(1,332,872) $ 478,109 $(3,145,832)$(1,363,696) =========== ========== ========== ========== AVERAGE OUTSTANDING COMMON SHARES: Basic 11,966,489 11,916,754 11,960,572 11,898,798 Stock compensation awards -0- 599,413 -0- -0- ---------- ---------- ---------- ---------- Diluted 11,966,489 12,516,167 11,960,572 11,898,798 =========== ========== ========== ========== BASIC EARNINGS (LOSS) PER COMMON SHARE: Net income (loss) available to common stockholders $ (0.11) $ 0.04 $ (0.26) $(0.11) ========== ========== ========== ========== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Net income (loss) available to common stockholders $ (0.11) $ 0.04 $ (0.26) $(0.11) ========== ========== ========== ==========
See notes to condensed consolidated financial statements. 5 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 six months ended June 30, 1999 (2,640,830) Common stock dividends ($.04 per share) (479,291) Preferred stock dividends (505,002) Issuance of treasury stock: 401 (k) plan 74,083 Purchase of Class B Common Stock ------- -------------- ----------- ------------- ---------- ------------- ------------- Balance at June 30, 1999 1,350 $ 13,500,000 7,961,574 $ 10,683,709 5,273,046 $ 66,866,468 $ 42,112,478 ======= ============== =========== ============= ========== ============= ============= 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) $126,702,870 Net loss for the six months ended June 30, 1999 (2,640,830) Common stock dividends ($.04 per share) (479,291) Preferred stock dividends (505,002) Issuance of treasury stock: 401 (k) plan 26,427 287,845 361,928 Purchase of Class B Common Stock (20,000) (257,004) (257,004) ----------- ------------- --------- ----------- ------------ Balance at June 30, 1999 (1,129,532) $ (8,578,682) (128,653) $(1,401,302) $123,182,671 =========== ============= ========= =========== ============
See notes to condensed consolidated financial statements. 6 GRAY COMMUNICATIONS SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, -------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES Net loss $(2,640,830) $ (645,700) Items which did not use (provide) cash: Depreciation 5,772,877 4,175,981 Amortization of intangible assets 5,346,487 3,667,326 Amortization of deferred loan costs 574,282 541,723 Amortization of program broadcast rights 2,400,745 1,899,189 Payments for program broadcast rights (2,430,524) (1,954,588) Supplemental employee benefits (75,820) (154,657) Common Stock contributed to 401(k) Plan 361,928 241,761 Deferred income taxes (1,028,001) 68,686 (Gain) loss on disposal of assets (331,157) 348,310 Changes in operating assets and liabilities: Receivables, inventories and other current assets 715,870 (1,012,774) Accounts payable and other current liabilities (2,199,854) 1,260,198 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,466,003 8,435,455 INVESTING ACTIVITIES Purchase of newspaper business (16,512,231) -0- Purchase of FCC license -0- (829,600) Purchases of property and equipment (4,499,224) (5,766,160) Deferred acquisition costs (1,190,978) (200,745) Payments on purchase liabilities (584,098) (269,018) Deferred costs associated with the exchange of television station -0- (859,534) Proceeds from asset sales -0- 182,421 Other 41,504 (241,707) ------ -------- NET CASH USED IN INVESTING ACTIVITIES (22,745,027) (7,984,343) FINANCING ACTIVITIES Dividends paid (1,251,794) (717,400) Class A Common Stock transactions -0- 27,564 Class B Common Stock transactions -0- 26,326 Purchase of treasury stock (257,004) (311,063) Sale of treasury stock -0- 1,070,272 Proceeds from borrowings of long-term debt 36,200,000 10,200,000 Payments on long-term debt (15,183,540) (10,374,923) Deferred loan costs (30,375) -0- ---------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 19,477,287 (79,224) ---------- ------- INCREASE IN CASH AND CASH EQUIVALENTS 3,198,263 371,888 Cash and cash equivalents at beginning of period 1,886,723 2,367,300 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,084,986 $2,739,188 ========= =========
See notes to condensed consolidated financial statements. 7 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Gray Communications Systems, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 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. NOTE B--BUSINESS ACQUISITIONS On April 14, 1999, the Company announced that it had entered into agreements to acquire the CBS affiliates KWTX-TV ("KWTX") located in Waco, Texas and KBTX-TV ("KBTX"), a satellite station of KWTX located in Bryan, Texas, each serving the Waco-Temple-Bryan, Texas television market. In addition, the Company has agreed to acquire KXII-TV ("KXII"), which is the CBS affiliate serving Sherman, Texas and Ada, Oklahoma. These transactions are referred to herein as the "Texas Acquisition." Aggregate consideration for the Texas Acquisition will be approximately $139 million before payment for certain net working capital amounts and other fees and expenses. The Company will acquire the assets of KWTX and KBTX in merger transactions with the KWTX and KBTX shareholders receiving a combination of cash and the Company's Class B Common Stock for their shares. The Company will acquire KXII in an all cash transaction. The Texas Acquisition is subject to a number of conditions, including the approval by the shareholders of the Company. Approval for the Texas Transaction was granted by the Federal Communications Commission (the "FCC") during the second quarter of 1999. The Company currently believes that the Texas Transaction will close on October 1, 1999. NOTE C--LONG-TERM DEBT The Company's bank loan agreement (the "Senior Credit Facility") provides for $200.0 million of committed credit and $100.0 million of uncommitted credit. The Company can borrow the $100.0 million in uncommitted available credit only after approval of the bank consortium. At June 30, 1999, the balance outstanding and the balance available under the $200.0 million committed portion of the Senior Credit Facility were $130.7 million and $69.3 million, respectively, and the interest rate on the balance outstanding was 7.01%. At June 30, 1999, the bank consortium had not committed, nor had the Company borrowed, any funds under the uncommitted $100.0 million portion of the Senior Credit Facility. NOTE D--INFORMATION ON BUSINESS SEGMENTS The Company operates in three business segments: broadcasting, publishing and paging. The broadcasting segment operates ten television stations located in the southeastern and mid-western United States at June 30, 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: 8 GRAY COMMUNICATIONS SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE D--INFORMATION ON BUSINESS SEGMENTS (Continued)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- ---------- --------- (in thousands) Operating revenues: Broadcasting $23,138 $22,690 $44,306 $42,201 Publishing 9,536 7,379 17,558 13,916 Paging 2,355 1,991 4,557 3,925 ------- ------- -------- -------- $35,029 $32,060 $66,421 $60,042 ======= ======= ======== ======== Operating income: Broadcasting $ 4,269 $ 6,317 $ 7,389 $10,181 Publishing 1,291 701 2,323 1,486 Paging 101 192 282 412 --- --- --- --- Total operating income 5,661 7,210 9,994 12,079 Miscellaneous income and (expense), net 35 (73) 456 (314) Interest expense 7,005 6,039 13,775 11,967 ------- ------- -------- -------- Income (loss) before income taxes $(1,309) $ 1,098 $(3,325) $ (202) ======= ======= ======== ======== 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. Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- ---------- --------- (in thousands) Media Cash Flow: Broadcasting $ 9,584 $10,118 $17,881 $17,546 Publishing 2,211 1,416 3,901 2,513 Paging 637 670 1,336 1,357 ------- ------- -------- -------- 12,432 12,204 23,118 21,416 ======= ======= ======== ======== Media Cash Flow reconciliation: Operating income $ 5,661 $ 7,210 $ 9,994 $12,079 Add: Amortization of program broadcast rights 1,198 959 2,401 1,899 Depreciation and amortization 5,664 4,221 11,119 7,843 Corporate overhead 940 658 1,687 1,317 Non-cash compensation and contributions to the Company's 401(k) plan, paid in common stock 209 115 348 233 Less: Payments for program broadcast obligations (1,240) (959) (2,431) (1,955) ------- ------- -------- -------- Media Cash Flow $12,432 $12,204 $23,118 $21,416 ======= ======= ======== ========
9 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 are 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 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. 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. 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 borrowings under its bank loan agreement (the "Senior Credit Facility"). 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 $70.6 million and estimated deferred income taxes of approximately $27.5 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. The Company recognizes revenue from three sources: broadcasting, publishing and paging. Broadcasting revenue is generated primarily from the sale of television advertising time. Publishing revenue is generated primarily from circulation revenue and advertising revenue. Paging revenue is generated primarily from the sale of pagers and paging services. Advertising revenue is billed to the customer and recognized when the advertisement is aired or published. The Company bills its customers in advance for newspaper subscriptions and paging services and the related revenues are recognized over the period the service is provided on the straight-line basis. Revenue from the sale of pagers is recognized at the time of sale. 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. 11 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 June 30, ------------------------------------------------------- 1999 1998 -------------------------- -------------------------- Percent of Percent of Amount Total Amount Total ------------ ------------ ------------ ------------ (dollars in thousands) Broadcasting Net revenues: Local $ 13,378 38.2% $ 11,167 34.8% National 6,917 19.8 6,530 20.4 Network compensation 1,442 4.1 1,358 4.2 Political 140 0.4 1,992 6.2 Production and other 1,261 3.6 1,643 5.2 -------- ------- --------- ------- $ 23,138 66.1% $22,690 70.8% ========= ======= ========= ======= Publishing Net revenues: Retail $ 4,302 12.3% $ 3,447 10.8% Classified 3,189 9.0 2,413 7.5 Circulation 1,736 5.0 1,340 4.2 Other 309 0.9 179 0.5 -------- ------- --------- ------- $ 9,536 27.2% $ 7,379 23.0% ========= ======= ========= ======= Paging Net revenues: Paging lease, sales and service $ 2,355 6.7% $ 1,991 6.2% ========= ======= ========= ======= Total $ 35,029 100.0% $ 32,060 100.0% ========= ======= ========= ======= 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Broadcasting, Publishing and Paging Revenues (Continued) - -------------------------------------------------------- Six Months Ended June 30, ------------------------------------------------------- 1999 1998 -------------------------- -------------------------- Percent of Percent of Amount Total Amount Total ------------ ------------ ------------ ------------ (dollars in thousands) Broadcasting Net revenues: Local $ 25,902 39.0% $ 22,065 36.7% National 12,420 18.7 12,100 20.2 Network compensation 2,838 4.3 2,573 4.3 Political 189 0.3 2,185 3.6 Production and other 2,957 4.4 3,278 5.5 -------- ------- --------- ------- $ 44,306 66.7% $ 42,201 70.3% ========= ======= ========= ======= Publishing Net revenues: Retail $ 7,984 12.0% $ 6,424 10.7% Classified 5,743 8.6 4,498 7.5 Circulation 3,238 4.9 2,619 4.4 Other 593 0.9 375 0.6 -------- ------- --------- ------- $ 17,558 26.4% $ 13,916 23.2% ========= ======= ========= ======= Paging Net revenues: Paging lease, sales and service $ 4,557 6.9% 3,925 6.5% ========= ======= ========= ======= Total $ 66,421 100.0% $ 60,042 100.0% ======== ======= ========= ======= Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998 REVENUES. Total revenues for the three months ended June 30, 1999 increased $3.0 million, or 9.3%, over the same period of the prior year, to $35.0 million from $32.1 million. This increase was primarily attributable to (i) revenues resulting from the acquisition of KOLN, KGIN and WEAU (the "Busse Stations") which were purchased on July 31, 1998, (ii) increased publishing revenues and (iii) increased paging revenues, offset in part by a decrease in revenues due to the disposition on July 31, 1998 of WALB. Broadcasting revenues increased $448,000, or 2.0%, over the same period of the prior year, to $23.1 million from $22.7 million. The acquisition of the Busse Stations accounted for an increase of $5.0 million. This increase was partially offset by a decrease in revenues of $3.2 million resulting from the sale of WALB and by a decrease in political advertising revenue of $1.5 million. 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 June 30, 1999 decreased $446,000, or 8.1%, to $5.0 million from $5.5 million, when compared to the same period of the prior year. The $446,000 decrease in revenue of the Busse Stations was primarily attributable to a decrease in political revenue of $381,000. Broadcasting revenues, excluding the results of the Busse Stations and WALB, decreased $1.4 million, or 7.0%, over the same period of the prior year, to $18.1 million from $19.5 million. This decrease was due primarily to decreased political advertising revenue of $1.5 million. Publishing revenues increased $2.1 million, or 29.2%, over the same period of the prior year, to $9.5 million from $7.4 million. The increase in publishing revenues was due primarily to increased revenues from the 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998 (Continued) Company's existing publishing operations and from the revenues provided by The Goshen News which was acquired on March 1, 1999. Revenues from the Company's existing publishing operations increased $718,000, or 9.7%, over the same period of the prior year, to $8.1 million from $7.4 million. The primary components of the $718,000 increase in revenues from existing operations were increases in retail advertising and classified advertising revenues of $232,000 and $379,000, respectively. The Goshen News had revenues of $1.4 million for the three months ended June 30, 1999. Paging revenues increased $364,000, or 18.3%, over the same period of the prior year, to $2.3 million from $2.0 million. The increase was attributable primarily to an increase in the number of pagers in service. The Company had approximately 87,000 pagers and 78,500 pagers in service at June 30, 1999 and 1998, respectively. OPERATING EXPENSES. Operating expenses for the three months ended June 30, 1999 increased $4.5 million, or 18.2%, over the same period of the prior year, to $29.4 million from $24.9 million, due primarily to increased broadcasting expenses, publishing expenses, paging expenses, depreciation expense, and amortization expense. Broadcasting expenses increased $1.0 million, or 8.0%, over the three months ended June 30, 1999, to $13.7 million from $12.7 million. The acquisition of the Busse Stations accounted for an increase of $2.4 million. This increase was partially offset by a decrease in expenses of $1.3 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 three months ended June 30, 1999 increased $254,000, or 11.7%, to $2.4 million from $2.2 million. Broadcasting expenses, excluding the results of the Busse Stations and WALB, decreased $140,000, or 1.2 %, over the same period of the prior year, to $11.2 million from $11.3 million. Publishing expenses for the three months ended June 30, 1999 increased $1.4 million, or 22.9%, from the same period of the prior year, to $7.4 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 of the Company's existing publishing operations increased $357,000, or 6.0%, over the same period of the prior year, to $6.3 million from $6.0 million. The increase in expenses of 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 June 30, 1999. Paging expenses increased $397,000, or 30.1%, over the same period of the prior year, to $1.7 million from $1.3 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 $284,000, or 43.3%, to $940,000 for the three months ended June 30, 1999 from $656,000 for the three months ended June 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 June 30, 1999, as compared to $4.2 million for the same period of the prior year, an increase of $1.5 million, or 34.2%. This increase was primarily the result of higher depreciation and amortization costs related to the acquisition of the Busse Stations and The Goshen News. MISCELLANEOUS INCOME (EXPENSE). Miscellaneous income for the three months ended June 30, 1999 was $34,000 and miscellaneous expense for the three months ended June 30, 1998 was $73,000. The change in miscellaneous income (expense) of $107,000 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 $1.0 million, or 16.0%, to $7.0 million for the three months ended June 30, 1999 from $6.0 million for the three months ended June 30, 1998. This increase was attributable primarily 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998 (Continued) 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 three months ended June 30, 1999 was $229,000 and income tax expense for the three months ended June 30, 1998 was $260,000. The decrease in income tax expense of $489,000 was due primarily to the recognition of a net loss before tax in the current year as compared to net income before tax recognized in the prior year. NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS. Net loss available to common stockholders of the Company was $1.3 million for the three months ended June 30, 1999 as compared to net income available to common stockholders of the Company of $479,000 for the three months ended June 30, 1998, a decrease of $1.8 million. Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998 REVENUES. Total revenues for the six months ended June 30, 1999 increased $6.4 million, or 10.6%, over the same period of the prior year, to $66.4 million from $60.0 million. This increase was primarily attributable to (i) revenues resulting from the acquisition of the Busse Stations which were purchased on July 31, 1998, (ii) increased publishing revenues and (iii) increased paging revenues, offset in part by a decrease in revenues due to the disposition on July 31, 1998 of WALB. Broadcasting revenues increased $2.1 million, or 5.0%, over the same period of the prior year, to $44.3 million from $42.2 million. The acquisition of the Busse Stations accounted for an increase of $9.6 million. This increase was partially offset by a decrease in revenues of $5.7 million resulting from the sale of WALB and by a decrease in political advertising revenue. 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 six months ended June 30, 1999 decreased $637,000, or 6.2%, when compared to the same period of the prior year to $9.6 million from $10.2 million. The $637,000 decrease in revenue of the Busse Stations was primarily attributable to a decrease in political revenue of $501,000. Broadcasting revenues, excluding the results of the Busse Stations and WALB, decreased $1.8 million, or 5.0%, over the same period of the prior year, to $34.7 million from $36.5 million. This decrease was due primarily to decreased political advertising revenue of $1.7 million. Publishing revenues increased $3.6 million, or 26.2%, over the same period of the prior year, to $17.6 million from $13.9 million. The increase in publishing revenues was due primarily to increased revenues from the Company's existing publishing operations and from the revenues provided by The Goshen News which was acquired on March 1, 1999. Revenues from the Company's existing publishing operations increased $1.7 million, or 12.0%, over the same period of the prior year, to $15.6 million from $13.9 million. The primary components of the $1.7 million increase in revenues from existing operations were increases in retail advertising, classified advertising and circulation revenue of $698,000, $731,000 and $199,000, respectively. The Goshen News had revenues of $2.0 million from the date of its purchase through June 30, 1999. Paging revenues increased $632,000, or 16.1%, over the same period of the prior year, to $4.6 million from $3.9 million. The increase was attributable primarily to an increase in the number of pagers in service. The Company had approximately 87,000 pagers and 78,500 pagers in service at June 30, 1999 and 1998, respectively. OPERATING EXPENSES. Operating expenses for the six months ended June 30, 1999 increased $8.5 million, or 17.6%, over the same period of the prior year, to $56.4 million from $48.0 million, due primarily to increased broadcasting expenses, publishing expenses, paging expenses, depreciation expense and amortization expense. Broadcasting expenses increased $1.9 million, or 7.6%, over the six months ended June 30, 1999, to $26.7 million from $24.8 million. The acquisition of the Busse Stations accounted for an increase of $4.7 million. This 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 (CONTINUED) increase was partially offset by a decrease in expenses of $2.4 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 of $4.7 million for the Busse Stations for the six months ended June 30, 1999 were slightly higher than the $4.4 million experienced in the prior year. Broadcasting expenses, excluding the results of the Busse Stations and WALB, decreased $431,000, or 1.9%, to $22.0 million from $22.4 million. This decrease was due primarily to decreases in payroll and other expenses of $307,000 and $386,000, respectively, partially offset by an increase in syndicated film costs of $213,000. Publishing expenses for the six months ended June 30, 1999 increased $2.3 million, or 19.8%, from the same period of the prior year, to $13.7 million from $11.4 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 of the Company's existing publishing operations increased $908,000, or 7.9%, over the same period of the prior year, to $12.3 million from $11.4 million. The increase in expenses of 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 $1.4 million for the six months ended June 30, 1999. Paging expenses increased $655,000, or 25.5%, over the same period of the prior year, to $3.2 million from $2.6 million. The increase was attributable primarily to an increase in the number of pagers in service. Corporate and administrative expenses increased $370,000, or 28.4%, to $1.7 million for the six months ended June 30, 1999 from $1.3 million for the six months ended June 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 $11.1 million for the six months ended June 30, 1999, as compared to $7.8 million for the same period of the prior year, an increase of $3.3 million, or 41.8%. This increase was primarily the result of higher depreciation and amortization costs related to the acquisition of the Busse Stations and The Goshen News. MISCELLANEOUS INCOME (EXPENSE). Miscellaneous income for the six months ended June 30, 1999 was $456,000 and miscellaneous expense for the six months ended June 30, 1998 was $314,000. The change in miscellaneous income (expense) of $770,000 was due primarily to the gain of $450,000 recognized upon the sale of one of the Company's weekly advertising publications in February 1999. INTEREST EXPENSE. Interest expense increased $1.8 million, or 15.1%, to $13.8 million for the six months ended June 30, 1999 from $12.0 million for the six months ended June 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 six months ended June 30, 1999 was $684,000 and income tax expense for the six months ended June 30, 1998 was $443,000. The decrease in income tax expense of $1.1 million was due primarily to the recognition of a net loss before tax in the current year as compared to net income before tax recognized in the prior year. NET LOSS AVAILABLE TO COMMON STOCKHOLDERS. Net loss available to common stockholders of the Company was $3.1 million and $1.4 million for the six months ended June 30, 1999 and 1998, respectively, an increase of $1.8 million. LIQUIDITY AND CAPITAL RESOURCES The Company's bank loan agreement, (the "Senior Credit Facility") provides for $200.0 million of committed credit and $100.0 million of uncommitted credit. The Company can borrow the $100.0 million in uncommitted 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) available credit only after approval of the bank consortium. At June 30, 1999, the balance outstanding and the balance available under the $200.0 million portion of the Senior Credit Facility were $130.7 million and $69.3 million, respectively, and the interest rate on the balance outstanding was 7.01%. At June 30, 1999, the bank consortium had not committed, nor had the Company borrowed, any funds under the uncommitted $100.0 million portion of the Senior Credit Facility. The Company's working capital was $15.0 million and $10.2 million at June 30, 1999 and December 31, 1998, respectively. The Company's cash provided from operations was $6.5 million and $8.4 million for the six months ended June 30, 1999 and 1998, respectively. The Company's cash used in investing activities was $22.7 million and $8.0 million for the six months ended June, 1999 and 1998, respectively. The increased usage of $14.7 million from 1998 to 1999 was primarily due to the Goshen Acquisition. The Company's cash provided by financing activities was $19.5 million for the six months ended June 30, 1999 and the cash used in financing activities was $79,000 for the same period of the prior year. The increase in cash provided by financing activities resulted from increased borrowings under the Senior Credit Facility, primarily to fund the Goshen Acquisition. During the six months ended June 30, 1999, the Company issued 26,427 shares of Class B Common Stock from treasury to fulfill obligations under its employee benefit plan. The Company also purchased 20,000 shares of Class B Common Stock for $257,004 during the six months ended June 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 six months ended June 30, 1999, the Company paid $2.4 million for such program broadcast rights. The Company and its subsidiaries file a consolidated federal income tax return and such state or local tax returns as are required. As of June 30, 1999, the Company anticipates that it will generate operating losses for the foreseeable future. On April 14, 1999, the Company announced that it had entered into agreements to acquire the CBS affiliates KWTX-TV ("KWTX") located in Waco, Texas and KBTX-TV ("KBTX"), a satellite station of KWTX located in Bryan, Texas. In addition, the Company has agreed to acquire KXII-TV ("KXII"), which is the CBS affiliate serving Sherman, Texas and Ada, Oklahoma. These transactions are referred to herein as the "Texas Acquisition." Aggregate consideration for the Texas Acquisition will be approximately $139 million before payment for certain net working capital amounts and other fees and expenses. The aggregate consideration for KWTX and KBTX will be $97.5 million before consideration for certain net working capital amounts. The amount of consideration paid in shares of the Company's Class B Common Stock will not be less than 40% of the aggregate consideration for KWTX and KBTX. The Company will acquire substantially all of the assets of KXII for $41.5 million in cash plus cash payments for certain accounts receivable. The total amount of funds required by the Company to consummate the Texas Acquisition and pay related fees and expenses is estimated to be approximately $100.0 million. The Company currently intends to issue long-term senior debt to fund the Texas Acquisition. While exact financing terms have not been finalized, the Company currently believes the financing will have a principal amount of $100.0 million and have a variable interest rate based upon LIBOR plus an additional percentage based upon the Company's overall ratio of indebtedness to its operating cash flow. The Company currently expects the principal will be repaid in scheduled quarterly installments with the final payment becoming due prior to October 1, 2006. The Company anticipates that the indebtedness will 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) be senior secured indebtedness of the Company and that the Company and its subsidiaries will jointly and severally pledge their assets to guarantee the indebtedness. This additional indebtedness will also contain covenants that are similar to those in the existing Senior Credit Facility. The actual amount of cash that will be needed to complete the Texas Acquisition can only be estimated at this time and it is dependent upon several factors contained in the related acquisition agreements: (1) the proportion of cash and Class B Common Stock elected to be received by the shareholders of KWTX and KBTX, (2) working capital amounts and (3) the actual amount of the transaction and closing costs. If the shareholders of KWTX and KBTX were to elect to receive more than 40% of their respective consideration in Class B Common Stock, the amount of cash requiring financing would be reduced. The Company has the option, in certain limited circumstances, to pay all of the consideration for KWTX and KBTX in cash for an aggregate price of $95.5 million plus certain net working capital amounts. If the Company elects to pay all such consideration in cash, then it would require a minimum of $37 million in additional financing from existing credit facilities or other sources of capital. The Company will require modifications to its existing Senior Credit Facility to allow for, among other things, the expected increase in the Company's total indebtedness and the issuance of the planned additional senior debt. Such modifications will require the approval of over two-thirds of the Senior Credit Facility's participants. The Company currently believes such approval will be obtained. If the approval were not obtained, the Company would explore alternate financing arrangements. On January 28, 1999, Bull Run Corporation ("Bull Run"), a principal shareholder of the Company, acquired 301,119 shares of the common stock of Sarkes Tarzian, Inc. ("Tarzian") from the Estate of Mary Tarzian (the "Estate") for $10.0 million. These 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. The Company has an option agreement with Bull Run, whereby the Company has the option to acquire the Tarzian Shares from Bull Run for an amount equal to Bull Run's purchase price for the Tarzian Shares and related costs. The option agreement expired on May 31, 1999, however, the Company extended the option period with Bull Run through September 30, 1999 at a cost of $266,800. However, if the Company has not exercised its option to acquire the Tarzian Shares prior to September 30, 1999, the Company plans to extend the option period in increments of 30 days. The Company can extend the option period until December 31, 2000 at a cost of $66,700 per 30 day extension. Neither Bull Run's investment nor the Company's potential investment is presently attributable under the ownership rules of the Federal Communications Commission. If the Company exercises the option agreement, the Company plans to fund the acquisition through its Senior Credit Facility. Management believes that current cash balances, cash flow from operations, borrowings under its Senior Credit Facility and additional borrowings necessary to complete the Texas Acquisition 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. 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 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) IMPACT OF YEAR 2000 (Continued) 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 are 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 that 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 75% complete and the Company anticipates that it will be completed by November 1, 1999. 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 70% complete and the Company anticipates that it will be completed by November 30, 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 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. 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 June 30, 1999, no IT projects have been deferred due to the Company's efforts related to the Year 2000 Issue. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) IMPACT OF YEAR 2000 (Continued) 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. 20 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 21 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRAY COMMUNICATIONS SYSTEMS, INC. (Registrant) Date: August 4, 1999 By: /s/ James C. Ryan -------------- ---------------------------------- James C. Ryan, Vice President - Finance & Chief Financial Officer EX-27 2 FDS -- GRAY COMMUNICATIONS SYSTEMS, INC.
5 This schedule contains summary financial information extracted from the June 30, 1999 unaudited condensed consolidated financial statements of Gray Communications Systems, Inc., and is qualified in its entirety by reference to such financial statements. 0000043196 GRAY COMMUNICATIONS SYSTEMS, INC. 1 US DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 5,084,986 0 24,034,187 1,239,269 877,689 32,563,896 86,889,596 34,005,075 480,827,713 17,542,022 291,286,715 0 13,500,000 67,570,193 42,112,478 480,827,713 66,621,239 66,621,239 0 56,427,759 (456,361) 307,956 13,774,671 (3,324,830) (684,000) (2,640,830) 0 0 0 (3,145,832) (0.26) (0.26)
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