UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________ .
COMMISSION FILE NUMBER 1-13796
GRAY COMMUNICATIONS SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0285030
--------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 PEACHTREE ROAD, NE, ATLANTA, GEORGIA 30319
-----------------------------------------------
(Address of principal executive offices)
(Zip code)
(404) 504-9828
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS A COMMON STOCK, (NO PAR VALUE) CLASS B COMMON STOCK, (NO PAR VALUE)
--------------------------------------- ------------------------------------
6,848,467 SHARES AS OF MAY 14, 2001 8,753,967 SHARES AS OF MAY 14, 2001
INDEX
GRAY COMMUNICATIONS SYSTEMS, INC.
PART I. FINANCIAL INFORMATION PAGE
------- --------------------- ----
Item 1 Financial Statements
Condensed consolidated balance sheets - March 31, 2001 (Unaudited) 3
and December 31, 2000
Condensed consolidated statements of operations (Unaudited) - 5
Three months ended March 31, 2001 and 2000
Condensed consolidated statement of stockholders' equity
(Unaudited) - Three months ended March 31, 2001 6
Condensed consolidated statements of cash flows (Unaudited) -
Three months ended March 31, 2001 and 2000 7
Notes to condensed consolidated financial statements (Unaudited) - 8
March 31, 2001
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 1,104,586 $ 2,214,838
Trade accounts receivable, less allowance for doubtful accounts
of $841,000 and $845,000, respectively 24,310,989 30,321,372
Recoverable income taxes 1,229,319 1,196,408
Inventories 1,376,488 1,472,377
Current portion of program broadcast rights 2,473,342 3,723,988
Other current assets 1,271,476 670,718
------------- -------------
Total current assets 31,766,200 39,599,701
PROPERTY AND EQUIPMENT:
Land 4,905,121 4,905,121
Buildings and improvements 16,676,980 16,639,424
Equipment 107,314,503 106,783,692
------------- -------------
128,896,604 128,328,237
Allowance for depreciation (59,893,078) (55,730,599)
------------- -------------
69,003,526 72,597,638
OTHER ASSETS:
Deferred loan costs, net 7,817,566 8,203,055
Goodwill and other intangibles, net:
Licenses and network affiliation agreements 433,288,033 436,255,773
Goodwill 73,488,813 73,978,230
Consulting and noncompete agreements 1,259,588 1,381,545
Other 4,551,694 4,755,793
------------- -------------
520,405,694 524,574,396
------------- -------------
$ 621,175,420 $ 636,771,735
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 31, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
CURRENT LIABILITIES:
Trade accounts payable (includes $200,000 payable
to Bull Run Corporation, respectively) $ 5,067,051 $ 4,452,911
Employee compensation and benefits 5,322,579 6,630,078
Accrued expenses 1,434,505 1,631,490
Accrued interest 10,604,437 6,875,294
Current portion of program broadcast obligations 2,289,503 3,605,960
Deferred revenue 3,008,075 3,015,044
Current portion of long-term debt 166,000 200,000
SFAS 133 derivative valuation allowance 975,000 -0-
------------- -------------
Total current liabilities 28,867,150 26,410,777
LONG-TERM DEBT 367,680,112 374,687,052
OTHER LONG-TERM LIABILITIES:
Program broadcast obligations, less current portion 282,877 303,308
Supplemental employee benefits 596,622 525,151
Deferred income taxes 70,311,767 72,935,799
Other deferred liabilities -0- 3,650,115
Other acquisition related liabilities 2,196,793 2,298,734
------------- -------------
73,388,059 79,713,107
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Serial Preferred Stock, no par value; authorized 20,000,000 shares; issued
and outstanding 861 shares, respectively ($8,605,788 aggregate
liquidation value, respectively) 4,636,663 4,636,663
Class A Common Stock, no par value; authorized 15,000,000
shares; issued 7,961,574 shares, respectively 20,172,959 20,172,959
Class B Common Stock, no par value; authorized 15,000,000
shares; issued 8,750,630 and 8,708,820 shares, respectively 117,107,199 116,486,600
Accumulated other comprehensive income (loss) (117,526) -0-
Retained earnings 17,779,522 23,273,239
------------- -------------
159,578,817 164,569,461
Treasury Stock at cost, Class A Common Stock, 1,113,107 shares,
respectively (8,338,718) (8,338,718)
Treasury Stock at cost, Class B Common Stock, 0 and 24,257 shares,
respectively -0- (269,944)
------------- -------------
151,240,099 155,960,799
------------- -------------
$ 621,175,420 $ 636,771,735
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2001 2000
------------ ------------
OPERATING REVENUES
Broadcasting (net of agency commissions) $ 25,042,113 $ 26,668,453
Publishing 9,739,846 9,921,227
Paging 2,146,610 2,298,121
------------ ------------
36,928,569 38,887,801
EXPENSES
Broadcasting 16,307,988 16,915,750
Publishing 7,902,104 7,664,910
Paging 1,435,663 1,504,024
Corporate and administrative 944,407 1,028,180
Depreciation and amortization 7,850,672 7,674,332
------------ ------------
34,440,834 34,787,196
------------ ------------
2,487,735 4,100,605
Miscellaneous income, net 70,933 63,301
SFAS 133 derivative valuation income (expense), net (785,442) -0-
------------ ------------
1,773,226 4,163,906
Interest expense 9,250,952 9,724,508
------------ ------------
LOSS BEFORE INCOME TAXES (7,477,726) (5,560,602)
Income tax benefit (2,450,000) (1,712,000)
------------ ------------
NET LOSS (5,027,726) (3,848,602)
Preferred dividends 154,087 252,500
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (5,181,813) $ (4,101,102)
============ ============
AVERAGE OUTSTANDING COMMON SHARES:
Basic and diluted 15,571,473 15,456,476
============ ============
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS:
Basic and diluted $ (0.33) $ (0.27)
============ ============
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
--------------------- -------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at December 31, 2000 861 $4,636,663 7,961,574 $20,172,959 8,708,820 $116,486,600
Comprehensive loss:
Net loss for the three months
ended March 31, 2001
SFAS 133 derivative valuation
income (expense), net
Total comprehensive loss
Common stock dividends ($.02
per share)
Preferred stock dividends
Issuance of treasury stock:
401 (k) plan 3,110 100,741
Non-qualified stock plan 38,700 519,858
------ ---------- --------- ----------- --------- ------------
Balance at March 31, 2001 861 $4,636,663 7,961,574 $20,172,959 8,750,630 $117,107,199
====== ========== ========= =========== ========= ============
Accumulated Class A Class B
Other Treasury Stock Treasury Stock
Comprehensive Retained -------------------------- ----------------------
Income (Loss) Earnings Shares Amount Shares Amount Total
------------- ------------ ----------- ----------- -------- ---------- ------------
Balance at December 31, 2000 $ -- $ 23,273,239 (1,113,107) $(8,338,718) (24,257) $(269,944) $155,960,799
Comprehensive loss:
Net loss for the three months
ended March 31, 2001 (5,027,726) (5,027,726)
SFAS 133 derivative valuation
income (expense), net (117,526) (117,526)
------------
Total comprehensive loss (5,145,252)
Common stock dividends ($.02
per share) (311,904) (311,904)
Preferred stock dividends (154,087) (154,087)
Issuance of treasury stock:
401 (k) plan 9,257 103,027 203,768
Non-qualified stock plan 15,000 166,917 686,775
----------- ------------ ----------- ----------- ----------- --------- ------------
Balance at March 31, 2001 $ (117,526) $ 17,779,522 (1,113,107) $(8,338,718) -- $ -- $151,240,099
=========== ============ =========== =========== =========== ========= ============
See notes to condensed consolidated financial statements.
6
GRAY COMMUNICATIONS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2001 2000
------------ -----------
OPERATING ACTIVITIES
Net loss $ (5,027,726) $ (3,848,602)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 4,270,780 4,077,529
Amortization of intangible assets 3,579,892 3,596,803
Amortization of deferred loan costs 385,491 381,804
Amortization of program broadcast rights 1,352,940 1,309,740
Payments for program broadcast rights (1,352,820) (1,489,954)
Supplemental employee benefits (82,548) (42,932)
Common stock contributed to 401(k) Plan 203,768 192,116
SFAS 133 derivative valuation expense 785,442 -0-
Deferred income taxes (2,552,000) (1,776,000)
Gain on disposal of assets (15,786) (9,290)
Changes in operating assets and liabilities:
Receivables, inventories and other current assets 5,472,603 4,841,182
Accounts payable and other current liabilities 2,985,849 557,563
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,005,885 7,789,959
INVESTING ACTIVITIES
Purchases of property and equipment (4,326,075) (2,228,979)
Payments on purchase liabilities (101,941) (133,653)
Other 132,035 341,638
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,295,981) (2,020,994)
FINANCING ACTIVITIES
Dividends paid (465,991) (561,893)
Proceeds from issuance of common stock 519,858 -0-
Proceeds from sale of treasury stock 166,917 48,244
Purchase of treasury stock -0- (142,584)
Proceeds from borrowings of long-term debt 4,950,000 5,500,000
Payments on long-term debt (11,990,940) (10,574,022)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (6,820,156) (5,730,255)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,110,252) 38,710
Cash and cash equivalents at beginning of period 2,214,838 1,787,446
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,104,586 $ 1,826,156
============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Gray Communications Systems, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2000.
Accounting for Hedging Activities
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," as amended ("SFAS 133").
SFAS 133 provides a comprehensive standard for the recognition and measurement
of derivatives and hedging activities. SFAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes "special accounting"
for the different types of hedges. Changes in the fair value of derivatives that
do not meet the hedged criteria are included in earnings in the same period of
the change.
In 1999, the Company entered into an interest rate swap agreement that is
designated as a hedge against fluctuations in interest expense resulting from a
portion of its variable rate debt. Due to the terms of the interest rate swap
agreement, it does not qualify for hedge accounting under SFAS 133. As a result
of the adoption of SFAS 133 and the general decrease in market interest rates
during the quarter ended March 31, 2001, the Company recognized a non-cash
derivative valuation expense of $785,442 during the current quarter.
NOTE B--LONG-TERM DEBT
At March 31, 2001, the balance outstanding and the balance available under
the Company's bank loan agreement were $207.5 million and $63.5 million,
respectively, and the interest rate on the balance outstanding was 8.0%.
NOTE C--INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing
and paging. The broadcasting segment operates 13 television stations located in
the southern and mid-western United States. The publishing segment operates four
daily newspapers located in Georgia and Indiana. The paging operations are
located in Florida, Georgia and Alabama. The following tables present certain
financial information concerning the Company's three operating segments:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Operating revenues:
Broadcasting $25,042 $26,669
Publishing 9,740 9,921
Paging 2,147 2,298
------- -------
$36,929 $38,888
======= =======
8
NOTE C--INFORMATION ON BUSINESS SEGMENTS (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Operating income:
Broadcasting $ 1,369 $ 2,506
Publishing 969 1,376
Paging 150 219
-------- --------
Total operating income 2,488 4,101
Miscellaneous income, net 71 63
SFAS 133 derivative valuation income (expense), net (786) -0-
Interest expense (9,251) (9,725)
-------- --------
Loss before income taxes $ (7,478) $ (5,561)
======== ========
Media Cash Flow:
Broadcasting $ 8,875 $ 9,710
Publishing 1,877 2,292
Paging 723 802
-------- --------
$ 11,475 $ 12,804
======== ========
Media Cash Flow reconciliation:
Operating income $ 2,488 $ 4,101
Add:
Amortization of program broadcast rights 1,353 1,310
Depreciation and amortization 7,851 7,674
Corporate overhead 944 1,028
Non-cash compensation and contributions to the Company's
401(k) plan, paid in common stock 192 181
Less:
Payments for program broadcast obligations (1,353) (1,490)
-------- --------
Media Cash Flow $ 11,475 $ 12,804
======== ========
Operating income is total operating revenues less operating expenses,
excluding miscellaneous income and expense (net), SFAS 133 derivative valuation
income (expense), net and interest. Corporate and administrative expenses are
allocated to operating income based on net segment revenues.
"Media Cash Flow" is defined as operating income, plus depreciation and
amortization (including amortization of program broadcast rights), non-cash
compensation and corporate overhead, less payments for program broadcast
obligations. The Company has included Media Cash Flow data because such data is
commonly used as a measure of performance for media companies and is also used
by investors to measure a company's ability to service debt. Media Cash Flow is
not, and should not be used as, an indicator or alternative to operating income,
net income or cash flow as reflected in the Company's unaudited Condensed
Consolidated Financial Statements. Media Cash Flow is not a measure of financial
performance under generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
NOTE D - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note E of the Notes to the Consolidated Financial
Statements for the year ended December 31, 2000 as filed in the Company's annual
report on Form 10K/A, during 1996 the Company issued 1,000 shares of Series A
Preferred Stock with a liquidation value of $10,000 per share and detachable
warrants for 731,250 shares of the Company's Class A Common Stock with a warrant
exercise price of $11.92 per share for aggregate consideration of $10.0 million.
Also during 1996, the Company issued 1,000 shares of Series B Preferred Stock
with a liquidation value of $10,000 per share and detachable warrants for
750,000 shares of the Company's Class A Common Stock with a warrant exercise
price of $16.00 per share for aggregate consideration of $10.0 million. At the
time of each issuance, the Company recorded the full value of the consideration
received as preferred stock on the balance sheet and did not separately allocate
a part of the value to the respective detachable warrants.
During 1998, the Company redeemed 650 shares of the originally issued
Series B Preferred stock at the liquidation value of $10,000 per share for an
aggregate cost of $6.5 million. During 2000, the Company redeemed 500 shares of
the Series A Preferred stock at the liquidation value of $10,000 per share for
an aggregate cost of $5.0 million.
On October 10, 2001, the Company became aware that the initial
recording of the Series A and Series B Preferred Stock in 1996 was incorrect and
the consideration received for each respective issuance of preferred stock and
detachable warrants should have been allocated between the respective
securities.
Accordingly, the Company has reclassified $9.5 million from Serial
Preferred Stock to Class A Common Stock to reflect the value of the respective
detachable warrants issued in 1996. The Company determined the relative value of
each series of detachable warrants using Black-Scholes valuation methods.
When the Company redeemed certain shares of the Series B Preferred
Stock during 1998 and certain shares of the Series A Preferred Stock during
2000, a non-cash constructive dividend to preferred shareholders should have
been recorded. This constructive dividend recognizes that the recorded value of
the respective preferred stock is less than the liquidation value at which the
shares were redeemed. The Company's Consolidated Statements of Operations for
the years ended December 31, 2000 and 1998 as well as the related Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 have been restated to reflect such non-cash constructive preferred
dividends. In recognizing these non-cash constructive preferred dividends, the
Company's income available for common shareholders decreased by $3.4 million for
the year ended December 31, 1998 and the loss available to common shareholders
for the year ended December 31, 2000 increased by $2.2 million. Related earnings
or loss per share available to common shareholder information has also been
restated.
A comparison of the Company's consolidated financial position prior to
and following the restatement follows:
Consolidated Balance Sheets ($ in thousands):
AS OF MARCH 31, 2001 AS OF DECEMBER 31, 2000
------------------------------- ------------------------------
AS RESTATED AS REPORTED AS RESTATED AS REPORTED
----------- ----------- ----------- -----------
Serial Preferred Stock, no par value $ 4,637 $ 8,606 $ 4,637 $ 8,606
Class A Common Stock, no par value $ 20,173 $ 10,684 $ 20,173 $ 10,684
Retained Earnings $ 17,780 $ 23,300 $ 23,273 $ 28,793
Stockholders Equity $151,240 $151,240 $155,961 $155,961
The required restatement of certain financial information related to
the non-cash preferred dividends did not impact the Company's Condensed
Consolidated Statement of Operations or the Condensed Consolidated Statement of
Cash Flows for the three months ended March 31, 2001 or 2000. In addition, the
required restatement has no impact on the Company's credit agreements.
9
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.
Restatement of Financial Statements
As discussed in Note E of the Notes to the Consolidated Financial
Statements for the year ended December 31, 2000 as filed in the Company's annual
report on Form 10K/A, during 1996 the Company issued 1,000 shares of Series A
Preferred Stock with a liquidation value of $10,000 per share and detachable
warrants for 731,250 shares of the Company's Class A Common Stock with a warrant
exercise price of $11.92 per share for aggregate consideration of $10.0 million.
Also during 1996, the Company issued 1,000 shares of Series B Preferred Stock
with a liquidation value of $10,000 per share and detachable warrants for
750,000 shares of the Company's Class A Common Stock with a warrant exercise
price of $16.00 per share for aggregate consideration of $10.0 million. At the
time of each issuance, the Company recorded the full value of the consideration
received as preferred stock on the balance sheet and did not separately allocate
a part of the value to the respective detachable warrants.
During 1998, the Company redeemed 650 shares of the originally issued
Series B Preferred stock at the liquidation value of $10,000 per share for an
aggregate cost of $6.5 million. During 2000, the Company redeemed 500 shares of
the Series A Preferred stock at the liquidation value of $10,000 per share for
an aggregate cost of $5.0 million.
Ernst & Young, LLP, the Company's independent auditors for each of the
years ended December 31, 1996, 1997, 1998, 1999 and 2000, notified the Company
on October 10, 2001 that the initial recording of the Series A and Series B
Preferred Stock in 1996 was incorrect and the consideration received for each
respective issuance of preferred stock and detachable warrants should have been
allocated between the respective securities.
Accordingly, the Company has reclassified $9.5 million from Serial
Preferred Stock to Class A Common Stock to reflect the value of the respective
detachable warrants issued in 1996. The Company determined the relative value of
each series of detachable warrants using Black-Scholes valuation methods.
When the Company redeemed certain shares of the Series B Preferred
Stock during 1998 and certain shares of the Series A Preferred Stock during
2000, a non-cash constructive dividend to preferred shareholders should have
been recorded. This constructive dividend recognizes that the recorded value of
the respective preferred stock is less than the liquidation value at which the
shares were redeemed. The Company's Consolidated Statements of Operations for
the years ended December 31, 2000 and 1998 as well as the related Consolidated
Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 have been restated to reflect such non-cash constructive preferred
dividends. In recognizing these non-cash constructive preferred dividends, the
Company's income available for common shareholders decreased by $3.4 million for
the year ended December 31, 1998 and the loss available to common shareholders
for the year ended December 31, 2000 increased by $2.2 million. Related earnings
or loss per share available to common shareholder information has also been
restated.
A comparison of the Company's consolidated financial position prior to
and following the restatement follows:
Consolidated Balance Sheets ($ in thousands):
AS OF MARCH 31, 2001 AS OF DECEMBER 31, 2000
------------------------------- ------------------------------
AS RESTATED AS REPORTED AS RESTATED AS REPORTED
----------- ----------- ----------- -----------
Serial Preferred Stock, no par value $ 4,637 $ 8,606 $ 4,637 $ 8,606
Class A Common Stock, no par value $ 20,173 $ 10,684 $ 20,173 $ 10,684
Retained Earnings $ 17,780 $ 23,300 $ 23,273 $ 28,793
Stockholders Equity $151,240 $151,240 $155,961 $155,961
The required restatement of certain financial information related to
the non-cash preferred dividends did not impact the Company's Condensed
Consolidated Statement of Operations or the Condensed Consolidated Statement of
Cash Flows for the three months ended March 31, 2001 or 2000. In addition, the
required restatement has no impact on the Company's credit agreements.
General
Broadcast advertising revenues are generally highest in the second and
fourth quarters each year, due in part to increases in consumer advertising in
the spring and retail advertising in the period leading up to and including the
holiday season. In addition, broadcast advertising revenues are generally higher
during even numbered election years due to spending by political candidates and
other political advocacy groups, which spending typically is heaviest during the
fourth quarter.
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of broadcasting, publishing and
paging revenues earned by the Company's broadcasting, publishing and paging
operations for the periods indicated and the percentage contribution of each to
the Company's total revenues:
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
2001 2000
------------------------------------- ------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
BROADCASTING
NET REVENUES:
Local $ 14,699 39.8% $ 14,946 38.4%
National 6,867 18.6 7,187 18.5
Network compensation 1,726 4.7 2,017 5.2
Political 31 0.1 524 1.4
Production and other 1,719 4.6 1,995 5.1
--------- --------- --------- ---------
$ 25,042 67.8% $ 26,669 68.6%
========= ========= ========= =========
PUBLISHING
NET REVENUES:
Retail $ 4,555 12.3% $ 4,484 11.5%
Classified 2,998 8.1 3,147 8.1
Circulation 1,875 5.1 1,939 5.0
Other 312 0.9 351 0.9
--------- --------- --------- ---------
$ 9,740 26.4% $ 9,921 25.5%
========= ========= ========= =========
PAGING
NET REVENUES:
Paging lease, sales and service $ 2,147 5.8% $ 2,298 5.9%
========= ========= ========= =========
TOTAL $ 36,929 100.0% $ 38,888 100.0%
========= ========= ========= =========
10
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Total revenues for the three months ended March 31, 2001
decreased $2.0 million, or 5.0%, over the same period of the prior year, to
$36.9 million from $38.9 million. This decrease was primarily attributable to
broadcasting and publishing operations.
Broadcasting revenues decreased $1.6 million, or 6.1%, from the same
period of the prior year, to $25.0 million from $26.7 million. Local advertising
revenue decreased $247,000, or 1.7%, from the same period of the prior year, to
$14.7 million from $14.9 million. National advertising revenue decreased
$320,000, or 4.5%, from the same period of the prior year to $6.9 million from
$7.2 million. These decreases in advertising revenues are due to a general
economic slowdown in the first quarter that generated lower than expected
advertising sales. Network compensation decreased $291,000, or 14.4%, from the
same period of the prior year, to $1.7 million from $2.0 million. Network
compensation decreased primarily due to the renewal of the CBS affiliation
agreements for the Company's three stations located in Texas. These affiliation
agreements were renewed for a period of five years and were effective January 1,
2001. Under the renewed terms of the agreements, network compensation decreased
$380,000, from the same period of the prior year, for these three stations. The
decrease in network compensation at the three stations located in Texas was
partially offset by increases in network compensation at several of the
Company's other stations. Political advertising revenue was $31,000 for the
three months ended March 31, 2001, compared to $524,000 for the same period of
the prior year. The decrease in political advertising revenue was due to the
lack of elections in the current year. Production and other revenue decreased
$276,000, or 13.8%, in the current quarter as compared to that of the prior
year, to $1.7 million from $2.0 million.
Publishing revenues decreased $181,000, or 1.8%, from the same period
of the prior year, to $9.7 million from $9.9 million. This decrease was due
primarily to a decrease in revenues from classified advertising and circulation
revenues, partially offset by an increase in retail advertising revenue. Retail
advertising revenue increased $71,000, or 1.6%, in the current quarter as
compared to the same period of the prior year, to $4.6 million from $4.5
million. Three of the Company's four newspapers generated increases in retail
advertising revenue, with the largest gains produced by the Company's metro
Atlanta newspapers which continue to benefit from the growing retail advertising
base in their areas. Classified advertising revenue decreased $149,000, or 4.7%,
from the same period of the prior year, to $3.0 million from $3.1 million. This
decrease was generally due to decreased help wanted and automotive
advertisements due to the general economic slowdown. Circulation revenue
decreased $64,000, or 3.3%, from the same period of the prior year, to $1.9
million. This decrease was due to decreased promotional spending in the period.
Paging revenues decreased $151,000, or 6.6%, from the same period of
the prior year, to $2.1 million from $2.3 million. The decrease was due
primarily to price competition and a reduction of units in service. The Company
had approximately 88,000 pagers and 90,000 pagers in service at March 31, 2001
and 2000, respectively.
Operating expenses. Operating expenses for the three months ended March
31, 2001 decreased $346,000, or 1.0%, from the same period of the prior year, to
$34.4 million from $34.8 million, due primarily to decreased broadcasting
expenses, paging expenses and corporate expenses partially offset by increases
in publishing expenses and depreciation expense.
Broadcasting expenses for the three months ended March 31, 2001
decreased $608,000, or 3.6%, from the same period of the prior year, to $16.3
million from $16.9 million. This decrease was the result of an expense reduction
program instituted by the Company during the second and third quarters of 2000.
The expense categories most affected by the program were payroll expense,
promotional expense and discretionary expenses.
Publishing expenses for the three months ended March 31, 2001 increased
$237,000, or 3.1%, from the same period of the prior year, to $7.9 million from
$7.7 million. This increase was the result of an increase in newsprint expense,
partially offset by a cost reduction program instituted by the Company during
the second and third quarters of 2000. The expense categories most affected by
the program were payroll expense, promotional expense and discretionary
expenses. The Company also reduced expenses by closing Gwinnett News and
Entertainment Television, its cable news channel in suburban Atlanta.
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Paging expenses for the three months ended March 31, 2001 decreased
$68,000, or 4.5%, from the same period of the prior year, to $1.4 million from
$1.5 million. The decrease was due primarily to a decrease in payroll expense of
$41,000.
Corporate and administrative expenses for the three months ended March
31, 2001 decreased $84,000, or 8.2%, from the same period of the prior year to
$944,000 from $1.0 million. The decrease was due primarily to a decrease in
payroll and benefit expense of $63,000.
Depreciation of property and equipment and amortization of intangible
assets was $7.9 million for the three months ended March 31, 2001, as compared
to $7.7 million for the same period of the prior year, an increase of $176,000,
or 2.3%.
Miscellaneous income. Miscellaneous income for the three months ended
March 31, 2001 was $71,000 compared to $63,000 of miscellaneous income for the
three months ended March 31, 2000. The amounts for each period were relatively
consistent which reflects the absence of any unusual activity in either period.
Derivative valuation income (expense), net. On January 1, 2001, the
Company adopted SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," as amended ("SFAS 133"). Under SFAS 133, the Company is
required to record its interest rate swap agreement at market value. It also
requires the Company to record any changes in market value of the interest rate
swap agreement after January 1, 2001 as income or expense in its statement of
operations. As a result of the adoption of SFAS 133 and the general decrease in
market interest rates during the quarter ended March 31, 2001, the Company
recognized a non-cash derivative valuation expense of $785,442.
Interest expense. Interest expense decreased $474,000, or 4.9%, to $9.3
million for the three months ended March 31, 2001 from $9.7 million for the
three months ended March 31, 2000. The decrease was due to lower interest rates
and lower debt balances.
Income tax benefit. Income tax benefit for the three months ended March
31, 2001 and March 31, 2000 was $2.5 million and $1.7 million, respectively. The
increase in the income tax benefit was directly attributable to the increase in
net loss before tax in the current quarter as compared to the first quarter of
the prior year.
Net loss available to common stockholders. Net loss available to common
stockholders of the Company for the three months ended March 31, 2001 and March
31, 2000 was $5.2 million and $4.1 million, respectively.
OUTLOOK
With the adoption of Regulation FD by the Securities and Exchange
Commission, the Company is providing this guidance to widely disseminate the
Company's outlook for the second quarter and full year 2001. The guidance being
provided is based on the economic and market conditions as of May 14, 2001. The
Company can give no assurances as to how changes in those conditions may affect
the current expectations. The Company assumes no obligation to update the
guidance or expectations contained in this "Outlook" section. All matters
discussed in this "Outlook" section are forward-looking and, as such, persons
relying on this information should refer to the "Cautionary Statements for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995" section below.
Outlook for Second Quarter 2001
The Company currently anticipates that the general slowdown in the
placement of broadcast and newspaper advertising will continue during the second
quarter of 2001. However, based on preliminary sales information, the Company
believes the relative performance of its Broadcast and Publishing businesses
will improve slightly during the second quarter of 2001 compared to results for
the first quarter of 2001. The Company cautions that revenue generation,
especially in light of current general economic conditions, is subject to many
factors beyond the control of the Company. The Company's primary revenue source
is derived from broadcast advertising contracts which are
12
generally placed with limited advance notice, are short-term and generally run
for no more than a few weeks. Accordingly, the Company's ability to forecast
future revenue is limited and actual results may vary substantially from current
expectations.
Total revenue for the three months ending June 30, 2001 is currently
expected to be approximately 3% to 5% below second quarter 2000 results.
Broadcast revenue in the second quarter of 2001 is currently expected to be
approximately 5% to 7% below results for the same quarter of 2000. This expected
decline reflects, among other things, the reduced level of network compensation
for the three television stations in Texas. In addition, during the second
quarter of 2000 the Company earned $770,000 of revenue from political
advertising. The Company does not anticipate earning any meaningful amount of
revenue from political advertising during the second quarter of 2001. Publishing
revenue is currently expected to be relatively stronger in the second quarter of
2001 and may be approximately consistent with or slightly above second quarter
2000 results. Such overall result is primarily premised on achieving currently
anticipated revenue growth at the Company's two suburban Atlanta daily
newspapers.
For the three months ending June 30, 2001, operating expenses,
excluding depreciation and amortization, are currently expected to be relatively
consistent with the results of the second quarter of 2000.
Outlook for Full Year 2001
Assuming that the general economy improves in the second half of 2001,
the Company currently anticipates that the demand for broadcast and newspaper
advertising will gradually improve as 2001 progresses and further believes the
relative performance of its Broadcast and Publishing businesses will improve
during the year as the result of such improved demand. The Company cautions that
revenue generation, especially in light of current general economic conditions,
is subject to many factors beyond the control of the Company. The Company's
primary revenue source is derived from broadcast advertising contracts which are
generally placed with limited advance notice, are short-term and generally run
for no more than a few weeks. Accordingly, the Company's ability to forecast
future revenue is limited and actual results may vary substantially from current
expectations.
Total revenue for the year ending December 31, 2001 is currently
expected to be approximately 2% to 5% below 2000 results. Broadcast revenue for
2001 is currently expected to be approximately 5% to 7% below results for 2000.
This anticipated level of decline reflects among other things, the assumption
that a general improvement in economic conditions will increase the demand for
advertising time in the Company's television markets during the second half of
this year. In addition, such expected decline reflects the reduced level of
network compensation for the three television stations in Texas and the off year
cycle of political advertising. During 2000 the Company earned $9.0 million of
political advertising revenue while during 2001 the Company does not anticipate
earning any meaningful amount of political advertising revenue. Publishing
revenue is currently expected to slightly exceed 2000 results by approximately
2% to 3% with such overall growth primarily premised on achieving currently
anticipated revenue growth at its two suburban Atlanta daily newspapers.
Total operating expenses, excluding depreciation and amortization, are
currently expected to be relatively consistent with the results of 2000.
Broadcast expenses, excluding depreciation and amortization, for 2001 may be
approximately consistent with or slightly lower than the 2000 results while
Publishing operating expenses for 2001 are expected to be approximately
consistent with or slightly higher than the 2000 results, primarily reflecting
higher newsprint prices. The generally favorable operating expense expectations
reflect the Company's on-going expense reduction efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $2.9 million and $13.2 million at
March 31, 2001 and December 31, 2000, respectively. The decrease was due to an
increase in accounts payable due to digital television ("DTV") equipment
purchases and accrued interest due to the timing of the interest payments on the
senior subordinated notes and a decrease in accounts receivable due to the
collection of seasonally elevated fourth quarter revenues.
13
The Company's cash provided from operations was $10.0 million and $7.8
million for the three months ended March 31, 2001 and March 31, 2000,
respectively. The Company's cash used in investing activities was $4.3 million
and $2.0 million for the three months ended March 31, 2001 and March 31, 2000,
respectively. The increase in cash provided by operations and cash used by
investing activities from 2000 to 2001 was primarily due to the purchase of DTV
equipment which is not payable until 2002. As of December 31, 2000, the Company
had taken delivery of $3.7 million of DTV equipment and accrued for it as a
deferred liability. This liability became a current liability in the first
quarter of 2001 and was reclassified as accounts payable.
In 2001, the Company made $4.3 million of capital expenditures,
relating primarily to the broadcasting and publishing operations. Of this
amount, $675,000 was paid in 2001. The remaining $3.7 million was accrued at
March 31, 2001 and is payable in 2002. Generally, under current Federal
Communications Commission ("FCC") rules each of the Company's stations must
construct DTV broadcast facilities and commence operations by May 2002. The
Company completed its DTV implementation at WRDW, its Augusta, Georgia station,
in early 2000. As of April 23, 2001, the Company has commenced such DTV
construction at KWTX and WEAU, its Waco, Texas and Eau Claire, Wisconsin
stations, respectively. The Company currently intends to complete the necessary
DTV construction at all of its stations by the FCC deadline. At present, the
Company anticipates incurring approximately $12.5 million of DTV capital
expenditures during 2001 and $10 million in 2002, including a capital lease of
approximately $2.3 million for tower facilities at WVLT, its Knoxville,
Tennessee station. Total capital expenditures, including DTV capital
expenditures, for 2001 are anticipated to be approximately $15.0 million.
The Company's financing activities used $6.8 million and $5.7 million
for the three months ended March 31, 2001 and 2000, respectively. The increase
in cash used in financing activities resulted primarily from increased payments
on long-term debt offset in part by the proceeds from the issuance of common
stock.
The Company regularly enters into program contracts for the right to
broadcast television programs produced by others and program commitments for the
right to broadcast programs in the future. Such programming commitments are
generally made to replace expiring or canceled program rights. Payments under
such contracts are made in cash or the concession of advertising spots for the
program provider to resell, or a combination of the two. During the three months
ended March 31, 2001, the Company paid $1.4 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 March 31,
2001, the Company anticipates that it will generate taxable operating losses for
the foreseeable future.
At March 31, 2001, the balance outstanding and the balance available
under the Company's bank loan agreement were $207.5 million and $63.5 million,
respectively, and the interest rate on the balance outstanding was 8.0%. At
March 31, 2000, the balance outstanding and the balance available under the
Company's bank loan agreement were $216.0 million and $79.0 million,
respectively, and the effective interest rate on the balance outstanding was
8.84%. The decrease in the balance outstanding and the interest rate generated a
decrease in interest expense of $474,000, or 4.9%.
On March 31, 2000, the Company's Board of Directors authorized payment
of a $1.0 million fee to Bull Run Corporation, a principal shareholder of the
Company, for services rendered in connection with the Company's option to
purchase Bull Run's equity investment in Sarkes Tarzian. Effective as of March
1, 2000, the fee was and continues to be payable in equal monthly installments
of $50,000. As of March 31, 2001, the unpaid portion of this fee was $200,000
and was included in the Company's accounts payable balance.
Management believes that current cash balances, cash flows from
operations and the borrowings under its bank loan agreement will be adequate to
provide for the Company's capital expenditures, debt service, cash dividends and
working capital requirements for the 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.
14
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
This quarterly report on Form 10-Q/A 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, (iv) high
debt levels and (v) 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.
15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRAY COMMUNICATIONS SYSTEMS, INC.
(Registrant)
Date: October 18, 2001 By: /s/ James C. Ryan
------------------------------------------
James C. Ryan,
Vice President and Chief Financial Officer
17