GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Gray Television owns 36 television stations serving 30 markets, with significant affiliations to CBS, NBC, ABC, and FOX. The company generates revenue primarily from local and national broadcast advertising, internet advertising, and retransmission consent fees. The reporting period was significantly impacted by the general economic recession, particularly a sharp decline in automotive advertising spending.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 16% ($23.3 million) year-over-year. Local advertising revenue fell 13% and national advertising revenue fell 27%, driven by the recession and a 45% drop in automotive advertising. Political advertising revenue dropped 76% due to the "off-year" election cycle.
• Expense Reductions: Broadcast expenses decreased 8% ($7.7 million) due to reduced compensation (fewer employees) and lower facility fees (discontinuation of analog broadcasts). Corporate and administrative expenses increased 22% due to severance and legal/consulting fees.
• Interest Expense: Interest expense increased 3% ($0.9 million) to $30.1 million. This was caused by a higher average interest rate (7.2% vs. 6.1%) resulting from a credit facility amendment, partially offset by a lower average debt balance.
• Unusual Items: The company recorded an $8.4 million loss on the early extinguishment of debt related to the amendment of its senior credit facility. Conversely, it recognized a $2.6 million gain on the disposal of assets related to FCC-mandated spectrum reallocation.
• Liquidity: Cash and cash equivalents decreased by $20.9 million to $9.8 million. Operating cash flow collapsed from $17.2 million to $0.4 million.

Guidance, Outlook, Risks, and Contingencies

• Covenant Compliance Risk: Management projects that the company is likely not to be in compliance with its leverage ratio covenant as of March 31, 2010. The current leverage ratio is 7.98, approaching the amended maximum of 8.25. Failure to comply could trigger a default and acceleration of debt repayment.
• Preferred Stock Dividends: The company has deferred cash dividend payments on its Series D Perpetual Preferred Stock for three consecutive quarters. Consequently, the dividend rate increased to 17.0% per annum effective July 16, 2009. While dividends are in arrears, the company is prohibited from paying dividends on common or Class A common stock.
• NYSE Listing Status: The company's average per share stock price ($0.49 for common, $0.60 for Class A) was below the NYSE minimum requirement of $1.00. The NYSE temporarily suspended this requirement until July 31, 2009. If the price does not recover by then, delisting procedures could begin in October 2009.
• Subsequent Event: On July 30, 2009, Gray was selected as a management advisor for seven television stations owned by Young Broadcasting, Inc. (in Chapter 11 bankruptcy). This is expected to generate a $2.2 million annual management fee.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to reduce debt or improve EBITDA to meet the 8.25 leverage ratio by March 31, 2010, to avoid default.
• Liquidity Position: Monitor cash burn rate and the sufficiency of the $27.1 million available borrowing capacity under the revolving credit facility.
• Preferred Stock Obligations: Assess the impact of the increased 17.0% dividend rate on future cash flows and the likelihood of resuming common stock dividends.
• Stock Price Recovery: Confirm if the stock price meets the $1.00 threshold by July 31, 2009, to maintain NYSE listing status.
• Advertising Recovery: Evaluate trends in automotive and local advertising spending to gauge revenue stabilization.