GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: Gray operates in three segments: Broadcasting (29 TV stations), Publishing (5 daily newspapers), and Paging (operations in FL, GA, AL). The company is a holding company with no material independent assets other than its investment in subsidiaries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 10% for the quarter and 12% for the six-month period compared to the prior year.
  • Broadcasting: Revenues rose 12% (quarter) and 15% (six months), driven by a 249% increase in political advertising (presidential election year) and 9-11% growth in local advertising.
  • Paging: Revenues declined 8% (quarter) and 7% (six months) due to price competition and a reduction in units in service (48,000 vs. 61,000 in 2003) from cellular phone competition.
• Profitability: Net income available to common stockholders increased significantly, from $6.2 million to $11.4 million for the quarter, and from $5.6 million to $16.1 million for the six-month period.
  • Expense Management: Operating expenses remained relatively flat for the quarter (down <1%) and rose only 2% for the six-month period. Amortization of intangible assets decreased 87% (quarter) and 86% (six months) as certain assets became fully amortized.
  • Interest Expense: Decreased due to lower interest rates and a lower average principal balance on the senior credit facility.
• Liquidity: Cash and cash equivalents increased from $11.9 million (Dec 31, 2003) to $31.8 million (June 30, 2004). Net cash provided by operating activities increased $12.6 million year-over-year for the six-month period.

Guidance, Outlook, Risks, and Unusual Items

• Debt Restructuring: On May 28, 2004, the company amended its senior credit facility, reducing the interest rate by 0.5% on the $375 million term loan and extending the maturity to June 30, 2011. Interest-only payments are scheduled until March 31, 2005.
• Digital Conversion: As of July 16, 2004, 28 of 29 stations were broadcasting digital signals. The company anticipates an additional $2.0 million in cash payments for digital conversion and up to $7.0 million for other capital expenditures in the remainder of 2004.
• Legal Contingencies:
  • Tarzian Litigation: Gray holds an equity investment in Sarkes Tarzian, Inc. subject to litigation. Tarzian claims a binding contract to purchase the shares and seeks damages up to $75 million plus punitive damages. Gray denies liability and intends to defend vigorously.
  • General: Management believes other legal proceedings will not materially affect financial position.
• Forward-Looking Risks: Risks include dependence on advertising revenues, competition, regulatory changes, high debt levels, and the impact of digital conversion costs.

Investor Verification Checklist

• Political Ad Revenue Sustainability: Verify the extent to which the 249% increase in political advertising revenue is a one-time benefit of the 2004 election cycle versus a recurring trend.
• Paging Segment Decline: Assess the long-term viability of the paging segment given the continued loss of units to cellular competition and the 8% revenue decline.
• Debt Covenants and Interest Rates: Confirm the impact of the amended credit facility terms on future cash flow and verify compliance with loan covenants.
• Legal Exposure: Monitor the status of the Tarzian litigation, specifically the potential $75 million claim and the likelihood of Gray retaining its equity investment.
• Digital Conversion Costs: Track actual capital expenditures against the projected $9.0 million total ($2.0M digital + $7.0M other) for the remainder of 2004.