Business Context and Reporting Period
Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company operates in three segments: Broadcasting (29 television stations), Publishing (4 daily newspapers), and Paging (operations in Florida, Georgia, and Alabama). The reporting period reflects the full impact of the "2002 Acquisitions" (Gray MidAmerica Television and KOLO-TV), which were completed in the fourth quarter of 2002.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Total Operating Revenues | $73,352 | $214,974 | $122,814 |
| Operating Income | $19,488 | $53,518 | $32,518 |
| Net Income (Loss) | $5,556 | $12,759 | $(31,842) |
| Net Income Available to Common Stockholders | $4,734 | $10,294 | $(37,414) |
| Diluted EPS (Available to Common) | $0.09 | $0.20 | $(2.38) |
| Cash and Cash Equivalents | $10,208 | $10,208 | $19,090 |
| Long-Term Debt (incl. current) | $655,904 | $655,904 | $658,220 |
| Net Cash Provided by Operating Activities | N/A | $51,684 | $17,320 |
Liquidity: As of September 30, 2003, the Company had $10.2 million in cash and $75.0 million available under its senior credit facility. Total debt remained relatively stable at approximately $656 million.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 73% for the quarter and 75% for the nine-month period compared to the prior year. This growth is primarily attributable to the inclusion of the 2002 Acquisitions.
- Broadcasting: Revenues surged 104% (quarter) and 109% (nine months). Organic revenue from continuously owned stations declined slightly (3% and 1% respectively) due to a 93% drop in political advertising (an "off-year" cycle), offset by increases in local and national advertising.
- Paging: Revenues declined 6% (quarter) and 5% (nine months) due to price competition and a reduction in units in service (from 72,000 to 58,000) caused by competition from cellular telephones.
- Operating Expenses: Increased 76% (quarter) and 79% (nine months), driven largely by the acquired stations. Depreciation and amortization expenses rose 92% and 91% respectively due to the new assets.
- Profitability: The Company returned to profitability. The nine-month 2002 period included a $30.6 million non-cash impairment charge (cumulative effect of accounting change) and an $11.3 million loss on early extinguishment of debt (reclassified from extraordinary item). Neither of these charges occurred in the 2003 period.
- Interest Expense: Increased to $10.5 million (quarter) and $32.7 million (nine months) due to a higher average debt balance, partially offset by lower average interest rates (5.94% vs 7.48% for the quarter).
Outlook, Risks, and Contingencies
- Capital Expenditures: The Company anticipates aggregate cash payments for capital expenditures, including digital television conversion, to approximate $23.5 million for the full year 2003. An additional $5.0 million is expected in 2004 for digital equipment.
- Digital Conversion: As of September 30, 2003, 25 of 29 stations were broadcasting digital signals. The Company has received FCC extensions for the remaining stations and expects to complete installations as soon as practicable.
- IRS Litigation: A dispute regarding the 1996 purchase of assets from First American Media, Inc. remains pending in Tax Court. If the IRS prevails, the tax basis of assets could be reduced by $166 million. However, the Company expects no immediate cash tax impact due to available net operating losses.
- Tarzian Litigation: The Company is involved in litigation regarding its equity investment in Sarkes Tarzian, Inc. Tarzian has sued the Company and Bull Run Corporation for tortious interference, seeking damages up to $75 million. The Company intends to defend vigorously.
- Related Party Transactions: In 2003, the Company repurchased warrants ($5.3 million) and common stock ($17.6 million) from Bull Run Corporation, a related party. Following these transactions, Bull Run no longer holds any shares of the Company.
Investor Verification Checklist
- Acquisition Impact: Verify the sustainability of revenue growth from the 2002 Acquisitions versus the organic decline in political advertising revenue.
- Debt Service: Confirm the Company's ability to service $656 million in debt given the high leverage ratio, despite the recent interest rate reduction on the term loan.
- Intangible Assets: Review the ongoing SEC discussions regarding the valuation of network affiliation agreements and potential future amortization or impairment charges.
- Litigation Exposure: Monitor the status of the Tarzian lawsuit and the IRS tax dispute for potential future cash outflows or asset write-downs.
- Digital CapEx: Track actual capital expenditures against the $23.5 million forecast for 2003 to ensure liquidity remains sufficient.