GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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. Operations are subject to seasonality, with higher revenues typically in Q2 and Q4, and political spending cycles affecting even-numbered years.

Key Financial Metrics

Operating Cash Flow: Net cash used in operating activities was $1.3 million for Q1 2009, compared to $6.7 million provided in Q1 2008.
Capital Expenditures: $5.4 million in Q1 2009 versus $2.9 million in Q1 2008.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 14% ($9.6 million) due to a 14% drop in local advertising and a 21% drop in national advertising, attributed to the economic recession. Political advertising fell 67% ($2.1 million) as 2009 is an "off year" for political spending.
• Retransmission Growth: Retransmission consent revenue surged 463% to $3.6 million following contract renewals.
• Expense Reduction: Operating expenses (excluding depreciation/amortization) decreased 9% ($4.4 million) primarily due to reduced payroll costs from workforce reductions.
• Debt Restructuring: The company amended its senior credit facility on March 31, 2009. This resulted in a one-time loss on early extinguishment of debt of $8.4 million and incurred $7.0 million in issuance costs.
• Interest Expense: Interest expense decreased 36% to $10.1 million due to lower average interest rates (4.9% vs 6.6%) and reduced principal balances.

Outlook, Risks, and Contingencies

• Liquidity: Management believes current cash, operating cash flows, and $50 million in available borrowing capacity are sufficient to meet requirements through March 31, 2010. However, further amendments to the credit facility may be required thereafter to accommodate leverage ratios.
• Preferred Stock Dividends: The company has 1,000 shares of Series D Perpetual Preferred Stock outstanding. Dividends accrued at 15% per annum (increasing from 12%) were not paid for the periods ending Dec 31, 2008, and March 31, 2009. If three consecutive dividends remain unfunded, the rate increases to 17%. While dividends are in arrears, the company is prohibited from paying common stock dividends.
• Derivatives: The company holds interest rate swap agreements with a negative market value of $20.5 million as of March 31, 2009, recorded as other comprehensive loss.
• Legal Proceedings: The company is subject to normal legal proceedings but does not expect them to materially affect financial position. A sports marketing agreement with the University of Kentucky involves potential contingent payments if a partner (IMG) fails to pay license fees, though no advances were outstanding as of March 31, 2009.

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued compliance with the amended senior credit facility covenants, specifically the total net leverage ratio.
• Preferred Dividend Status: Monitor the payment status of Series D Preferred Stock dividends to assess the risk of the dividend rate increasing to 17% and the continued prohibition on common dividends.
• Cash Burn Rate: Review the sustainability of the $1.3 million operating cash outflow and the impact of the $7 million debt amendment cost on liquidity.
• Advertising Recovery: Assess the trajectory of local and national advertising spend recovery as the economic recession impacts persist.
• License Renewals: Confirm the status of FCC broadcast license renewals, noting the current backlog and negative weighted-average renewal period.