GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: Gray operates 36 television stations serving 30 markets, affiliated with CBS, NBC, ABC, and Fox. The company also operates 13 digital multi-cast channels. Revenues are derived primarily from broadcast advertising (local and national) and network compensation.

Key Financial Metrics

Note: Net income available to common stockholders for the six months ended June 30, 2006, was significantly reduced by preferred dividends of $1,629,000.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 20% ($13.4 million) for the three months and 18% ($23.3 million) for the six months ended June 30, 2006, compared to the prior year. This growth is primarily attributed to the acquisitions of WNDU-TV (March 2006) and WSAZ-TV (November 2005), as well as the launch of 13 digital second channels.
• Political Advertising: Political advertising revenues increased significantly due to the 2006 election cycle, rising $4.0 million in the quarter and $5.5 million in the six-month period.
• Operating Expenses: Operating expenses increased 19% ($9.4 million) for the quarter and 20% ($19.5 million) for the six months. Increases were driven by payroll, employee benefits, and operating costs associated with new acquisitions and digital channel launches.
• Interest Expense: Interest expense rose 47% ($5.4 million) for the quarter and 43% ($9.7 million) for the six months due to higher debt levels financing acquisitions and increased average interest rates.
• Discontinued Operations: The company spun off its publishing and wireless businesses (Triple Crown Media, Inc.) in December 2005. Consequently, income from discontinued operations reported in the prior year is not present in the current period.

Guidance, Outlook, and Risks

• Acquisition Activity: The company acquired WNDU-TV for $88.8 million in March 2006, funded by a $100 million incremental term loan. Management expects current cash balances and credit facility availability ($96 million) to be adequate for capital expenditures and debt service.
• Accounting Changes: The company adopted SFAS 123(R) on January 1, 2006, requiring fair value measurement of stock-based compensation. This resulted in additional non-cash expenses of $72,000 (quarter) and $148,000 (six months).
• Legal Proceedings: Litigation regarding the company's equity investment in Sarkes Tarzian, Inc. concluded in June 2006 with a dismissal of claims against the company. Management believes remaining legal proceedings will not materially affect financial position.
• Risk Factors: Key risks include potential impairment charges on goodwill and FCC licenses (totaling $1.37 billion in book value), dependence on advertising revenues, high debt levels, and the challenges of integrating acquisitions.
• Forward-Looking Statements: Management disclaims any obligation to update forward-looking statements regarding future strategic plans or economic conditions.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the impact of the $858 million debt load on future cash flows, given the 47% increase in interest expense.
• Acquisition Integration: Assess the performance of WNDU-TV and WSAZ-TV to ensure they meet projected revenue and margin targets.
• Intangible Asset Valuation: Monitor the $1.37 billion in goodwill and broadcast licenses for potential impairment charges, which could materially impact net income.
• Political Revenue Cyclicality: Confirm the sustainability of revenue growth once the 2006 election cycle concludes, as political advertising is a significant temporary driver.
• Preferred Dividend Obligations: Note the $1.6 million preferred dividend payment that significantly reduced net income available to common shareholders for the six-month period.