GTN

Business Context and Reporting Period

Company: Gray Television, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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) completed in the fourth quarter of 2002.

Key Financial Metrics

Note: Q1 2002 results included a $30.6 million cumulative effect of accounting change (SFAS 142) and an $11.3 million loss on early extinguishment of debt, which were reclassified or absent in Q1 2003.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 73% to $65.0 million, driven primarily by the inclusion of the 2002 Acquisitions. Broadcasting revenues rose 107% to $52.6 million. Publishing revenues grew 3%, while Paging revenues declined 2% due to competition.
• Expense Increases: Operating expenses rose 82.3% to $53.3 million, largely due to the acquired stations. Depreciation and amortization increased 90% to $7.1 million.
• Profitability Improvement: The Company moved from a significant net loss in Q1 2002 to a near-break-even net income of $171,000 in Q1 2003. This improvement is attributed to the absence of the prior year's goodwill impairment charge and debt extinguishment loss, alongside strong operating cash flow from new assets.
• Cash Flow: Net cash provided by operating activities surged to $23.0 million from $266,000, fueled by the positive cash flow of the newly acquired television stations.

Outlook, Risks, and Contingencies

• Capital Expenditures: Management anticipates aggregate cash payments for capital expenditures (including digital TV conversion) to range between $18.0 million and $19.0 million for the full year 2003.
• Digital Conversion: The Company is broadcasting digital signals at 16 of 29 stations. It anticipates spending an additional $10.0 million in 2003 and $10.5 million in 2004 for equipment and services.
• IRS Litigation: The IRS withdrew a claim regarding a $12.1 million tax liability. However, a dispute remains regarding the tax basis of assets acquired in 1996. If the IRS prevails, the tax basis could be reduced by $166 million, potentially increasing future cash taxes, though the Company currently has net operating losses to offset this.
• Legal Proceedings: The Company is involved in litigation regarding its equity investment in Sarkes Tarzian, Inc. A jury awarded Tarzian $4.0 million in damages, but the Company is defending against a separate suit seeking up to $75 million in damages and specific performance of a stock purchase contract.
• Debt Structure: As of March 31, 2003, the Company had $375.0 million outstanding on its senior credit agreement (with $75.0 million available) and $278.7 million in Senior Subordinated Notes due 2011.

Investor Verification Checklist

• Acquisition Integration: Verify the sustained revenue and cash flow performance of the 16 stations acquired in late 2002.
• IRS Tax Dispute: Monitor the status of the Tax Court case regarding the 1996 asset acquisition characterization and its potential impact on future tax liabilities.
• Tarzian Litigation: Track the resolution of the $4.0 million judgment and the pending $75 million lawsuit regarding the Sarkes Tarzian, Inc. shares.
• Digital Conversion Costs: Confirm actual capital expenditures against the $18.0–$19.0 million guidance for 2003.
• Debt Covenants: Review compliance with debt covenants given the high leverage ratio and interest expense of $11.3 million for the quarter.