Business Context and Reporting Period
Company: Gray Television, Inc. (formerly Gray Communications Systems, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Operations: The Company operates in three segments: Broadcasting (13 TV stations), Publishing (4 daily newspapers), and Paging (operations in FL, GA, AL).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2002 |
Six Months Ended June 30, 2002 |
|---|---|---|
| Total Operating Revenues | $42.7 million | $80.3 million |
| Operating Income | $12.3 million | $20.6 million |
| Net Income (Loss) | $3.1 million | $(35.0) million |
| Net Loss Available to Common Stockholders | $(1.5) million | $(39.7) million |
| Media Cash Flow | $17.2 million | $30.5 million |
| Cash and Cash Equivalents | $15.5 million | $15.5 million |
| Long-Term Debt (incl. current) | $378.9 million | $378.9 million |
| Preferred Stock (Series C) | $39.2 million | $39.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 7% for the quarter and 4% for the six-month period compared to 2001. Broadcasting revenues rose due to a cyclical increase in political advertising ($1.4M in Q2 2002 vs. $0.1M in Q2 2001). Publishing revenues increased 9% (quarter) and 7% (six months) driven by retail and classified ads. Paging revenues declined 8% (quarter) and 7% (six months) due to price competition and reduced units in service.
- Expense Reduction: Operating expenses decreased 10% (quarter) and 13% (six months). This was primarily driven by a 53% reduction in depreciation and amortization following the adoption of SFAS 142, which eliminated the amortization of goodwill and indefinite-lived intangibles.
- Accounting Changes: The Company recorded a non-cash cumulative effect of accounting change of $30.6 million (net of tax) in the first half of 2002 due to the adoption of SFAS 142, resulting in a goodwill impairment charge of $39.5 million.
- Debt Extinguishment: An extraordinary charge of $7.3 million (net of tax) was recorded in the first quarter of 2002 related to the early extinguishment of debt.
- Preferred Stock: In April 2002, the Company issued $40 million of Series C Preferred Stock. Proceeds were used to repay $13.5 million of revolving credit facility borrowings.
Guidance, Outlook, and Risks
- Outlook: Management anticipates mid-single-digit percentage increases in broadcast local and national revenue (excluding political) for the full year 2002. Political advertising is expected to benefit from the election year cycle. Publishing revenue growth rates are expected to continue. Total operating expenses (excluding D&A) are expected to be slightly less than or equal to 2001 results.
- Acquisition: On June 4, 2002, the Company executed a merger agreement to acquire Stations Holding Co. (Benedek Broadcasting) for an estimated $502.5 million. The deal is expected to close in Q4 2002, financed by approximately $300 million in new debt and $250 million in equity. A $12.5 million letter of credit and 885,269 shares of Class B stock have been escrowed as security.
- Risks:
- Tax Litigation: The IRS is auditing 1996 and 1998 returns, alleging a deficiency of approximately $12.1 million plus interest/penalties. The Company has filed a petition in Tax Court.
- Debt Levels: The Company carries significant debt ($378.9 million outstanding) and has established a $12.5 million letter of credit for the pending acquisition.
- Regulatory: Ongoing capital expenditures are required for digital television conversion ($18.6 million remaining).
Investor Verification Checklist
- Verify the status and potential outcome of the IRS audit regarding the $12.1 million tax deficiency.
- Confirm the closing timeline and financing terms for the $502.5 million acquisition of Benedek Broadcasting.
- Monitor the impact of the new Series C Preferred Stock on future cash flows (8% dividend rate).
- Assess the sustainability of political advertising revenue growth in the second half of the election year.
- Review the Company's ability to service debt given the high leverage and pending acquisition financing.