GTN

Gray Television, Inc. - 10-Q Summary (Period Ended September 30, 2007)

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Gray Television, Inc. for the period ended September 30, 2007. Gray operates 36 primary television stations across 30 markets, serving approximately 6.3% of U.S. TV households. The company is the largest independent owner of CBS affiliates. The reporting period covers the three and nine months ended September 30, 2007, compared to the same periods in 2006.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 9% ($7.0 million) for the quarter and 3% ($7.2 million) for the nine-month period. This was primarily driven by a significant drop in political advertising revenues (down 86% for the quarter and 70% for the nine months) due to the absence of the 2006 election cycle. Local advertising revenues increased, partially offsetting declines in national advertising.
• Net Loss: The company reported a net loss of $4.2 million for the quarter and $24.6 million for the nine months, compared to net income of $1.4 million and $3.1 million, respectively, in the prior year periods.
• Debt Restructuring Costs: A major factor in the nine-month loss was a $22.9 million loss on early extinguishment of debt. This included a $6.5 million loss from refinancing the senior credit facility and a $16.4 million loss from redeeming 9.25% Senior Subordinated Notes.
• Expense Increases: Broadcast expenses increased 4% for the quarter and 7% for the nine months, driven by payroll increases related to the expansion of digital second channels and higher programming costs.

Guidance, Outlook, and Risks

• Capital Structure Changes: In March 2007, Gray refinanced its senior credit facility to a $1.025 billion commitment ($100 million revolver, $925 million term loan). In April and May 2007, the company redeemed its 9.25% Notes and Series C Preferred Stock, respectively.
• Liquidity: As of September 30, 2007, the company had $1.2 million in cash and $100 million available under its revolving credit facility. Management believes current resources are adequate for foreseeable capital expenditures, debt service, and dividends.
• Seasonality: Management notes that broadcast advertising revenues are typically highest in the second and fourth quarters. Even-numbered years generally see higher revenues due to political spending.
• Risks: The company faces restrictions under its senior secured credit facility, including limitations on indebtedness, asset sales, and dividends. Failure to meet leverage ratio tests could result in default. Additionally, the company is subject to normal legal proceedings and uncertainties regarding tax positions under FIN 48.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the new senior credit facility leverage ratios and restrictions on dividends/acquisitions.
• Political Revenue Volatility: Assess the impact of the non-election year (2007) on revenue stability compared to election years (2006, 2008).
• Cash Flow Sustainability: Review the significant decrease in operating cash flow (from $60.4 million to $11.9 million for the nine-month period) and its ability to cover debt service and capital expenditures.
• Related Party Transactions: Examine the sports marketing agreements with Triple Crown Media, Inc. (TCM) regarding the University of Kentucky and University of Tennessee, including potential contingent liabilities.
• Intangible Asset Amortization: Monitor the reduction in amortization expenses as prior acquisition assets become fully amortized and the impact on future operating margins.