GRAY TELEVISION, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|
|
|
þ |
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2005 or
|
|
|
o |
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
For the transition period from _________ to _________ .
Commission file number 1-13796
Gray Television, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Georgia
|
|
58-0285030 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification Number) |
|
|
|
4370 Peachtree Road, NE, Atlanta, Georgia
|
|
30319 |
|
|
|
(Address of principal executive offices)
|
|
(Zip code) |
(404) 504-9828
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter periods that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).
Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practical date.
|
|
|
Common Stock, (No Par Value)
|
|
Class A Common Stock, (No Par Value) |
|
|
|
43,046,466 shares outstanding as of July 22, 2005
|
|
5,753,020 shares outstanding as of July 22, 2005 |
INDEX
GRAY TELEVISION, INC.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Assets: |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,203 |
|
|
$ |
50,566 |
|
Trade accounts receivable, less allowance for doubtful accounts
of $591 and $947 respectively |
|
|
56,043 |
|
|
|
56,964 |
|
Inventories |
|
|
909 |
|
|
|
1,101 |
|
Current portion of program broadcast rights, net |
|
|
2,446 |
|
|
|
7,679 |
|
Related party receivable |
|
|
1,334 |
|
|
|
1,411 |
|
Other current assets |
|
|
3,409 |
|
|
|
2,188 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
70,344 |
|
|
|
119,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Land |
|
|
18,498 |
|
|
|
18,394 |
|
Buildings and improvements |
|
|
38,194 |
|
|
|
37,225 |
|
Equipment |
|
|
218,888 |
|
|
|
200,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
275,580 |
|
|
|
256,093 |
|
Accumulated depreciation |
|
|
(122,823 |
) |
|
|
(113,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
152,757 |
|
|
|
142,209 |
|
|
|
|
|
|
|
|
|
|
Deferred loan costs, net |
|
|
10,135 |
|
|
|
12,101 |
|
Broadcast licenses |
|
|
935,078 |
|
|
|
926,739 |
|
Goodwill |
|
|
158,128 |
|
|
|
153,858 |
|
Other intangible assets, net |
|
|
2,414 |
|
|
|
2,832 |
|
Investment in broadcasting company |
|
|
13,599 |
|
|
|
13,599 |
|
Other |
|
|
2,098 |
|
|
|
2,222 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,344,553 |
|
|
$ |
1,373,469 |
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Liabilities and stockholders’ equity: |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Trade accounts payable |
|
$ |
3,492 |
|
|
$ |
3,276 |
|
Employee compensation and benefits |
|
|
8,714 |
|
|
|
12,389 |
|
Current portion of accrued pension costs |
|
|
5,854 |
|
|
|
2,685 |
|
Accrued interest |
|
|
1,228 |
|
|
|
4,233 |
|
Other accrued expenses |
|
|
12,874 |
|
|
|
7,710 |
|
Dividends payable |
|
|
-0- |
|
|
|
5,871 |
|
Federal and state income taxes |
|
|
1,301 |
|
|
|
1,063 |
|
Current portion of program broadcast obligations |
|
|
4,116 |
|
|
|
9,225 |
|
Acquisition related liabilities |
|
|
774 |
|
|
|
1,231 |
|
Deferred revenue |
|
|
2,252 |
|
|
|
2,386 |
|
Current portion of long-term debt |
|
|
2,075 |
|
|
|
3,823 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
42,680 |
|
|
|
53,892 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
633,416 |
|
|
|
652,082 |
|
Program broadcast obligations, less current portion |
|
|
591 |
|
|
|
852 |
|
Deferred income taxes |
|
|
245,605 |
|
|
|
242,988 |
|
Other |
|
|
5,545 |
|
|
|
6,415 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
927,837 |
|
|
|
956,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note F) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Serial Preferred Stock, no par value; cumulative;
convertible; designated 5 shares, respectively, issued and
outstanding 4 shares, respectively ($39,640 aggregate liquidation
value, respectively) |
|
|
39,047 |
|
|
|
39,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common Stock, no par value; authorized 100,000 shares and
50,000 shares, respectively, issued 45,090 shares and 44,787
shares, respectively |
|
|
405,789 |
|
|
|
402,162 |
|
Class A Common Stock, no par value; authorized 15,000
shares; issued 7,332 shares, respectively |
|
|
11,037 |
|
|
|
11,037 |
|
Retained earnings |
|
|
12,585 |
|
|
|
11,669 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(1,414 |
) |
|
|
(1,414 |
) |
Unearned compensation |
|
|
(932 |
) |
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
427,065 |
|
|
|
422,398 |
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost, Common Stock, 2,048 shares and 1,693
shares, respectively |
|
|
(26,997 |
) |
|
|
(21,934 |
) |
Treasury Stock at cost, Class A Common Stock, 1,579 shares
and 1,566 shares, respectively |
|
|
(22,399 |
) |
|
|
(22,227 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
377,669 |
|
|
|
378,237 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,344,553 |
|
|
$ |
1,373,469 |
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcasting (less agency commissions) |
|
$ |
67,988 |
|
|
$ |
71,235 |
|
|
$ |
126,297 |
|
|
$ |
133,144 |
|
Publishing and other |
|
|
13,531 |
|
|
|
12,860 |
|
|
|
26,477 |
|
|
|
25,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,519 |
|
|
|
84,095 |
|
|
|
152,774 |
|
|
|
158,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses before depreciation,
amortization and (gain) loss on disposal of
assets, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcasting |
|
|
39,585 |
|
|
|
37,053 |
|
|
|
78,279 |
|
|
|
74,451 |
|
Publishing and other |
|
|
9,818 |
|
|
|
9,020 |
|
|
|
19,340 |
|
|
|
17,925 |
|
Corporate and administrative |
|
|
4,082 |
|
|
|
2,163 |
|
|
|
6,728 |
|
|
|
4,536 |
|
Depreciation |
|
|
5,888 |
|
|
|
5,870 |
|
|
|
11,702 |
|
|
|
11,672 |
|
Amortization of intangible assets |
|
|
208 |
|
|
|
237 |
|
|
|
417 |
|
|
|
519 |
|
Amortization of restricted stock awards |
|
|
98 |
|
|
|
94 |
|
|
|
196 |
|
|
|
189 |
|
(Gain) loss on disposal of assets, net |
|
|
305 |
|
|
|
(626 |
) |
|
|
339 |
|
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,984 |
|
|
|
53,811 |
|
|
|
117,001 |
|
|
|
108,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
21,535 |
|
|
|
30,284 |
|
|
|
35,773 |
|
|
|
49,657 |
|
Miscellaneous income, net |
|
|
158 |
|
|
|
262 |
|
|
|
453 |
|
|
|
407 |
|
Interest expense |
|
|
(11,312 |
) |
|
|
(10,474 |
) |
|
|
(22,425 |
) |
|
|
(20,935 |
) |
Loss on early extinguishment of debt |
|
|
(4,770 |
) |
|
|
-0- |
|
|
|
(4,770 |
) |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,611 |
|
|
|
20,072 |
|
|
|
9,031 |
|
|
|
29,129 |
|
Income tax expense |
|
|
2,218 |
|
|
|
7,875 |
|
|
|
3,563 |
|
|
|
11,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,393 |
|
|
|
12,197 |
|
|
|
5,468 |
|
|
|
17,700 |
|
Preferred dividends (includes accretion of
issuance cost of $22, $22, $44 and $44,
respectively) |
|
|
814 |
|
|
|
821 |
|
|
|
1,629 |
|
|
|
1,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
2,579 |
|
|
$ |
11,376 |
|
|
$ |
3,839 |
|
|
$ |
16,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
0.08 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,639 |
|
|
|
49,958 |
|
|
|
48,619 |
|
|
|
49,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.05 |
|
|
$ |
0.22 |
|
|
$ |
0.08 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,851 |
|
|
|
50,588 |
|
|
|
48,948 |
|
|
|
50,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
GRAY TELEVISION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)
(in thousands except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
|
|
Retained |
|
Class A |
|
Common |
|
Other |
|
|
|
|
|
|
Common Stock |
|
Common Stock |
|
Earnings |
|
Treasury Stock |
|
Treasury Stock |
|
Comprehensive |
|
Unearned |
|
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
(Deficit) |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Income (Loss) |
|
Compensation |
|
Total |
Balance at December 31,
2004 |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
44,786,566 |
|
|
$ |
402,162 |
|
|
$ |
11,669 |
|
|
|
(1,565,754 |
) |
|
$ |
(22,227 |
) |
|
|
(1,693,150 |
) |
|
$ |
(21,934 |
) |
|
$ |
(1,414 |
) |
|
$ |
(1,056 |
) |
|
$ |
378,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
5,468 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
5,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock cash
dividends ($0.06) per
share |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(2,923 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(2,923 |
) |
Preferred Stock dividends |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,629 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,629 |
) |
Issuance of Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
63,420 |
|
|
|
848 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
848 |
|
Non-qualified stock plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
234,830 |
|
|
|
2,303 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
2,303 |
|
Directors’ restricted
stock
plan |
|
|
-0- |
|
|
|
-0- |
|
|
|
5,000 |
|
|
|
72 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(72 |
) |
|
|
-0- |
|
Amortization of unearned
compensation |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
196 |
|
|
|
196 |
|
Purchase of Common Stock |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(12,800 |
) |
|
|
(172 |
) |
|
|
(354,900 |
) |
|
|
(5,063 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
(5,235 |
) |
Income tax benefits
relating to stock plans |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
404 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 |
|
|
7,331,574 |
|
|
$ |
11,037 |
|
|
|
45,089,816 |
|
|
$ |
405,789 |
|
|
$ |
12,585 |
|
|
|
(1,578,554 |
) |
|
$ |
(22,399 |
) |
|
|
(2,048,050 |
) |
|
$ |
(26,997 |
) |
|
$ |
(1,414 |
) |
|
$ |
(932 |
) |
|
$ |
377,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2005 |
|
2004 |
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,468 |
|
|
$ |
17,700 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
11,702 |
|
|
|
11,672 |
|
Amortization of intangible assets |
|
|
417 |
|
|
|
519 |
|
Amortization of deferred loan costs |
|
|
878 |
|
|
|
936 |
|
Amortization of bond discount |
|
|
70 |
|
|
|
72 |
|
Amortization of restricted stock award |
|
|
196 |
|
|
|
189 |
|
Amortization of program broadcast rights |
|
|
5,657 |
|
|
|
5,515 |
|
Write off loan acquisition costs from early extinguishment of debt |
|
|
2,684 |
|
|
|
-0- |
|
Payments on program broadcast obligations |
|
|
(5,668 |
) |
|
|
(5,399 |
) |
Supplemental employee benefits |
|
|
(25 |
) |
|
|
(22 |
) |
Common Stock contributed to 401(k) Plan |
|
|
848 |
|
|
|
952 |
|
Deferred income taxes |
|
|
2,617 |
|
|
|
9,785 |
|
(Gain) loss on disposal of assets, net |
|
|
339 |
|
|
|
(622 |
) |
Other |
|
|
705 |
|
|
|
-0- |
|
Changes in operating assets and liabilities, net of business
acquisitions: |
|
|
|
|
|
|
|
|
Receivables, inventories and other current assets |
|
|
602 |
|
|
|
536 |
|
Accounts payable and other current liabilities |
|
|
(2,024 |
) |
|
|
(2,145 |
) |
Accrued interest |
|
|
(3,005 |
) |
|
|
(1,987 |
) |
Income taxes payable |
|
|
238 |
|
|
|
1,984 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
21,699 |
|
|
|
39,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Acquisition of television businesses and licenses, net of cash acquired |
|
|
(13,945 |
) |
|
|
-0- |
|
Purchases of property and equipment |
|
|
(17,095 |
) |
|
|
(15,807 |
) |
Payments on acquisition related liabilities |
|
|
(520 |
) |
|
|
(1,160 |
) |
Other |
|
|
485 |
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(31,075 |
) |
|
|
(16,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt |
|
|
1,938 |
|
|
|
938 |
|
Repayments of borrowings on long-term debt |
|
|
(22,421 |
) |
|
|
(1,024 |
) |
Deferred loan costs |
|
|
(1,595 |
) |
|
|
(811 |
) |
Dividends paid, net of accreted preferred dividend |
|
|
(10,381 |
) |
|
|
(4,603 |
) |
Income tax benefit relating to stock plans |
|
|
404 |
|
|
|
-0- |
|
Proceeds from issuance of common stock |
|
|
2,303 |
|
|
|
1,658 |
|
Purchase of common stock |
|
|
(5,235 |
) |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(34,987 |
) |
|
|
(3,842 |
) |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(44,363 |
) |
|
|
19,814 |
|
Cash and cash equivalents at beginning of period |
|
|
50,566 |
|
|
|
11,947 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
6,203 |
|
|
$ |
31,761 |
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
7
GRAY TELEVISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Gray Television,
Inc. (“Gray”, “we”, “us”, “our” or “the Company”) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair statement have been included. Operating results for the three-month and
six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto included in Gray’s Annual Report on Form 10-K for the
year ended December 31, 2004.
Stock-Based Compensation
The Company follows the provisions of FASB Statement No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”). The provisions of SFAS No. 123 allow companies to either expense
the estimated fair value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”,
(“APB 25”), but disclose the pro forma effects on net income had the fair value of the options been
expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option
incentive plans.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options’ vesting period. Gray’s pro forma information follows (in thousands,
except per common share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income available to common stockholders, as reported |
|
$ |
2,579 |
|
|
$ |
11,376 |
|
|
$ |
3,839 |
|
|
$ |
16,057 |
|
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects |
|
|
(666 |
) |
|
|
(262 |
) |
|
|
(855 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders, pro forma |
|
$ |
1,913 |
|
|
$ |
11,114 |
|
|
$ |
2,984 |
|
|
$ |
15,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.05 |
|
|
$ |
0.23 |
|
|
$ |
0.08 |
|
|
$ |
0.32 |
|
Basic, pro forma |
|
$ |
0.04 |
|
|
$ |
0.22 |
|
|
$ |
0.06 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
0.05 |
|
|
$ |
0.22 |
|
|
$ |
0.08 |
|
|
$ |
0.32 |
|
Diluted, pro forma |
|
$ |
0.04 |
|
|
$ |
0.22 |
|
|
$ |
0.06 |
|
|
$ |
0.31 |
|
8
NOTE A—BASIS OF PRESENTATION (Continued)
Earnings Per Share
Gray computes earnings per share in accordance with FASB Statement No. 128, “Earnings Per
Share” (“EPS”). The following table reconciles weighted average shares outstanding — basic to
weighted average shares outstanding — diluted for the three months and six months ended June 30,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Weighted average shares outstanding — basic |
|
|
48,639 |
|
|
|
49,958 |
|
|
|
48,619 |
|
|
|
49,907 |
|
Stock options, warrants, convertible
preferred stock and restricted stock |
|
|
212 |
|
|
|
630 |
|
|
|
329 |
|
|
|
639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — diluted |
|
|
48,851 |
|
|
|
50,588 |
|
|
|
48,948 |
|
|
|
50,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months and six months ended June 30, 2005 and 2004, the Company generated net
income; therefore, common stock equivalents related to employee stock-based compensation plans,
warrants and convertible preferred stock were included in the computation of diluted earnings per
share to the extent that their exercise costs and conversion prices exceeded market value. The
number of antidilutive common stock equivalents excluded from diluted earnings per share for the
respective periods are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Antidilutive common
stock equivalents
excluded from diluted
earnings per share |
|
|
4,674 |
|
|
|
4,732 |
|
|
|
4,557 |
|
|
|
4,723 |
|
Recent Accounting Pronouncements
Accounting
Changes and Corrections of Errors — In May 2005, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standard No. 154, (“SFAS No. 154”),
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement
No. 20. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all
voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those provisions should
be followed. SFAS No. 154 is effective for the Company in the first quarter of 2006.
Share-Based
Payment — In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, (“SFAS No. 123”) (revised 2005), Share-Based
Payment (SFAS 123(R)), that addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity instruments of the enterprise
or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that
may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to
account for share-based compensation transactions using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally
would require instead that such transactions be accounted for using a fair-value-based method. The
Company is currently evaluating SFAS 123(R) to determine which fair-value-based model and
transitional provision it will follow upon adoption. The options for transition methods as
prescribed in SFAS 123(R) include either the modified prospective or the modified retrospective
methods. The modified prospective method requires that compensation expense be recorded for all
unvested stock options and restricted stock as the requisite service is rendered beginning with the
first quarter of adoption, while the modified retrospective method would record compensation
expense for
9
NOTE A—BASIS OF PRESENTATION (Continued)
Recent Accounting Pronouncements (Continued)
stock options and restricted stock beginning with the first period restated. Under the modified
retrospective method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. SFAS 123(R) will be effective for the Company beginning in
its first quarter of fiscal 2006. Although the Company will continue to evaluate the application of
SFAS 123(R), based on options issued and outstanding at present, the Company expects that the
expense will be between $75,000 and $125,000 for the year ended December 31, 2006.
American Jobs Creation Act of 2004 — On October 22, 2004, the President signed the American
Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010. The Company is
currently evaluating which of its operations may qualify as “qualified domestic production
activities” under the Act and thus the financial effect that the Act may or may not have upon the
Company.
Reclassifications
Portions of prior year publishing revenue and expense in the accompanying condensed
consolidated financial statements have been reclassified to conform to the 2005 presentation.
For the three months and six months ended June 30, 2004, $258,000 and $754,000, respectively, of publishing
revenue and expense that was previously recognized separately has been presented on a net basis.
The reclassification does not affect operating income, net income or cash flows.
NOTE B—BUSINESS ACQUISITION
On January 31, 2005, the Company completed its acquisition of KKCO-TV, Channel 11 (“KKCO”)
from Eagle III Broadcasting, LLC for a purchase price of $13.5 million plus related transaction
costs of $700,000. Total cost was $14.2 million. KKCO, Channel 11 serves the Grand Junction,
Colorado television market and is an NBC affiliate. The Company used a portion of its cash on hand
to fully fund this acquisition.
The acquisition of KKCO has been accounted for under the purchase method of accounting. Under
the purchase method of accounting, the results of operations of the acquired business are included
in the accompanying condensed consolidated financial statements as of its acquisition date. The
identifiable assets and liabilities of the
10
NOTE B—BUSINESS ACQUISITION (Continued)
acquired business are recorded at their estimated fair values with the excess of the purchase price
over such identifiable net assets allocated to goodwill.
The following table summarizes the preliminary fair values of the assets acquired and the
liabilities assumed at the date of acquisition for KKCO (in thousands):
|
|
|
|
|
|
|
Amount |
Accounts receivable |
|
$ |
442 |
|
Current portion of program broadcast rights |
|
|
35 |
|
Other current assets |
|
|
44 |
|
Property and equipment |
|
|
1,111 |
|
Intangible assets not subject to amortization: |
|
|
|
|
Broadcast licenses |
|
|
8,338 |
|
Goodwill |
|
|
4,269 |
|
Trade payables and accrued expenses |
|
|
(1 |
) |
Current portion of program broadcast obligations |
|
|
(35 |
) |
|
|
|
|
|
Total purchase price including expenses |
|
$ |
14,203 |
|
|
|
|
|
|
All of the goodwill recorded in association with the acquisition of KKCO is expected to be
deductible for income tax purposes. Broadcast licenses and goodwill are indefinite lived
intangible assets. KKCO contributed revenue of $715,000 and operating income of $54,000 to the
Company’s operating results for the three months ended June 30, 2005. KKCO contributed revenue of
$1.1 million and operating income of $93,000 to the Company’s operating results for the six months
ended June 30, 2005.
NOTE C—LONG-TERM DEBT
On June 28, 2005, Gray amended its existing senior credit facility. The amended agreement has
a maximum term of seven and one half years and the total amount available under the agreement is
$400 million, consisting of a $100 million revolving facility, a $100 million term loan A facility
and a $200 million term loan B facility. Gray may use the proceeds from the credit facilities for
working capital, capital expenditures made in the ordinary course of business and for certain
investments and acquisitions permitted under the facilities. The amended agreement contains
affirmative and negative covenants that Gray must comply with, including (a) limitations on
additional indebtedness, (b) limitations on liens, (c) limitations on the sale of assets, (d)
limitations on guarantees, (e) limitations on investments and acquisitions, (f) limitations on the
payment of dividends, (g) limitations on mergers, as well as other customary covenants. Also, Gray
must not let its leverage ratio and senior leverage ratio exceed certain maximum limits and Gray
can not let its interest coverage ratio or fixed charge ratio fall below certain minimum limits as
such ratio is defined in the senior credit facility.
Simultaneous with amending its senior credit facility, Gray borrowed $376 million under the
senior credit facility to retire all previous outstanding obligations under its previously existing
senior credit facility. The previous senior credit facility originally provided for borrowing of up
to $450 million, and consisted of a $375 million term facility and a $75 million revolving
facility.
Gray paid out approximately $1.6 million in cash for the amendment of the senior credit
facility and of this amount $1.2 million was capitalized as deferred financing costs which will be
amortized to interest expense over the remaining life of the agreement. The remaining $370,126 was
reported as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing
costs and recognized a loss on early extinguishment of debt in the amount of $1.8 million.
Therefore, the total loss on early extinguishment of debt related to the amendment of the senior
credit facility was $2.2 million.
Gray’s interest rate is based on the lender’s base rate (generally reflecting the lender’s
prime rate) plus the specified margin or a London Interbank Offered Rate (“LIBOR”) plus a specified
margin. The specified margin for revolving and term loan A advances is determined by Gray’s debt
leverage ratio as defined in the agreement.
11
NOTE C—LONG-TERM DEBT (Continued)
|
|
|
|
|
|
|
|
|
|
|
Range of Applicable Margin |
|
Range of Applicable Margin |
|
|
for Base Rate Advances |
|
for LIBOR Rate Advances |
|
Revolving and term A advances |
|
0% to 0.25% |
|
0.75% to 1.5% |
Term B advances |
|
|
0.25 |
% |
|
|
1.5 |
% |
Gray has elected to borrow these funds under its LIBOR option. The interest rate under this
option is LIBOR plus the current margin of 1.25% for revolving and term loan A advances and a
margin of 1.5% for term loan B advances. The amount outstanding under the senior credit facility
as of June 30, 2005 is $376 million and is allocated as follows: revolving loan of $76 million,
term loan A of $100 million and term loan B of $200 million. Available credit under the senior
credit facility as of June 30, 2005, was $24 million.
During the six months ended June 30, 2005, Gray repurchased $21.5 million, face amount, of its
Senior Subordinated Notes due 2011 (the “9 1/4% Notes”) in the open market. Associated with this
repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included a premium
of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted
discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued interest.
Gray used cash on hand of $24.3 million for the repurchase of
its 9 1/4% Notes which included amounts
for the face amount of the 9 1/4% Notes, premium and accrued interest. As of June 30, 2005, Gray’s
9 1/4% Notes had a balance outstanding of $257.6 million excluding unaccreted discount of $0.9
million.
The
9 1/4% Notes are jointly and severally guaranteed (the “Subsidiary Guarantees”) by all of
Gray’s subsidiaries (the “Subsidiary Guarantors”). The obligations of the Subsidiary Guarantors
under the Subsidiary Guarantees is subordinated, to the same extent as the obligations of Gray in
respect of the 9 1/4% Notes, to the prior payment in full of all existing and future senior debt of
the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary Guarantors of
any senior debt).
Gray is a holding company with no material independent assets or operations, other than its
investment in its subsidiaries. The aggregate assets, liabilities, earnings and equity of the
Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity
of Gray on a consolidated basis. The Subsidiary Guarantors are, directly or indirectly, wholly
owned subsidiaries of Gray and the Subsidiary Guarantees are full, unconditional and joint and
several. All of the current and future direct and indirect subsidiaries of Gray are guarantors of
the 9 1/4% Notes. Accordingly, separate financial statements and other disclosures of each of the
Subsidiary Guarantors are not presented because Gray has no independent assets or operations, the
guarantees are full and unconditional and joint and several and any subsidiaries of the parent
company other than the Subsidiary Guarantors are minor. The senior credit facility is
collateralized by substantially all of Gray’s existing and hereafter acquired assets except for
real estate and the assets utilized in Gray’s publishing and paging business.
NOTE D—RETIREMENT PLANS
The following table provides the components of net periodic benefit cost for Gray’s pension
plans for the three and six months ended June 30, 2005 and 2004, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Service cost |
|
$ |
758 |
|
|
$ |
592 |
|
|
$ |
1,457 |
|
|
$ |
1,092 |
|
Interest cost |
|
|
325 |
|
|
|
267 |
|
|
|
650 |
|
|
|
517 |
|
Expected return on plan assets |
|
|
(222 |
) |
|
|
(203 |
) |
|
|
(472 |
) |
|
|
(403 |
) |
Loss amortization |
|
|
139 |
|
|
|
28 |
|
|
|
239 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,000 |
|
|
$ |
684 |
|
|
$ |
1,874 |
|
|
$ |
1,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2005, Gray contributed $766,000 to its pension plans.
During the remainder of 2005, Gray expects to contribute an additional $4.2 million to its pension
plans.
12
NOTE E—INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: broadcasting, publishing and paging. As of
June 30, 2005, the broadcasting segment operates 31 television stations located in the United
States. The publishing segment operates five daily newspapers located in Georgia and Indiana. The
paging operations are located in Florida, Georgia and Alabama. The following tables present
certain financial information concerning Gray’s three operating segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Operating revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcasting |
|
$ |
67,988 |
|
|
$ |
71,235 |
|
|
$ |
126,297 |
|
|
$ |
133,144 |
|
Publishing |
|
|
11,615 |
|
|
|
11,062 |
|
|
|
22,803 |
|
|
|
21,529 |
|
Paging |
|
|
1,916 |
|
|
|
1,798 |
|
|
|
3,674 |
|
|
|
3,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$ |
81,519 |
|
|
$ |
84,095 |
|
|
$ |
152,774 |
|
|
$ |
158,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadcasting |
|
$ |
19,219 |
|
|
$ |
27,205 |
|
|
$ |
30,950 |
|
|
$ |
44,092 |
|
Publishing |
|
|
2,094 |
|
|
|
2,766 |
|
|
|
4,391 |
|
|
|
5,015 |
|
Paging |
|
|
222 |
|
|
|
313 |
|
|
|
432 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
|
21,535 |
|
|
|
30,284 |
|
|
|
35,773 |
|
|
|
49,657 |
|
Miscellaneous income, net |
|
|
158 |
|
|
|
262 |
|
|
|
453 |
|
|
|
407 |
|
Interest expense |
|
|
(11,312 |
) |
|
|
(10,474 |
) |
|
|
(22,425 |
) |
|
|
(20,935 |
) |
Loss on early extinguishment of debt |
|
|
(4,770 |
) |
|
|
-0- |
|
|
|
(4,770 |
) |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
5,611 |
|
|
$ |
20,072 |
|
|
$ |
9,031 |
|
|
$ |
29,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and administrative expenses as well as amortization of restricted stock are
allocated to operating income based on segment net revenues.
NOTE F—COMMITMENTS AND CONTINGENCIES
Tarzian Litigation
The Company has an equity investment in Sarkes Tarzian, Inc. (“Tarzian”) representing shares
in Tarzian which were originally held by the estate of Mary Tarzian (the “Estate”). As described
more fully below, the Company’s ownership of the Tarzian shares is subject to certain litigation.
On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern
District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative
of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian
shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor
of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. The Estate
appealed the judgment and the Court’s rulings on certain post-trial motions, and Tarzian
cross-appealed. On February 14, 2005, the U.S. Court of Appeals for the Seventh Circuit issued a
decision concluding that no contract was ever created between Tarzian and the Estate, reversing the
judgment of the District Court, and remanding the case to the District Court with instructions to
enter judgment for the Estate. Tarzian’s petition for rehearing was denied by the Seventh Circuit,
and Tarzian has petitioned the U.S. Supreme Court for certiorari. Tarzian also filed a motion for
a new trial in the District Court based on the Estate’s alleged failure to produce certain
documents in discovery, and on June 16, 2005, the Court denied Tarzian’s motion. On July 21, 2005,
Tarzian filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court’s
denial of its motion for new trial and entry of final judgment for the Estate. The Company cannot
predict when the final resolution of this litigation will occur.
On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern
District of Georgia against Bull Run Corporation and the Company for tortious interference with
contract and conversion. The lawsuit
13
NOTE F—COMMITMENTS AND CONTINGENCIES (Continued)
Tarzian Litigation (Continued)
alleges that Bull Run Corporation and Gray purchased the Tarzian shares with actual knowledge that
Tarzian had a binding agreement to purchase the stock from the Estate. The lawsuit seeks damages
in an amount equal to the liquidation value of the interest in Tarzian that the stock represents,
which Tarzian claims to be as much as $75 million, as well as attorneys’ fees, expenses, and
punitive damages. The lawsuit also seeks an order requiring the Company and Bull Run Corporation
to turn over the stock certificates to Tarzian and relinquish all claims to the stock. The stock
purchase agreement with the Estate would permit the Company to make a claim against the Estate in
the event that title to the Tarzian Shares is ultimately awarded to Tarzian. There is no assurance
that the Estate would have sufficient assets to honor any or all of such potential claims. The
Company filed its answer to the lawsuit on May 14, 2003 denying any liability for Tarzian’s claims.
On May 27, 2005, the Court issued an Order administratively closing the case pending resolution of
Tarzian’s lawsuit against the Estate in Indiana federal court. The Company believes it has
meritorious defenses and intends to vigorously defend the lawsuit. The Company cannot predict when
the final resolution of this litigation will occur.
Related Party Receivable
Through a rights-sharing agreement with Host Communications, Inc. (“Host”), a wholly owned
subsidiary of Bull Run Corporation (“Bull Run”), Gray participated jointly with Host in the
marketing, selling and broadcasting of certain collegiate sporting events and in related
programming, production and other associated activities related to the University of Kentucky.
Certain executive officers and significant stockholders of Gray are also executive officers and
significant stockholders of Bull Run Corporation.
The agreement commenced April 1, 2000 and terminated April 15, 2005. Gray shared the profit
or loss from these activities with Host. Under that agreement, in certain circumstances, Gray was
called upon to advance payment directly to the respective collegiate institution for a portion of
certain upfront rights fees. Gray was given credit for any such advance payments when determining
its share of income or loss from these activities. During 2003, Gray paid $1.5 million under this
provision. No similar payments were made during 2004 or 2005. As of June 30, 2005 and December
31, 2004, Gray had $1.3 million and $1.4 million respectively, recorded as a related party
receivable for payments made in 2003 and earlier years.
Host Commitment
On October 12, 2004, the University of Kentucky jointly awarded a new sports marketing
agreement to Gray and Host. The new agreement commenced April 16, 2005 and has an initial term of
seven years with the option to extend the license for three additional years. Aggregate license
fees to be paid to the University of Kentucky over a full ten year term for the agreement will
approximate $80.5 million. Gray and Host will share equally the cost of the license fees.
NOTE G —SUBSEQUENT EVENT
Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses
On August 2, 2005, Gray announced that our board of directors approved a plan to spin off our
newspaper publishing business and our paging business to our shareholders, which will result in a
newly created and separately traded public company named Triple Crown Media, Inc. (“TCM”). We
expect that as a result of the spin-off, both Gray and TCM will be better able to focus financial
and operational resources on their own business and executing their own strategic plan. In
addition, we believe that both Gray and TCM will have greater strategic and financial flexibility
to support future growth opportunities.
We currently conduct our newspaper publishing business and wireless business through our
subsidiary Gray Publishing, LLC and its subsidiaries. Under the proposed spin-off, we will
contribute all of the membership interests of Gray Publishing, LLC and certain other assets to TCM.
We will then distribute 100% of TCM’s common stock
14
NOTE G —SUBSEQUENT EVENT (Continued)
Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses (Continued)
pro rata as a dividend to our stockholders. Upon completion of the spin-off, each common
shareholder of Gray will receive as a dividend one share of common stock of TCM for every 10 shares
of Gray common stock and for every 10 shares of Gray Class A common stock. No stockholder vote
will be required to effect the spin-off, and no consideration will be required to be paid by our
shareholders in order to receive the shares of common stock of TCM. On the date of the spin-off,
TCM will distribute $40 million to us, which we intend to use to reduce our outstanding
indebtedness. TCM will also be obligated reimburse Gray for approximately 75% of the professional
service costs and expenses incurred by Gray related to the spin-off transactions.
Planned Merger of Spun-off Company with Bull Run Corporation
On August 2, 2005, Gray also announced that TCM, BR Acquisition Corp., which is a wholly owned
subsidiary of TCM, and Bull Run have entered into an agreement and plan of merger, pursuant to
which Bull Run will be merged with and into BR Acquisition Corp. immediately following our spin-off
of TCM. In the merger, each Bull Run shareholder will receive 0.0289 shares of TCM common stock
for each share of Bull Run common stock owned. In the merger, Bull Run preferred stock held by
non-affiliated holders will be redeemed for its current redemption value. Holders of preferred
stock and other loans to Bull Run who are affiliates of Bull Run, including J. Mack Robinson, our
current Chairman and Chief Executive Officer and Chairman of the Board of Bull Run, will receive
shares of TCM common stock in exchange for shares of Bull Run series F preferred stock and accrued
and unpaid dividends thereon; shares of TCM series A preferred stock in exchange for shares of Bull
Run series D and series E preferred stocks and accrued and unpaid dividends thereon; and shares of
TCM series B preferred stock in exchange for cash previously advanced to Bull Run. The agreement is
subject to certain closing conditions, including an affirmative vote of Bull Run’s shareholders.
On a combined basis, after the merger, current shareholders of Gray will own approximately 95% of
the outstanding common stock of TCM and certain holders of Bull Run preferred stock and current
holders of Bull Run common stock will hold the remaining 5%. TCM has received a long-term financing
commitment from bank lenders that will accommodate the payment of the distribution to us and the
refinancing of all of Bull Run’s bank and subordinated indebtedness. Bull Run’s common stock is
traded on the Pink Sheets centralized quotation service for OTC securities under the symbol
“BULL.PK”.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Introduction
The following analysis of the financial condition and results of operations of Gray
Television, Inc. (“the Company” or “Gray”) should be read in conjunction with Gray’s financial
statements contained in this report and in Gray’s Form 10-K for the year ended December 31, 2004.
Overview
The Company derives its revenues primarily from its television broadcasting operations and to
a lesser extent, from its newspaper publishing and paging operations. The operating revenues of the
Company’s television stations are derived from broadcast advertising revenues and, to a much lesser
extent, from ancillary services such as production of commercials and tower rentals as well as
compensation paid by the networks to the stations for broadcasting network programming. The
operating revenues of the Company’s newspaper publishing operations are derived from advertising,
circulation and classified revenue. Paging revenue is derived primarily from the sale of pagers,
cellular telephones and related services. Certain information concerning the relative contributions
of the Company’s television broadcasting, publishing and paging operations is provided in Note E.
“Information on Business Segments” to the Company’s unaudited consolidated financial statements
included elsewhere herein.
In the Company’s broadcasting operations, broadcast advertising is sold for placement either
preceding or following a television station’s network programming and within local and syndicated
programming. Broadcast advertising is sold in time increments and is priced primarily on the basis
of a program’s popularity among the specific audience an advertiser desires to reach, as measured
by Nielsen. In addition, broadcast advertising rates are affected by the number of advertisers
competing for the available time, the size and demographic makeup of the market served by the
station and the availability of alternative advertising media in the market area. Broadcast
advertising rates are the highest during the most desirable viewing hours, with corresponding
reductions during other hours. The ratings of a local station affiliated with a major network can
be affected by ratings of network programming.
Most broadcast advertising contracts are short-term, and generally run only for a few weeks.
Approximately 67% of the net revenues of the Company’s television stations for the six months ended
June 30, 2005, were generated from local advertising (including political advertising revenues),
which is sold primarily by a station’s sales staff directly to local accounts, and the remainder
represented primarily by national advertising, which is sold by a station’s national advertising
sales representative. The stations generally pay commissions to advertising agencies on local,
regional and national advertising and the stations also pay commissions to the national sales
representative on national advertising.
Broadcast advertising revenues are generally highest in the second and fourth quarters each
year, due in part to increases in consumer advertising in the spring and retail advertising in the
period leading up to and including the holiday season. In addition, broadcast advertising revenues
are generally higher during even numbered years due to spending by political candidates, which
spending typically is heaviest during the fourth quarter. The Company received significant
political advertising revenue during the prior year.
The Company’s publishing operations’ advertising contracts are generally entered into annually
and provide for a commitment as to the volume of advertising to be purchased by an advertiser
during the year. The publishing operations’ advertising revenues are primarily generated from
local advertising and are generally highest in the second and fourth quarters of each year.
The Company’s paging subscribers either own pagers, thereby paying solely for the use of the
Company’s paging services, or lease pagers, thereby paying a periodic charge for both the pagers
and the paging services. The terms of the lease contracts are month-to-month, three months, six
months or twelve-months in duration. Paging revenues are generally equally distributed throughout
the year.
16
The broadcasting operations’ primary operating expenses are employee compensation, related
benefits and programming costs. The publishing operations’ primary operating expenses are employee
compensation, related benefits and newsprint costs. The paging operations’ primary operating
expenses are employee compensation and communications costs. In addition, the broadcasting,
publishing and paging operations incur overhead expenses, such as maintenance, supplies, insurance,
rent and utilities. A large portion of the operating expenses of the broadcasting, publishing and
paging operations is fixed, although the Company has experienced significant variability in its
newsprint costs in recent years.
Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses
On August 2, 2005, Gray announced that our board of directors approved a plan to spin off our
newspaper publishing business and our paging business to our shareholders, which will result in a
newly created and separately traded public company named Triple Crown Media, Inc. (“TCM”). We
expect that as a result of the spin-off, both Gray and TCM will be better able to focus financial
and operational resources on their own business and executing their own strategic plan. In
addition, we believe that both Gray and TCM will have greater strategic and financial flexibility
to support future growth opportunities.
We currently conduct our newspaper publishing business and wireless business through our
subsidiary Gray Publishing, LLC and its subsidiaries. Under the proposed spin-off, we will
contribute all of the membership interests of Gray Publishing, LLC and certain other assets to TCM.
We will then distribute 100% of TCM’s common stock pro rata as a dividend to our stockholders.
Upon completion of the spin-off, each common shareholder of Gray will receive as a dividend one
share of common stock of TCM for every 10 shares of Gray common stock and for every 10 shares of
Gray Class A common stock. No stockholder vote will be required to effect the spin-off, and no
consideration will be required to be paid by our shareholders in order to receive the shares of
common stock of TCM. On the date of the spin-off, TCM will distribute $40 million to us, which we
intend to use to reduce our outstanding indebtedness. TCM will also be obligated reimburse Gray
for approximately 75% of the professional service costs and expenses incurred by Gray related to
the spin-off transactions.
Planned Merger of Spun-off Company with Bull Run Corporation
On August 2, 2005, Gray also announced that TCM, BR Acquisition Corp., which is a wholly owned
subsidiary of TCM, and Bull Run have entered into an agreement and plan of merger, pursuant to
which Bull Run will be merged with and into BR Acquisition Corp. immediately following our spin-off
of TCM. In the merger, each Bull Run shareholder will receive 0.0289 shares of TCM common stock
for each share of Bull Run common stock owned. In the merger, Bull Run preferred stock held by
non-affiliated holders will be redeemed for its current redemption value. Holders of preferred
stock and other loans to Bull Run who are affiliates of Bull Run, including J. Mack Robinson, our
current Chairman and Chief Executive Officer and Chairman of the Board of Bull Run, will receive
shares of TCM common stock in exchange for shares of Bull Run series F preferred stock and accrued
and unpaid dividends thereon; shares of TCM series A preferred stock in exchange for shares of Bull
Run series D and series E preferred stocks and accrued and unpaid dividends thereon; and shares of
TCM series B preferred stock in exchange for cash previously advanced to Bull Run. The agreement is
subject to certain closing conditions, including an affirmative vote of Bull Run’s shareholders.
On a combined basis, after the merger, current shareholders of Gray will own approximately 95% of
the outstanding common stock of TCM and certain holders of Bull Run preferred stock and current
holders of Bull Run common stock will hold the remaining 5%. TCM has received a long-term financing
commitment from bank lenders that will accommodate the payment of the distribution to us and the
refinancing of all of Bull Run’s bank and subordinated indebtedness. Bull Run’s common stock is
traded on the Pink Sheets centralized quotation service for OTC securities under the symbol
“BULL.PK”.
Acquisition of KKCO-TV
On January 31, 2005, the Company completed its acquisition of KKCO-TV, Channel 11 (“KKCO”)
from Eagle III Broadcasting, LLC for a purchase price of $13.5 million plus related transaction
costs of $700,000. Total cost was $14.2 million. KKCO, Channel 11 serves the Grand Junction,
Colorado television market and is an NBC affiliate. The Company used a portion of its cash on hand
to fully fund this acquisition.
17
Broadcasting, Publishing and Paging Revenues
Set forth below are the principal types of revenues earned by Gray’s broadcasting, publishing
and paging operations for the periods indicated and the percentage contribution of each to Gray’s
total revenues (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
Broadcasting net
revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
$ |
44,980 |
|
|
|
55.2 |
% |
|
$ |
42,021 |
|
|
|
50.0 |
% |
|
$ |
84,123 |
|
|
|
55.1 |
% |
|
$ |
79,379 |
|
|
|
50.1 |
% |
National |
|
|
18,793 |
|
|
|
23.1 |
|
|
|
18,803 |
|
|
|
22.4 |
|
|
|
34,065 |
|
|
|
22.3 |
|
|
|
35,046 |
|
|
|
22.1 |
|
Network compensation |
|
|
1,407 |
|
|
|
1.7 |
|
|
|
2,501 |
|
|
|
3.0 |
|
|
|
3,050 |
|
|
|
2.0 |
|
|
|
4,911 |
|
|
|
3.1 |
|
Political |
|
|
687 |
|
|
|
0.8 |
|
|
|
5,422 |
|
|
|
6.4 |
|
|
|
980 |
|
|
|
0.6 |
|
|
|
8,956 |
|
|
|
5.7 |
|
Production and other |
|
|
2,121 |
|
|
|
2.6 |
|
|
|
2,488 |
|
|
|
2.9 |
|
|
|
4,079 |
|
|
|
2.7 |
|
|
|
4,852 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
67,988 |
|
|
|
83.4 |
% |
|
$ |
71,235 |
|
|
|
84.7 |
% |
|
$ |
126,297 |
|
|
|
82.7 |
% |
|
$ |
133,144 |
|
|
|
84.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publishing and other
net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
6,205 |
|
|
|
7.6 |
% |
|
$ |
5,991 |
|
|
|
7.1 |
% |
|
$ |
12,252 |
|
|
|
8.0 |
% |
|
$ |
11,512 |
|
|
|
7.3 |
% |
Classified |
|
|
3,631 |
|
|
|
4.5 |
|
|
|
3,323 |
|
|
|
4.0 |
|
|
|
7,132 |
|
|
|
4.7 |
|
|
|
6,495 |
|
|
|
4.1 |
|
Circulation |
|
|
1,359 |
|
|
|
1.7 |
|
|
|
1,508 |
|
|
|
1.8 |
|
|
|
2,773 |
|
|
|
1.8 |
|
|
|
3,062 |
|
|
|
1.9 |
|
Paging lease, sales
and service |
|
|
1,916 |
|
|
|
2.3 |
|
|
|
1,798 |
|
|
|
2.1 |
|
|
|
3,674 |
|
|
|
2.4 |
|
|
|
3,654 |
|
|
|
2.3 |
|
Other |
|
|
420 |
|
|
|
0.5 |
|
|
|
240 |
|
|
|
0.3 |
|
|
|
646 |
|
|
|
0.4 |
|
|
|
460 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,531 |
|
|
|
16.6 |
% |
|
$ |
12,860 |
|
|
|
15.3 |
% |
|
$ |
26,477 |
|
|
|
17.3 |
% |
|
$ |
25,183 |
|
|
|
15.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,519 |
|
|
|
100.0 |
% |
|
$ |
84,095 |
|
|
|
100.0 |
% |
|
$ |
152,774 |
|
|
|
100.0 |
% |
|
$ |
158,327 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
Three Months Ended June 30, 2005 Compared To Three Months Ended June 30, 2004
Revenues. Total revenues for the three months ended June 30, 2005 decreased 3% to $81.5
million as compared to the same period of the prior year.
|
• |
|
Local broadcasting advertising revenues, excluding political advertising revenues, increased 7% to
$45.0 million from $42.0 million. Approximately 33% of this increase
is attributable to results from Gray’s
launch of four UPN second channels in four of its existing television markets since June 30, 2004, results of WCAV,
Charlottesville, VA which began operations in August 2004 and
the acquisition of KKCO on January 31, 2005 offset in part by the
sale of the Company’s satellite uplink operations on
December 31, 2004. We attribute the remaining increase in non-political local broadcasting advertising revenues to a
moderate increase in demand for commercial time by local advertisers. National broadcasting advertising revenues were
unchanged at $18.8 million. Political advertising revenues decreased to $687,000 from $5.4 million reflecting the cyclical
influence of the 2004 Presidential election. Network compensation revenue decreased 44% to $1.4 million due to lower revenue
from newly renewed network affiliation agreements. Total broadcasting revenues decreased 5% to $68.0 million. The decrease in
broadcasting revenues reflects decreased political advertising revenues and network compensation partially offset by increased
non-political local broadcasting advertising revenues as discussed above.
|
|
|
• |
|
Publishing and other revenues consists primarily of Gray’s newspaper publishing and
paging operations. Publishing revenues increased 5% to $11.6 million. Classified and
retail advertising revenue were the |
18
|
|
|
primary contributors to the increase in publishing revenues. Classified advertising revenue
increased 9% to $3.6 million and retail advertising increased 4% to $6.2 million. The
increases in retail advertising revenue reflect, in part, the expansion of circulation at
the suburban Atlanta newspapers compared to the prior period. The increases in classified
revenue was due largely to increases in help wanted advertising.
Circulation revenue decreased largely due to a decrease in the number
of subscriptions at Gray’s newspapers located in Albany, Georgia and
Goshen, Indiana. Paging revenues increased
7% to $1.9 million. The Company had approximately 36,000 and 47,000 units in service at
June 30, 2005 and 2004, respectively. The number of units in service decreased due to
increased competition from other communication services and products such as cellular
telephones. Competition from these products is expected to continue in the future. |
Operating expenses.
Operating expenses increased 11% to $60.0 million as compared to the same
period of the prior year.
|
• |
|
Broadcasting expenses, before depreciation, amortization and loss on disposal of assets
increased 7% to $39.6 million. The primary reason for the increase in broadcast expenses
was due to increases in payroll expense. Approximately 50% of this increase is
attributable to operating expenses relating to Gray’s launch of four UPN second channels in
four of its existing television markets since June 30, 2004, expenses of WCAV,
Charlottesville, VA which began operations in August 2004 and expenses of KKCO, acquired on
January 31, 2005, offset, in part, by the sale of the Company’s satellite uplink operations
on December 31, 2004. We attribute the remaining increase to routine increases in payroll
and benefits costs. |
|
|
• |
|
Publishing and other expenses, before depreciation, amortization and loss on disposal of
assets, increased 9% to $9.8 million. The increase was primarily the result of increased
payroll expense reflecting the expansion of circulation at the suburban Atlanta newspapers
compared to the prior period and to a lesser degree an increase in the cost of newsprint
reflecting both increases in pricing as well as consumption due to the expanded circulation
compared to the prior period. |
|
|
• |
|
Corporate and administrative expenses, before depreciation,
amortization and loss on disposal of assets increased 89% to $4.1 million in the
three months ended June 30, 2005. Legal and other professional service fees increased approximately $1.5
million over the second quarter of 2004 and such increase is primarily attributable to professional services
associated with Gray’s previously announced proposed spin-off of its Publishing and Paging businesses. In addition,
consulting service fees increased in the second quarter of 2005 reflecting approximately $163,000 of audience research studies
commissioned for various television markets in which the company operates. The prior period did not include similar expenses.
Upon consummation of the spin-off transactions Triple Crown Media will reimburse Gray for approximately 75% of the professional
service costs and expenses incurred by Gray related to the spin-off transactions.
|
|
|
• |
|
Amortization of intangible assets was $208,000 for the three months ended June 30, 2005,
as compared to $237,000 for the same period of the prior year, a decrease of 12%. The
decrease in amortization expense was due to certain definite lived intangible assets, that
were acquired in 2002, becoming fully amortized. |
|
|
• |
|
Loss on disposal of assets, net was $305,000 for the three months ended June 30, 2005,
as compared to a gain on disposal of assets of $626,000 for the same period of the prior
year. The loss in the current year was principally the result of the disposal of paging
assets. The gain in the prior year is due to a net gain on insurance settlements related to
certain broadcast towers damaged in 2003 and to the sale of a building not utilized in
operations. |
Interest expense. Interest expense increased 8% to $11.3 million. This increase is primarily
attributable to higher average interest rates in 2005 compared to 2004. The combined average
interest rates on the Company’s senior credit facility and 9 1/4% Notes were 6.95% and 6.21% for the
three months ended June 30, 2005 and 2004, respectively. The increase in interest rates was
partially offset by the repurchase and extinguishment of
$21.5 million of Gray’s 9 1/4% Notes during
the second quarter of 2005.
19
Loss on early extinguishment of debt. Gray reported a loss on early extinguishment of debt in
the amount of $4.8 million which related to two events: the repurchase by Gray of a portion of its
9 1/4% Notes and the amendment of Gray’s senior credit facility.
Gray repurchased $21.5 million, face amount, of its 9 1/4% Notes in the open market. Associated
with this repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included
a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an
unaccreted discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued
interest.
On June 28, 2005, Gray amended its senior credit facility. Gray paid out approximately $1.6
million in cash for the amendment of the senior credit facility and of this amount $1.2 million was
capitalized as deferred financing costs which will be amortized to interest expense over the
remaining life of the agreement. The remaining $370,126 was reported as a loss on early
extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized a loss
on early extinguishment of debt in the amount of $1.8 million. The total loss on early
extinguishment of debt related to the amendment of the senior credit facility was $2.2 million.
Income tax expense. An income tax expense of $2.2 million was recorded for the three months
ended June 30, 2005 as compared to an income tax expense of $7.9 million for the three months ended
June 30, 2004. The decreased expense in the current year as compared to that of the prior year was
attributable to having decreased income in the current period as compared to the prior period. The
effective income tax rate was approximately 39% for the current year and prior year periods.
Six months ended June 30, 2005 Compared To the Six months ended June 30, 2004
Revenues. Total revenues for the six months ended June 30, 2005 decreased 4% to $152.8 million
as compared to the same period of the prior year.
|
• |
|
Local broadcasting advertising revenues, excluding political advertising revenues,
increased 6% to $84.1 million from $79.4 million. Approximately 35% of this increase is
attributable to results from Gray’s launch of four UPN second channels in four of its existing
television markets since June 30, 2004, results of WCAV, Charlottesville, VA which began operations in August
2004 and the acquisition of KKCO on January 31, 2005 offset in part
by the sale of the Company’s
satellite uplink operations on December 31, 2004. We attribute the remaining increase in non-political
local broadcasting advertising revenues to a moderate increase in demand for commercial time by local advertisers.
National broadcasting advertising revenues decreased 3% to $34.1 million from $35.0 million due to a decrease in
demand from national advertisers. Political advertising revenues decreased to $980,000 from $9.0 million reflecting
the cyclical influence of the 2004 Presidential election. Network compensation revenue decreased 38% to $3.1 million
due to lower revenue from newly renewed network affiliation agreements. Total broadcasting revenues decreased 5%
over the same period of the prior year to $126.3 million. The decrease in broadcasting revenues reflects decreased
political advertising revenues, national advertising revenues and network compensation, partially offset by increased
non-political local broadcasting advertising revenues as discussed above.
|
|
|
• |
|
Publishing and other revenues consists primarily of Gray’s newspaper publishing and
paging operations. Publishing revenues increased 6% to $22.8 million. Retail advertising
revenue and classified advertising revenue were the primary contributors to the increase in
publishing revenues. Retail advertising increased 6% and classified advertising revenue
increased 10% reflecting, in part, the expansion of circulation at the suburban Atlanta
newspapers compared to the prior period. Circulation revenue decreased largely due to a
decrease in the number of subscriptions at Gray’s newspapers
located in Albany, Georgia and Goshen, Indiana. Paging revenues increased 1% to
$3.7 million. The Company had approximately 36,000 and 47,000 units in service at June 30,
2005 and 2004, respectively. The number of units in service decreased due to increased
competition from other communication services and products such as cellular telephones.
Competition from these products is expected to continue in the future. |
Operating expenses. Operating expenses increased 8% to $117.0 million as compared to the same
period of the prior year.
20
|
• |
|
Broadcasting expenses, before depreciation, amortization and loss on disposal of assets
increased 5% to $78.3 million. Approximately 52% of this increase is attributable to
operating expenses relating to Gray’s launch of four UPN second channels in four of its
existing television markets since June 30, 2004, expenses of WCAV, Charlottesville, VA
which began operations in August 2004 and expenses of KKCO, acquired on January 31, 2005,
offset, in part, by the sale of the Company’s satellite uplink operations on December 31,
2004. We attribute the remaining increase to routine increases in payroll and benefits
costs. |
|
|
• |
|
Publishing and other expenses, before depreciation, amortization and loss on disposal of
assets, increased 8% to $19.3 million. The increase was primarily the result of increased
payroll expense reflecting the expansion of circulation at the suburban Atlanta newspapers
compared to the prior period and to a lesser degree an increase in the cost of newsprint
reflecting both increases in pricing as well as consumption due to the expanded circulation
compared to the prior period. |
|
|
• |
|
Corporate and administrative expenses, before depreciation, amortization and loss on disposal of assets increased 48% to $6.7 million in the six months ended June 30, 2005.
Legal and other professional service fees increased approximately $1.4 million over the first half of 2004 and such
increase is primarily attributable to professional services
associated with Gray’s proposed spin-off of its Publishing
and Paging businesses. Audit fees increased approximately $425,000 over the comparable period of 2004. In addition,
consulting service fees increased in the second quarter of 2005 reflecting approximately $252,000 of audience research
studies commissioned for various television markets in which the company operates. The prior period did not include
similar expenses. Upon consummation of the spin-off transactions Triple Crown Media will reimburse Gray for approximately
75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.
|
|
|
• |
|
Amortization of intangible assets was $417,000 for the six months ended June 30, 2005,
as compared to $519,000 for the same period of the prior year, a decrease of $102,000 or
20%. The decrease in amortization expense was due to certain definite lived intangible
assets becoming fully amortized. |
|
|
• |
|
Loss on disposal of assets, net was $339,000 for the six months ended June 30, 2005, as
compared to a gain on disposal of assets of $622,000 for the same period of the prior year.
The loss in the current year was principally the result of the disposal of paging assets.
The gain in the prior year is due to a net gain on insurance settlements related to certain
broadcast towers damaged in 2003 and to the sale of a building not utilized in operations. |
Interest expense. Interest expense increased $1.5 million to $22.4 million. This increase is
primarily attributable to higher average interest rates in 2005 compared to 2004. The combined
average interest rates on the Company’s senior credit facility and the 9 1/4% Notes were 6.71% and
6.10% for the six months ended June 30, 2005 and 2004, respectively. The increase in interest
rates was partially offset by the repurchase and extinguishment of $21.5 million of Gray’s 9 1/4%
Notes during the second quarter of 2005.
Loss on early extinguishment of debt. Gray reported a loss on early extinguishment of debt in
the amount of $4.8 million which related to two events: the repurchase by Gray of a portion of its
9 1/4% Notes and the amendment of Gray’s senior credit facility.
Gray repurchased $21.5 million, face amount, of its 9 1/4% Notes in the open market. Associated
with this repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included
a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an
unaccreted discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued
interest.
On June 28, 2005, Gray amended its senior credit facility. Gray paid out approximately $1.6
million in cash for the amendment of the senior credit facility and of this amount $1.2 million was
capitalized as deferred financing costs which will be amortized to interest expense over the
remaining life of the agreement. The remaining $370,126 was reported as a loss on early
extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and
21
recognized a loss on early extinguishment of debt in the amount of $1.8 million. The total
loss on early extinguishment of debt related to the amendment of the senior credit facility was
$2.2 million.
Income tax expense. An income tax expense of $3.6 million was recorded for the six months
ended June 30, 2005 as compared to an income tax expense of $11.4 million for the six months ended
June 30, 2004. The decreased expense in the current year as compared to that of the prior year was
attributable to having decreased income in the current period as compared to the prior period. The
effective income tax rate was approximately 39% for the current year and prior year periods.
Liquidity and Capital Resources
General
The following tables present certain data that Gray believes is helpful in evaluating its
liquidity and capital resources (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
2005 |
|
2004 |
Net cash provided by operating activities |
|
$ |
21,699 |
|
|
$ |
39,685 |
|
Net cash used in investing activities |
|
|
(31,075 |
) |
|
|
(16,029 |
) |
Net cash used in financing activities |
|
|
(34,987 |
) |
|
|
(3,842 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(44,363 |
) |
|
$ |
19,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
June 30, 2005 |
|
December 31, 2004 |
Cash and cash equivalents |
|
$ |
6,203 |
|
|
$ |
50,566 |
|
Long-term debt including current portion |
|
|
635,491 |
|
|
|
655,905 |
|
Preferred stock |
|
|
39,047 |
|
|
|
39,003 |
|
Available credit under senior credit agreement |
|
|
24,000 |
|
|
|
71,250 |
|
Gray and its subsidiaries file a consolidated federal income tax return and such state or
local tax returns as are required. Although Gray expects to earn taxable operating income for the
foreseeable future, it anticipates that through the use of its available loss carryforwards it will
not pay significant amounts of federal or state income taxes in the next several years.
Management believes that current cash balances, cash flows from operations and available funds
under its senior credit facility will be adequate to provide for Gray’s capital expenditures, debt
service, cash dividends and working capital requirements for the foreseeable future.
Management does not believe that inflation in past years has had a significant impact on
Gray’s results of operations nor is inflation expected to have a significant effect upon our
business in the near future.
Net cash provided by operating activities decreased $18.0 million. The decrease was due
primarily to a decrease in net income, deferred income taxes and changes in operating assets and
liabilities.
Net cash used in investing activities increased $15.0 million. The increase was due primarily
to the completion of the acquisition of a television station representing a use of cash totaling
$13.9 million and increased purchases of property and equipment of $1.3 million.
Net cash used in financing activities increased $31.1 million. The Company repurchased
354,900 shares of Common Stock for $5.1 million and 12,800 shares of Class A Common Stock for $0.2
million. Gray also amended its senior credit facility and repurchased a portion of its 9 1/4% Notes.
These transactions are described in more detail below. No similar purchases were made in the prior
year. Dividends paid increased $5.8 million due to the payment in January 2005 of a special
dividend that was declared in the fourth quarter of 2004.
22
Capital Expenditures
Set forth below is the Company’s capital expenditure activity for the six months ended June
30, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
Non Digital |
|
Digital |
|
Total |
Capital expenditure
payments made during
the six months ended
June 30, 2005 |
|
$ |
12,096 |
|
|
$ |
4,999 |
|
|
$ |
17,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
Non Digital |
|
Digital |
|
Total |
Capital expenditure
payments made during
the six months ended
June 30, 2004 |
|
$ |
7,767 |
|
|
$ |
8,040 |
|
|
$ |
15,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company will increase the power output of its digital broadcast signals of certain
stations. These enhancements will be phased in by July 2006 to meet certain FCC regulations. In
July 2005 the Company purchased a building and certain broadcast equipment in Tallahasssee, Florida
for $4.75 million. Gray currently intends to relocate the studio facilities of its Tallahassee,
Floridia television station to the newly purchased building before the end of 2005.
Debt
On June 28, 2005, Gray amended its existing senior credit facility. The amended agreement has
a maximum term of seven and one half years and the total amount available under the agreement is
$400 million, consisting of a $100 million revolving facility, a $100 million term loan A facility
and a $200 million term loan B facility. As of June 30, 2005, the balance outstanding and the
balance available under Gray’s senior credit facility were $376 million and $24 million,
respectively.
Gray paid approximately $1.6 million in cash for the amendment of the senior credit facility
and of this amount $1.2 million was capitalized as deferred financing costs which will be amortized
to interest expense over the remaining life of the agreement. The remaining $370,126 was reported
as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing costs
and recognized a loss on early extinguishment of debt in the amount of $1.8 million. Therefore,
the total loss on early extinguishment of debt related to the amendment of the senior credit
facility was $2.2 million. As a result of the amendment, on an annual basis we anticipate a
savings of $1.4 million in interest expense. For additional information concerning the amendment,
see Note C. “Long-Term Debt” to Gray’s unaudited condensed consolidated financial statements
included elsewhere herein.
During the six months ended June 30, 2005, Gray repurchased $21.5 million, face amount, of its
Senior Subordinated Notes due 2011 (the “9 1/4% Notes”) in the open market. Associated with this
repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included a premium
of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted
discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued interest.
Gray used cash previously held in its investment account in the amount of $24.3 million for the
repurchase of its 9 1/4% Notes which included amounts for the face amount of the 9 1/4% Notes, premium
and accrued interest. As a result of these repurchases and extinguishments, on an annual basis we
anticipate a savings of $2.0 million in interest expense. As of June 30, 2005, Gray’s 9 1/4% Notes
had a balance outstanding of $257.6 million excluding unaccreted discount of $0.9 million.
Gray makes semiannual interest payments on the 9 1/4% Notes of $12.95 million on June
15th and December 15th. Interest payments on the senior credit facility are
made on varying dates throughout the year.
Related Party Receivable
Through a rights-sharing agreement with Host Communications, Inc. (“Host”), a wholly owned
subsidiary of Bull Run Corporation (“Bull Run”), Gray participated jointly with Host in the
marketing, selling and broadcasting of
23
certain collegiate sporting events and in related programming, production and other associated
activities related to the University of Kentucky. Certain executive officers and significant
stockholders of Gray are also executive officers and significant stockholders of Bull Run
Corporation.
The agreement commenced April 1, 2000 and terminated April 15, 2005. Gray shared the profit
or loss from these activities with Host. Under that agreement, in certain circumstances, Gray was
called upon to advance payment directly to the respective collegiate institution for a portion of
certain upfront rights fees. Gray was given credit for any such advance payments when determining
its share of income or loss from these activities. During 2003, Gray paid $1.5 million under this
provision. No similar payments were made during 2004 or 2005. As of June 30, 2005 and December
31, 2004, Gray had $1.3 million and $1.4 million respectively, recorded as a related party
receivable for payments made in 2003 and earlier years.
Host Commitment
On October 12, 2004, the University of Kentucky jointly awarded a new sports marketing
agreement to Gray and Host. The new agreement commenced April 16, 2005 and has an initial term of
seven years with the option to extend the license for three additional years. Aggregate license
fees to be paid to the University of Kentucky over a full ten year term for the agreement will
approximate $80.5 million. Gray and Host will share equally the cost of the license fees.
Other
During the quarter ended June 30, 2005, Gray contributed $766,000 to its pension plans.
During the remainder of 2005, Gray expects to contribute an additional $4.2 million to its pension
plans.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make judgments and estimations that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates. Gray considers its accounting policies relating to intangible assets and
income taxes to be critical policies that require judgments or estimations in their application
where variances in those judgments or estimations could make a significant difference to future
reported results. These critical accounting policies and estimates are more fully disclosed in
Gray’s Annual Report on Form 10-K for the year ended December 31, 2004.
Recent Accounting Pronouncements
Accounting
Changes and Corrections of Errors — In May 2005, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standard No. 154, (“SFAS No. 154”),
Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement
No. 20. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all
voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those provisions should
be followed. SFAS No. 154 is effective for the Company in the first quarter of 2006.
Share-Based
Payment — In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, (“SFAS No. 123”) (revised 2005), Share-Based
Payment (SFAS 123(R)), that addresses the accounting for share-based payment transactions in which
an enterprise receives employee services in exchange for (a) equity instruments of the enterprise
or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that
may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to
account for share-based compensation transactions using the intrinsic value method under Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally
would require instead that such transactions be accounted for using a fair-value-based method. The
Company is
24
currently evaluating SFAS 123(R) to determine which fair-value-based model and transitional
provision it will follow upon adoption. The options for transition methods as prescribed in SFAS
123(R) include either the modified prospective or the modified retrospective methods. The modified
prospective method requires that compensation expense be recorded for all unvested stock options
and restricted stock as the requisite service is rendered beginning with the first quarter of
adoption, while the modified retrospective method would record compensation expense for stock
options and restricted stock beginning with the first period restated. Under the modified
retrospective method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. SFAS 123(R) will be effective for the Company beginning in
its first quarter of fiscal 2006. Although the Company will continue to evaluate the application of
SFAS 123(R), based on options issued and outstanding at present, the Company expects that the
expense will be between $75,000 and $125,000 for the year ended December 31, 2006.
American
Jobs Creation Act of 2004 — On October 22, 2004, the President signed the American
Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified
domestic production activities, which will be phased in from 2005 through 2010. The Company is
currently evaluating which of its operations may qualify as “qualified domestic production
activities” under the Act and thus the financial effect that the Act may or may not have upon the
Company.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains “forward-looking statements.” When used in this
report, the words “believes,” “expects,” “anticipates,” “should”, “estimates” and similar words and
expressions are generally intended to identify forward-looking statements, but some of those
statements may use other phrasing. Statements that describe Gray’s future strategic plans, goals
or objectives are also forward-looking statements. Readers of this report are cautioned that any
forward-looking statements, including those regarding the intent, belief or current expectations of
Gray or management, are not guarantees of future performance, results or events and involve risks
and uncertainties, and that actual results and events may differ materially from those in the
forward-looking statements as a result of various factors including, but not limited to, (i)
general economic conditions in the markets in which Gray operates, (ii) competitive pressures in
the markets in which Gray operates, (iii) the effect of future legislation or regulatory changes on
Gray’s operations and (iv) certain other risks relating to our business, including, our dependence
on advertising revenues, our need to acquire non-network television programming, the impact of a
loss of any of our FCC broadcast licenses, increased competition and capital costs relating to
digital advanced television, pending litigation and our significant level of intangible assets, (v)
our high debt levels, and (vi) other factors described from time to time in our SEC filings. The
forward-looking statements included in this report are made only as of the date hereof. Gray
disclaims any obligation to update such forward-looking statements to reflect subsequent events or
circumstances, except as required by law.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Gray believes that the market risk of its financial instruments as of June 30, 2005 has not
materially changed since December 31, 2004. The market risk profile on December 31, 2004 is
disclosed in Gray’s Annual Report on Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was
carried out under the supervision and with the participation of management, including the Chief
Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the
Company’s disclosure controls and procedures. Based on that evaluation, the CEO and the CFO have
concluded that Gray’s disclosure controls and procedures are effective to ensure that information
required to be disclosed by Gray in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and to ensure that such information is
accumulated and communicated to Gray’s management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosures. There were no changes in Gray’s internal
control over financial reporting during the second quarter of 2005 identified in connection with
this evaluation that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The
information contained in Note F — “Commitments and Contingencies” to Gray’s unaudited
Condensed Consolidated Financial Statements filed as part of this Quarterly Report on Form 10-Q is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were voted upon at the 2005 Annual Meeting of Shareholders of the
Company, on May 4, 2005, and votes were cast as indicated.
(a) The following directors were elected:
|
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Nominee |
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Common Stock Votes |
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Class A Votes |
|
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For |
|
Withheld |
|
For |
|
Withheld |
Richard L. Boger |
|
|
32,876,884 |
|
|
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900,341 |
|
|
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52,612,610 |
|
|
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361,330 |
|
Ray M. Deaver |
|
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17,010,880 |
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|
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16,766,345 |
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|
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51,411,570 |
|
|
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1,562,370 |
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T. L. Elder |
|
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32,880,854 |
|
|
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896,371 |
|
|
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52,612,610 |
|
|
|
361,330 |
|
Hilton H. Howell, Jr. |
|
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32,586,843 |
|
|
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1,190,382 |
|
|
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52,613,390 |
|
|
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360,550 |
|
William E. Mayher, III |
|
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32,880,681 |
|
|
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896,544 |
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|
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52,612,610 |
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|
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361,330 |
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Zell B. Miller |
|
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33,178,225 |
|
|
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599,000 |
|
|
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52,605,860 |
|
|
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368,080 |
|
Howell W. Newton |
|
|
32,829,004 |
|
|
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948,221 |
|
|
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52,612,610 |
|
|
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361,330 |
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Hugh Norton |
|
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31,777,386 |
|
|
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1,999,839 |
|
|
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52,604,020 |
|
|
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369,920 |
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Robert S. Prather, Jr. |
|
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32,596,248 |
|
|
|
1,180,977 |
|
|
|
52,613,400 |
|
|
|
360,540 |
|
Harriett J. Robinson |
|
|
32,393,590 |
|
|
|
1,383,635 |
|
|
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52,599,300 |
|
|
|
374,640 |
|
J. Mack Robinson |
|
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32,857,894 |
|
|
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919,331 |
|
|
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52,613,180 |
|
|
|
360,760 |
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Item 6. Exhibits
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Exhibit 10.1 |
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Separation and Distribution Agreement by and between Gray Television Inc. and Triple Crown Media, Inc. dated as of August 2, 2005 |
|
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Exhibit 10.2 |
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Agreement and Plan of Merger by and among Triple Crown Media, Inc., BR Acquisition Corp. and Bull Run Corporation dated as of August 2, 2005 |
|
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Exhibit 10.3 |
|
Tax Sharing Agreement by and between Gray Television, Inc. and Triple Crown Media, Inc. dated as of August 2, 2005 |
|
|
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Exhibit 10.4 |
|
Letter Agreement by and among Gray Television Inc. and Bull Run Corporation dated as of August 2, 2005. |
|
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Exhibit 31.1 |
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Rule 13 (a) — 14(a) Certificate of Chief Executive Officer |
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Exhibit 31.2 |
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Rule 13 (a) — 14(a) Certificate of Chief Financial Officer |
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Exhibit 32.1 |
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Section 1350 Certificate of Chief Executive Officer |
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Exhibit 32.2 |
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Section 1350 Certificate of Chief Financial Officer |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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GRAY TELEVISION, INC.
(Registrant)
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Date: August 8, 2005 |
By: |
/s/ James C. Ryan
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James C. Ryan, |
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Senior Vice President and Chief Financial Officer |
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27