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Article by DailyStocks_admin    (08-06-08 07:52 AM)

Gray Television Inc. CEO J MACK ROBINSON bought 75000 shares on 7-31-2008 at $2.71

BUSINESS OVERVIEW

General
As of the filing date of this Annual Report, we own 36 television stations serving 30 television markets. Seventeen of the stations are affiliated with CBS Inc., or “CBS,” 10 are affiliated with the National Broadcasting Company, Inc., or “NBC,” eight are affiliated with the American Broadcasting Company, or “ABC” and one is affiliated with FOX Entertainment Group, Inc. or “FOX.” The combined station group has 20 markets with stations ranked #1 in local news audience and 23 markets with stations ranked #1 in overall audience within their respective markets based on the results of the average of the Nielsen November, July, May and February 2007 ratings reports. Of the 30 markets that we serve, we operate the #1 or #2 ranked station in 29 of those markets. The combined TV station group reaches approximately 6.2% of total U.S. TV households. In addition, we currently operate 40 digital second channels including one affiliated with ABC, five affiliated with FOX, eight affiliated with The CW Network, LLC (“CW”) and 16 affiliated with Twentieth Television, Inc. (“MyNetworkTV” or “MyNet.”), plus eight local news/weather channels and two independent channels in certain of our existing markets. With 17 CBS affiliated stations, we are the largest independent owner of CBS affiliates in the country.
In 1993, we implemented a strategy to foster growth through strategic acquisitions and certain select divestitures. Since January 1, 1994, our significant acquisitions have included 33 television stations.
Acquisitions, Investments and Divestitures
We did not purchase any television stations during 2007. Our other acquisition, investment and divestiture activities during the most recent five years are described below.
2006 Acquisition
On March 3, 2006, we completed the acquisition of the stock of Michiana Telecasting Corp., owner of WNDU-TV, the NBC affiliate in South Bend, Indiana, from the University of Notre Dame for $88.9 million, which included certain working capital adjustments and transaction fees. We financed this acquisition with borrowings under our senior credit facility.
2005 Spinoff
On December 30, 2005, we completed the spinoff of all of the outstanding stock of Triple Crown Media., Inc. (“TCM”). Immediately prior to the spinoff, we contributed all of the membership interests in Gray Publishing, LLC which owned and operated our Gray Publishing and GrayLink Wireless businesses and certain other assets, to TCM. In the spinoff, each of the holders of our common stock received one share of TCM common stock for every ten shares of our common stock and each holder of our Class A common stock received one share of TCM common stock for every ten shares of our Class A common stock. As part of the spinoff, we received a cash dividend of approximately $44.0 million from TCM, which we used to reduce our outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market under the symbol “TCMI.” The financial position and results of operations of the publishing and wireless businesses are reported in our consolidated statement of operations as Discontinued Operations for the year ended December 31, 2005.
2005 Acquisitions
On November 30, 2005, we completed the acquisition of the assets of WSAZ-TV, the NBC affiliate in Charleston-Huntington, West Virginia from Emmis Communications Corp. for approximately $185.8 million in cash plus certain transaction fees. We financed this acquisition with borrowings under our senior credit facility.
On November 10, 2005, we completed the acquisition of the assets of WSWG-TV, the UPN affiliate serving the Albany, Georgia television market from P.D. Communications, LLC. for $3.75 million in cash. We used a portion of our cash on hand to fund this acquisition. Subsequent to the acquisition, we obtained a CBS affiliation for this station.
On January 31, 2005, we completed the acquisition of KKCO-TV from Eagle III Broadcasting, LLC for approximately $13.5 million plus certain transaction fees. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. We used a portion of our cash on hand to fully fund this acquisition.
During 2005 we acquired a Federal Communications Commission (“FCC”) license to operate a low power television station, WAHU-TV, in the Charlottesville, Virginia television market. The FOX broadcast network has agreed to an affiliation agreement to allow us to operate WAHU-TV as a FOX affiliate.
2004 Acquisition
On August 17, 2004, we completed the acquisition of an FCC television license for WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation. Our cost to acquire that FCC license was approximately $1.0 million. CBS Inc. has agreed to a ten-year affiliation agreement to allow us to operate WCAV-TV as a CBS affiliate.

Television Industry Background
Licenses to operate a television station are granted by the FCC. Historically, there have been a limited number of channels available for broadcasting in any one geographic area.
Television station revenues are primarily derived from local, regional and national advertising and, to a much lesser extent, from retransmission consent fees, network compensation and revenues from studio and tower space rental and commercial production activities. Advertising refers primarily to advertisements broadcast by stations, but it also includes advertisements placed on a station’s websites. Advertising rates are based upon a variety of factors, including a program’s popularity among the viewers an advertiser wishes to attract, 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. Rates are also determined by a station’s overall ratings and in-market share, as well as the station’s ratings and share among particular demographic groups which an advertiser may be targeting. Because broadcast stations rely on advertising revenues, they are sensitive to cyclical changes in the economy. The sizes of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations.
All television stations in the country are grouped by Nielsen, a national audience measuring service, into approximately 210 generally recognized television markets that are ranked in size according to various formulae based upon actual or potential audience. Each DMA is an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours. Nielsen periodically publishes data on estimated audiences for the television stations in the various television markets throughout the country.
Four major broadcast networks, ABC, NBC, CBS and FOX, dominate broadcast television. FOX, CW and MyNetworkTV provide their affiliates with a smaller portion of each day’s programming, compared to affiliates of ABC, NBC and CBS.
Network Affiliation of the Stations
The affiliation of a station with ABC, NBC or CBS has a significant impact on the composition of the station’s programming, revenues, expenses and operations. A typical affiliate of these networks receives the majority of each day’s programming from the network. This programming, along with cash payments (“network compensation”) in certain instances, is provided to the affiliate by the network in exchange for a substantial majority of the advertising time available for sale during the airing of network programs. The network then sells this advertising time and retains the revenues. The affiliate retains the revenues from time sold during breaks between network programs and in programs the affiliate produces or purchases from non-network sources. In acquiring programming to supplement programming supplied by the affiliated network, the affiliates compete primarily with other affiliates and independent stations in their markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. In addition, a television station may acquire programming through barter arrangements. Under barter arrangements, a national program distributor will retain a fixed amount of advertising time within the program in exchange for the programming it supplies, with the station paying a fixed fee (or in certain instances no fee) for such programming. Most successful commercial television stations obtain their brand identity from locally produced news programs.
In contrast to a station affiliated with a network, a fully independent station purchases or produces all of the programming that it broadcasts, resulting in generally higher programming costs. An independent station, however, retains its entire inventory of advertising time and all the revenues obtained therefrom. As a result of the smaller amount of programming provided by its network, an affiliate of FOX, CW or MyNetworkTV must purchase or produce a greater amount of programming, resulting in generally higher programming costs. These affiliate stations, however, retain a larger portion of the inventory of advertising time and the revenues obtained therefrom compared to stations affiliated with the major networks.
Cable-originated programming is a significant competitor for viewers of broadcast television programming, although no single cable programming network regularly attains audience levels amounting to more than a small fraction of any single major broadcast network. The advertising share of cable networks has increased as a result of the growth in cable penetration (the percentage of television households which are connected to a cable system). Notwithstanding such increases in cable viewership and advertising, as well as growth in direct broadcast satellite (“DBS”), and other multichannel video program distribution services, over-the-air broadcasting remains the dominant distribution system for mass-market television advertising.
We account for trade or barter transactions involving the exchange of tangible goods or services with our customers. The revenue is recorded at the time the advertisement is broadcast and the expense is recorded at the time the goods or services are used. The revenue and expense associated with these transactions are based on the fair value of the assets or services received.
In accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 63, “Financial Reporting by Broadcasters,” we do not account for barter revenue and related barter expense generated from network or syndicated programming.
Seasonality
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, political parties and special interest groups, and this spending typically is heaviest during the fourth quarter.
Competition
Competition in the television industry exists on several levels: competition for audience, competition for programming (including news) and competition for advertisers. Additional factors that are material to a television station’s competitive position include signal coverage and assigned frequency.
Audience
Stations compete for audience based on program popularity, which has a direct effect on advertising rates. A substantial portion of the daily programming on each of our stations is supplied by the affiliated network. During those periods, the stations are dependent upon the performance of the network programs to attract viewers. There can be no assurance that such programming will achieve or maintain satisfactory viewership levels in the future. Non-network time periods are programmed by the station with a combination of locally produced news, public affairs and other entertainment programming, including news and syndicated programs purchased for cash, cash and barter, or barter only.
In addition, the development of methods of television transmission of video programming other than over-the-air broadcasting, and in particular cable and/or satellite television, has significantly altered competition for audience in the television industry. These other transmission methods can increase competition for a broadcasting station by bringing into its market distant broadcasting signals not otherwise available to the station’s audience and also by serving as a distribution system for non-broadcast programming.
Other sources of competition include home entertainment systems, “wireless cable” services, satellite master antenna television systems, low power television stations, television translator stations, DBS video distribution services and the internet.
Recent developments by many companies, including internet service providers, are expanding the variety and quality of broadcast content on the internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television, production studios for news and live content, as well as motion picture studios.

Programming
Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Each station competes against the broadcast station competitors in its market for exclusive access to off-network reruns (such as Seinfeld ) and first-run product (such as Oprah ). Competition exists for exclusive news stories and features as well. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations.
Advertising
Advertising rates are based upon the size of the market in which the station operates, a station’s overall ratings, a program’s popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic makeup of the market served by the station, the availability of alternative advertising media in the market area, aggressive and knowledgeable sales forces and the development of projects, features and programs that tie advertiser messages to programming. Advertising revenues comprise the primary source of revenues for our stations. Our stations compete for such advertising revenues with other television stations in their respective markets. The stations also compete for advertising revenue with other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, internet and local cable systems. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets.
Federal Regulation of the Company’s Business
General
Our television broadcast operations are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). Among other things, the Communications Act empowers the FCC to: (1) issue, revoke and modify broadcasting licenses; (2) regulate stations’ technical operations and equipment; and (3) impose penalties for violations of the Communications Act or FCC regulations. The Communications Act prohibits the assignment of a license or the transfer of control of a licensee without prior approval of the FCC.
License Grant and Renewal
The FCC grants television station licenses for terms of up to eight years. Broadcast licenses are of paramount importance to the operations of our television stations. The Communications Act requires a broadcast license to be renewed if the FCC finds that: (1) the station has served the public interest, convenience and necessity; (2) there have been no serious violations of either the Communications Act or the FCC’s rules and regulations; and (3) there have been no other violations which, taken together, would constitute a pattern of abuse. Although in substantially all cases broadcast licenses are renewed by the FCC, there can be no assurance that our stations’ licenses will be renewed. We are not aware of any facts or circumstances that could prevent the renewal of the licenses for our stations at the end of their respective license terms. See the dates through which the current licenses are effective and the status of the renewal applications in the table “Our Stations and Their Markets” included on pages five and six of this Annual Report. Under FCC rules, a license expiration date is automatically extended pending review and grant of the renewal application.

CEO BACKGROUND

J. Mack Robinson has been Gray’s Chairman and Chief Executive Officer since September 2002. Prior to that, he was Gray’s President and Chief Executive Officer from 1996 through September 2002. He is the Chairman of the Executive Committee of Gray’s Board of Directors. Mr. Robinson has served as Chairman Emeritus of Triple Crown Media, Inc. since December 30, 2005 and previously served as Chairman of the Board of Bull Run Corporation, from 1994 through its 2005 merger with Triple Crown Media, Inc., Chairman of the Board and President of Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since 1958, and Chairman of the Board of Atlantic American Corporation, an insurance holding company, since 1974. Mr. Robinson also serves as a director of the following companies: Bankers Fidelity Life Insurance Company, American Southern Insurance Company and American Safety Insurance Company. He is a director emeritus of Wachovia Corporation. Mr. Robinson is the husband of Mrs. Harriett J. Robinson and the father-in-law of Mr. Hilton H. Howell, Jr., both members of Gray’s Board of Directors.
Robert S. Prather, Jr. has served as Gray’s President and Chief Operating Officer since September 2002. Prior to that, he served as Gray’s Executive Vice President-Acquisitions from 1996 through September 2002. He is a member of the Executive Committee of Gray’s Board of Directors. He has served as Chairman of Triple Crown Media, Inc. since December 30, 2005 and was previously President and Chief Executive Officer and a director of Bull Run Corporation, from 1992 through its 2005 merger with Triple Crown Media, Inc. He serves as an advisory director of Swiss Army Brands, Inc. and serves on the Board of Trustees of the Georgia World Congress Center Authority and also serves as a member of the Board of Directors for Gabelli Asset Management and Victory Ventures, Inc.
Hilton H. Howell, Jr. has been Gray’s Vice Chairman since September 2002. Prior to that, he was Gray’s Executive Vice President from September 2000. He is a member of Gray’s Executive Committee. He has served as President and Chief Executive Officer of Atlantic American Corporation, an insurance holding company, since 1995. He has been Executive Vice President and General Counsel of Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since 1991, and Vice Chairman of Bankers Fidelity Life Insurance Company since 1992. He has been a director of Triple Crown Media, Inc. since December 30, 2005 and was previously a director, Vice President and Secretary of Bull Run Corporation from 1994 through its 2005 merger with Triple Crown Media, Inc. Mr. Howell also serves as a director of the following companies: Atlantic American Corporation, Bankers Fidelity Life Insurance Company, Delta Life Insurance Company, Delta Fire and Casualty Insurance Company, American Southern Insurance Company and American Safety Insurance Company. He is the son-in-law of Mr. J. Mack Robinson and Mrs. Harriett J. Robinson, both members of Gray’s Board of Directors.
William E. Mayher, III is a member of the Executive Committee, the Audit Committee, the Management Personnel Committee, the 2002 Long Term Incentive Plan Committee, the Director Restricted Stock Plan Committee and the Employee Stock Purchase Plan Committee of Gray’s Board of Directors and has served as Chairman of Gray’s Board of Directors since August 1993. Dr. Mayher was a neurosurgeon in Albany, Georgia from 1970 to 1998. Dr. Mayher is immediate past Chairman of the Medical College of Georgia Foundation and a past member of the Board of Directors of the American Association of Neurological Surgeons. He also serves as a director of Palmyra Medical Centers and Chairman of the Albany Dougherty County Airport Commission.
Richard L. Boger is a member of the Audit Committee of Gray’s Board of Directors. Mr. Boger has been President and Chief Executive Officer of Lex-Tek International, Inc., an insurance software company, since February 2002 and was previously President and Chief Executive Officer of Export Insurance Services, Inc., an insurance brokerage and agency. Since July 2003, he has also served as business manager for Owen Holdings, LLLP, a Georgia Limited Liability Limited Partnership; since July 2004, has served as General Partner of Shawnee Meadow Holdings, LLLP, a Georgia Limited Liability Limited Partnership; and since March 2006 has served as business manager for Heathland Holdings, LLLP, a Georgia Limited Liability Partnership. He also serves as a member of the Board of Trustees and is chairman of the Audit Committee of Corner Cap Group of Funds, a series mutual fund.
Ray M. Deaver is Chairman of the Management Personnel Committee of Gray’s Board of Directors and a member of the 2002 Long Term Incentive Plan Committee, the Director Restricted Stock Plan Committee and the Employee Stock Purchase Plan Committee. Prior to his appointment to Gray’s Board of Directors, Mr. Deaver served as Gray’s Regional Vice President-Texas from October 1999 until his retirement on December 31, 2001. He was the President and General Manager of KWTX Broadcasting Company and President of Brazos Broadcasting Company from November 1997 until their acquisition by Gray in October 1999.
T.L. (Gene) Elder is a member of Gray’s Audit Committee. Until May 2003, Mr. Elder was a partner of Tatum, LLC, a national firm of career chief financial officers, and since 2004 has been a Senior Partner of that firm.

Zell B. Miller is a member of the Management Personnel Committee, the Director Restricted Stock Plan Committee, the Employee Stock Purchase Plan Committee and the 2002 Long Term Incentive Plan Committee. He was U.S. Senator from Georgia from July 2000 until his retirement on December 31, 2004. Prior to that time he was Governor of the State of Georgia from 1991-1999 and Lieutenant Governor from 1975-1991. He is an honorary member of the Board of Directors of United Community Banks in Blairsville, Georgia.
Howell W. Newton is Chairman of the Audit Committee of Gray’s Board of Directors. Mr. Newton has been President and Treasurer of Trio Manufacturing Co., a textile manufacturing company, since 1978.
Hugh E. Norton is Chairman of the 2002 Long Term Incentive Plan Committee and is a member of the Management Personnel Committee, the Director Restricted Stock Plan Committee and the Employee Stock Purchase Plan Committee of Gray’s Board of Directors. Mr. Norton has been President of Norco, Inc., an insurance agency, from 1973 and also is a real estate developer in Destin, Florida.
Harriett J. Robinson has been a director of Atlantic American Corporation since 1989. Mrs. Robinson has also been a director of Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since 1967. Mrs. Robinson is the wife of Mr. J. Mack Robinson and the mother-in-law of Mr. Hilton H. Howell, Jr., both members of Gray’s Board of Directors.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview
Introduction
The following analysis of the financial condition and results of operations of Gray Television, Inc. (“we,” “us,” or “our”) should be read in conjunction with our audited consolidated financial statements and notes thereto included elsewhere herein.
Overview
We own 36 television stations serving 30 television markets. 17 of the stations are affiliated with CBS, 10 are affiliated with NBC, eight are affiliated with ABC and one is affiliated with FOX. The combined station group has 20 markets with stations ranked #1 in local news audience and 23 markets with stations ranked #1 in overall audience within their respective markets based on the results of the average of the Nielsen November, July, May and February 2007 ratings reports. Of the 30 markets that we serve, we operate the #1 or #2 ranked station in 29 of those markets. The combined TV station group reaches approximately 6.2% of total U.S. TV households. In addition, we currently operate 40 digital second channels including one affiliated with ABC, five affiliated with FOX, eight affiliated with CW and 16 affiliated with MyNetworkTV, plus eight local news/weather channels and two independent channels in certain of our existing markets. With 17 CBS affiliated stations, we are the largest independent owner of CBS affiliates in the United States.
Our operating revenues are derived primarily from broadcast and internet advertising, and from other sources such as production of commercials and tower rentals and from retransmission consent fees.
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.
Internet advertising is sold on our stations’ websites. These advertisements are sold as banner advertisements on the websites, pre-roll advertisements or video and other types of advertisements.
Most advertising contracts are short-term, and generally run only for a few weeks. Approximately 68% of the net revenues of our television stations for the year ended December 31, 2007 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 advertising in the spring and 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 primary broadcasting operating expenses are employee compensation, related benefits and programming costs. In addition, the broadcasting operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of the broadcasting operations is fixed.
Recent Acquisition and Expansion Activity
During 2007, we launched or rebranded four digital second channels including one CW and one My NetworkTV affiliate, as well as two local news/weather channels in certain of our existing markets. We launched these additional secondary channels in order to develop additional revenue streams while incurring minimal incremental expenses.
On March 3, 2006, we completed the acquisition of the stock of Michiana Telecasting Corp., owner of WNDU-TV, the NBC affiliate in South Bend, Indiana, from the University of Notre Dame for $88.9 million, which included certain working capital adjustments and transaction fees. We financed this acquisition with borrowings under the senior credit facility.
In addition, during 2006, we launched or rebranded 36 digital second channels including one ABC, five FOX, seven CW and 15 MyNetworkTV affiliates plus six local news/weather channels and two “independent” channels in certain of its existing markets. We launched these additional secondary channels in order to develop additional revenue streams while incurring minimal incremental expenses. The rebranding of our existing UPN stations was necessary due to the merging of the UPN and WB networks into the CW network during 2006.
On November 30, 2005, we completed the acquisition of the assets of WSAZ-TV, Channel 3, the NBC affiliate serving the Charleston-Huntington, West Virginia market, from Emmis Communications Corp. for approximately $185.8 million. We used funds borrowed under the senior credit facility and a portion of our cash on hand to fund this acquisition.
On November 10, 2005, we completed the acquisition of the assets of WSWG-TV, the CBS affiliate serving Albany, Georgia from P.D. Communications, LLC for approximately $3.75 million plus related transaction costs. We used a portion of our cash on hand to fund this acquisition.
On July 1, 2005, we acquired a third FCC license to operate a second low power television station, WAHU-TV, in the Charlottesville, Virginia television market. WAHU-TV is a FOX network affiliate. Our original cost to acquire and/or construct the combined broadcast facilities of WCAV-TV, WVAW-TV and WAHU-TV was approximately $8.5 million.
On January 31, 2005, we completed the acquisition of KKCO-TV for approximately $13.5 million. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. We used a portion of our cash on hand to fully fund this acquisition.
2005 Spinoff
On December 30, 2005, we completed the spinoff of all of the outstanding stock of TCM. Immediately prior to the spinoff, we contributed all of the membership interests in Gray Publishing, LLC, which owned and operated our Gray Publishing and GrayLink Wireless businesses and certain other assets, to TCM. In the spinoff, each of the holders of our common stock received one share of TCM common stock for every ten shares of our common stock and each holder of our Class A common stock received one share of TCM common stock for every ten shares of our Class A common stock. As part of the spinoff, we received approximately $44.0 million in cash distributed from TCM, which we used to reduce our outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market under the symbol “TCMI.” The financial position and results of operations of our former publishing and wireless businesses are reported in our consolidated balance sheet and statement of operations as discontinued operations for the year ended December 31, 2005. Please refer to Note B. “Discontinued Operations” to our audited consolidated financial statements included elsewhere herein.
Revenues

Results of Operations
Year Ended December 31, 2007 (“2007”) Compared to Year Ended December 31, 2006 (“2006”)
Revenue. Total revenues decreased $24.8 million, or 7%, to $307.3 million reflecting reduced cyclical political advertising revenues. Political advertising revenues decreased to $7.8 million from $42.7 million reflecting the cyclical influence of the 2006 elections. Local advertising revenues, excluding political advertising revenues, increased 4% or approximately $8.4 million. National advertising revenues, excluding political advertising revenues, decreased 1% or approximately $1.1 million. Internet advertising revenues, excluding political advertising revenues, increased $1.9 million, or 25%, reflecting increased website traffic and internet sales initiatives in each of our markets. The decrease in political advertising revenues was partially offset by an increase of $2.0 million in non-political advertising revenue resulting from operating WNDU-TV for 12 months in 2007 compared to 10 months in 2006. We acquired WNDU-TV in 2006. The decrease in political advertising revenues was also partially offset by increased non-political advertising revenue from our expanded digital second channels.
Operating expense. Broadcast expenses (before depreciation, amortization and (gain) loss on disposal of assets) increased $8.2 million, or 4%, to $199.7 million due primarily to increases in the operating expenses of our primary channels totaling $5.1 million which primarily reflects routine increases in payroll, programming and promotion costs. Approximately $578,000 of this increase was the result of our operation of WNDU-TV for 12 months in 2007, compared to 10 months in 2006. The remaining $3.1 million increase is the result of additional costs associated with the expansion of the number of our digital second channels to 40 during 2007 as described above.
Corporate and administrative expense. Corporate and administrative expenses, before depreciation, amortization and (gain) loss on disposal of assets were unchanged, totaling $15.1 million in each of 2007 and 2006. During 2007, corporate payroll expenses increased by $479,000 compared to 2006 due primarily to routine compensation increases. The increase in payroll costs was largely offset by decreases of $447,000 in professional and other services. Corporate and administrative expenses included non-cash stock-based compensation expense during the years ended 2007 and 2006 of $1.2 million and $1.1 million, respectively.
Depreciation. Depreciation of property and equipment totaled $38.6 million and $34.1 million for 2007 and 2006, respectively. The increase in depreciation was due to acquired stations and newly acquired equipment.
Amortization of intangible assets. Amortization of intangible assets was $0.8 million for 2007 as compared to $2.5 million for 2006. The decrease in amortization expense was due to definite lived intangible assets of stations acquired in prior years, becoming fully amortized, partially offset by amortization of intangible assets acquired with the purchase of WNDU-TV in 2006.
Interest expense. Interest expense increased $0.4 million to $67.2 million for 2007 compared to $66.8 million for 2006. This increase is primarily attributable to higher average debt balances in 2007 compared to 2006 partially offset by lower average interest rates. The total average debt balance was $913.0 million and $814.8 million for 2007 and 2006, respectively. The average interest rates were 7.00% and 7.51% for 2007 and 2006, respectively.
Loss on Early Extinguishment of Debt. In 2007, we replaced our former senior credit facility with a new senior credit facility and redeemed our 9.25% Notes. As a result of these transactions, we recorded a loss on early extinguishment of debt of $6.5 million related to the senior credit facility and $16.4 million related to the redemption of the 9.25% Notes. The loss related to the redemption of the 9.25% Notes included $11.8 million in premiums, the write-off of $4.0 million in deferred financing costs and $614,000 in unamortized bond discount.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Months Ended March 31, 2008 (“2008 three-month period”) Compared To Three Months Ended March 31, 2007 (“2007 three-month period”)
Revenue. Total revenues increased $1.3 million, or 2%, to $71.0 million in the 2008 three-month period reflecting increased political advertising revenue, internet advertising revenue and production revenue which were partially offset by decreased local and national advertising revenues. Political advertising revenues increased to $3.1 million from $1.1 million reflecting increased advertising from political candidates in the 2008 primary elections. Internet advertising revenues increased $571,000, or 28%, reflecting increased website traffic and internet sales initiatives in each of our markets. Local advertising revenues decreased 2% or approximately $1.0 million. National advertising revenues decreased 4% or approximately $756,000. The decrease in local and national revenue was partially due to reduced advertising revenues resulting from the change in networks broadcasting the super bowl. During the 2008 three-month period, we earned approximately $130,000 of net revenue relating to the Super Bowl broadcast on our six Fox channels compared to earning approximately $750,000 of net revenue during the 2007 three-month period relating to the 2007 Super Bowl broadcast on our seventeen CBS channels.
Operating Expenses. Broadcast expenses (before depreciation, amortization and gain on disposal of assets) increased $1.2 million, or 2%, to $50.0 million in the 2008 three month period, due primarily to normal increases in payroll costs.
Corporate and Administrative Expenses . Corporate and administrative expenses (before depreciation, amortization and gain on disposal of assets) decreased $522,000, or 13%, to $3.5 million. During the 2008 three-month period, our costs for outside consulting, legal fees and non-cash stock-based compensation decreased. During the 2008 three-month period and the 2007 three-month period, we recorded non-cash stock-based compensation expense of $294,000 and $520,000, respectively.
Depreciation. Depreciation of property and equipment totaled $8.9 million and $9.6 million for the 2008 three-month period and the 2007 three-month period, respectively. The decrease in depreciation was the result of the large proportion of stations’ equipment, acquired in 2002, becoming fully depreciated in 2007.
Gain on Disposal of Assets. Gain on disposal of assets increased $918,000 to $921,000 during the 2008 three-month period as compared to the comparable period of the prior year. The Federal Communications Commission (the “FCC”) has mandated that all broadcasters operating microwave facilities on certain frequencies in the 2 GHz band relocate to other frequencies and upgrade their equipment. The spectrum being vacated by broadcasters has been reallocated to third parties who, as part of the overall FCC-mandated spectrum reallocation project, must provide affected broadcasters with new digital microwave replacement equipment at no cost to the broadcaster and also reimburse them for certain associated out-of-pocket expenses. During the 2008 three-month period, we recognized a gain of $936,000 on the disposal of assets associated with the spectrum reallocation project. We did not recognize any gains or losses on the disposal of assets associated with the spectrum reallocation project in the comparable period of the prior year.
Interest Expense. Interest expense decreased $1.5 million to $15.8 million for the 2008 three-month period compared to $17.3 million for the 2007 three-month period. This decrease is primarily attributable to lower average interest rates partially offset by the increase in total debt outstanding. Average interest rates have descreased due to a decrease in market interest rates on our senior credit facility and the redemption of our 9.25% senior subordinated notes on April 18, 2007. Our total debt balance has increased as a result of our redemption of our redeemable serial preferred stock on May 22, 2007 and the incurrance of costs associated with the redemption of our 9.25% senior subordinated notes on April 18, 2007. The redemption of our redeemable serial preferred stock and our 9.25% senior subordinated notes were financed through additional borrowings on our senior credit facility. Our average debt balance was $925.9 million and $869.3 million during the 2008 three-month period and the 2007 three-month period, respectively. The average interest rates on our total debt balances was 6.2% and 7.6% during the 2008 three-month period and the 2007 three-month period, respectively.
Loss on Early Extinguishment of Debt. On March 19, 2007, we refinanced our senior credit facility. In connection with this transaction, we reported a loss on early extinguishment of debt of $6.5 million in the 2007 three-month period.
Income Tax Benefit. We recognized an income tax benefit of $2.6 million in the 2008 three-month period compared to an income tax benefit of $5.9 million in the 2007 three-month period. The income tax benefits recorded in each year are consistent with our pre-tax losses. The effective income tax rate was approximately 41% for the current year three-month period and 36% in the prior year three-month period. Income tax benefit for the 2008 three-month period increased as a percentage of pre-tax loss primarily as a result of adjustments to our income tax valuation allowances against state net operating loss carryforwards and adjustments to our accruals of state tax reserves.
Liquidity and Capital Resources
General

We file a consolidated federal income tax return and such state or local tax returns as are required. Although we may earn taxable operating income in future years, as of March 31, 2008, we anticipate that through the use of our available loss carryforwards we will not pay significant amounts of federal or state income taxes in the next several years.
We believe that current cash balances, cash flows from operations and available funds under our senior credit facility will be adequate to provide for our capital expenditures, debt service, cash dividends and working capital requirements for the foreseeable future.
We do not believe that inflation has had a significant impact on our 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 was $6.7 million in the 2008 three-month period compared to net cash used in operating activities of $1.6 million in the 2007 three-month period. The increase in cash provided by operations is due primarily to a decrease in payments on broadcast obligations of $1.3 million, a decrease in deferred income tax of $3.8 million and change in current operating assets and liabilities of $5.0 million.
Net cash used in investing activities was $2.9 million in the 2008 three-month period compared to net cash used in investing activities of $9.8 million for the 2007 three-month period. The decrease in cash used in investing activities was largely due to decreased spending for equipment.
Net cash used in financing activities was $3.8 million in the 2008 three-month period compared to net cash provided by financing activities of $7.9 million in the 2007 three-month period. This was due primarily to a reduction in borrowings of long-term debt in the 2008 three-month period compared to the comparable period in the prior year. During the 2008 three-month period, we made our first required payment of $2.3 million to reduce the term loan portion of our senior credit facility and paid common stock dividends of $1.4 million, which were declared in fiscal 2007. Common stock dividends declared in the 2008 three-month period were paid in April of 2008. In the 2007 three-month period, we paid redeemable serial preferred stock dividends of $778,000. We did not pay any redeemable serial preferred stock dividends in the 2008 three-month period as a result of the redemption of our then outstanding redeemable serial preferred stock in May 2007. During the 2007 three-month period, we received $21.0 million in proceeds from the refinancing of our senior credit facility. In addition to the dividend payments made in the 2007 three-month period, we used cash provided by financing activities to purchase $5.5 million of our common stock and pay $3.2 million of debt refinancing fees related to our refinancing. During the 2008 three-month period, we did not repurchase any of our common stock.
Senior Credit Facility
The amount outstanding under our senior credit facility as of March 31, 2008 was $922.7 million comprised solely of the term loan facility. The revolving credit facility did not have an outstanding balance as of March 31, 2008. Available credit under the revolving credit facility as of March 31, 2008 was $100.0 million. As of March 31, 2008, the commitment fee was 0.50% on the available credit under the senior credit facility.
Our senior credit facility contains affirmative and restrictive covenants that we must comply with. As of March 31, 2008, we were in compliance with these covenants.
Capital Expenditures
Capital expenditures in 2008 and 2007 three-month periods were $2.9 million and $9.6 million, respectively. The 2007 three-month period included, in part, capital expenditures for the purchase of land and or buildings in two markets and the commencement of broadcasting local news in high definition digital format in another market while the 2008 three-month period did not contain comparable projects.
Other
During the 2008 three-month period, we contributed $11,000 to our pension plans. During the remainder of fiscal 2008, we expect to contribute an additional $3.7 million to our pension plans.

Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP 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. We consider our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report, the words “believes,” “expects,” “anticipates,” “estimates” and similar words and expressions are generally intended to identify forward-looking statements. Statements that describe our future strategic plans, goals or objectives are also forward-looking statements. Readers of this Quarterly Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of our 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 those listed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and the other factors described from time to time in our filings with the Securities and Exchange Commission. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to update such forward-looking statements to reflect subsequent events or circumstances, except as required by law.

CONF CALL

Robert S. Prather, Jr.

Welcome everybody to the Gray Television first quarter earnings call. I think we all know we’re living in some pretty interesting times these days. I guess we’ve got overall basically mostly good news. We finished at the top end of our guidance for the first quarter.

Our guidance wasn’t fantastic, but we did what we said we were going to do. We are feeling real good about the economy for most of the rest of the year especially in the second half. We think the political is going to be an all-time record spending. I think the Presidential was coming in a little slower than it did in 2004, but I think that was a unique situation and obviously this year is unique with the democratic primary still being contested, but the good news is we got big stations in Kentucky and West Virginia and we’re hoping the two democrats will continue to spend money on those two states, but we were a little ahead of budget for the first quarter in political; the second quarter may be a little behind, but we normally get between 85% and 88% of our political in the third and fourth quarters.

That’s has been our historical average over the years; so, we’re expecting some big numbers coming in the third and fourth quarters. Also we’re looking forward to the Olympics. Some of our biggest stations are NBCs and the Olympics in China should be big for us. I think we did $3.5 million in the last Olympics, and we hope we can do better than that this time – we should be able to. We got 284 days until the digital transition. I think this is fantastic for our industry. I think it’s great for Gray Television.

I think it’s going to be great for the consumer, viewers, and the advertisers; and I wish it was here tomorrow and I think it may be a little bumpy those weeks or so during the transition, but I think we’ll get through that pretty quickly. I don’t know if most of you saw, but Wilmington, North Carolina, has been picked as a test market and they’re going to try to test going forward digital there in September this year, I believe, it is. Here again, I think this is going to be great for our industry in the long run and I think it will be very good for us. We’re in a great position with our 40 digital channels on air already. So, we’re looking forward to going full digital.

Second quarter, I think we’re going to be doing okay. We’ve got a guidance out that – here again – not much growth, but that’s just the nature of the economy these days, and especially national advertising continues to be challenged all over the country it looks like and we’re part of that. I think the good news for us is that most of our markets are feeling the housing slump less than the rest of the country; here again, our idea of going after state capitals and university towns, I think, is paying off. I think most of our economies are stronger than the national average; so, I think we’ll fare well especially if this housing market continues to be gloomy going forward. We’re watching our expenses very closely.

We actually initiated early in January some cuts from our budgets and we think we’re probably saving $5 million in employment costs over a 12-month period and probably similar costs like that throughout the company. We’re looking at doing more hubbing. We’ve completed all our traffic hubbing. We’re looking at expanding our master control hubbing and we’re expanding our accounting hubbing, and our [inaudible] has the operation. So, we’re doing all these things which I think will make us more efficient in the coming months and the years ahead. We’re looking forward to, like I said, a huge political second half of the year. I think we’re in great position to break our all-time record there, and I think we should without any trouble, I think you’re going to see both in the Presidential and in a lot of the senate house races, a tremendous amount of money being spent, and I think we’ll be a big beneficiary of that.

On a personal note, I’ve been buying Gray stock – I hate to see the stock down this low. I will tell you right now. I’ve got 90% of my net worth in Gray stock; so, I hadn’t been fair until real lately, but I’ve got 100% faith in the strength of our company. I’ve bought shares as early as last week and I bought shares a month ago, and every time I buy them I think I’m stealing with the price I’m paying, so I guess I’ll just keep stealing more down, but I think our stock is way underway as are most of the television stocks right now. I think our whole industry has been unfairly painted with the old media brush, and I think we just got all get out there and show the world that we’re going to be in business and profitable and growing for a long time in the future.

I think our digital strategy is one of the things that is going to help us there. We are continuing to grow our digital. Our digital is very very profitable. We’ve deliberately cut our margins some this year because we insisted that all our stations hire a digital only salesperson; so every station we have as a digital only, at least one person, whose only job is to sell our new media product. We think this is going to pay off with big dividends in the years ahead. As I said, our digital revenues continue to grow and our digital profits continue to grow, so we think this is an area – here again – we feel like we want to be the number one news source in the towns we’re in and I think we all realize we live in a 3-screen world today; we got a TV screen, a computer screen, and a mobile screen, and we want to make sure we’re the number one source for local news, weather, sports, and events in our markets. So this is something we’re going to continue to do work on and we think we will continue to grow at a much faster rate than anything else we’re doing. At this point, I’m going to turn it over to Jim Ryan, our Chief Financial Officer and let him go through some of the numbers and then we’ll open it up for questions. Jim?

James C. Ryan

I’ll keep my comments relatively brief. Bob certainly covered all the highlights. First quarter, our total net revenues were up about 2% on the increase in political which we had expected. Also, we had a relatively strong growth in our internet which Bob alluded to a minute ago or two and we’re pleased to see the internet growth. Like a lot of people in the industry we did see softness in core local and national. Local was down about 2%, national down about 4%. A lot of that really reflects I think the general economic tone right now.

We also saw from a category standpoint similar to other people that have already reported softness in auto; our auto was down about 6%. Also, softness in teleco. Restaurants were down. Furniture was down a little. We did have some bright spots though. Our entertainment, medical, and supermarkets were up. Our financial category was actually flat year over year and so were the packaged goods department store categories. Operating expenses came in basically where we had expected, up slightly at about 2% as Bob mentioned. We have initiated some staffing reductions in the company that on a full 12-month basis would conservatively save us $5 million. About half of that will flow through the rest of this year and we’ll pick up the full value of that in ’09.

The guidance we’ve already put out for the second quarter – on the high side, we think we can be up a little. Political is coming in pretty well. We’ve seen a lot of activity in the last few weeks in North Carolina and in Indiana; both of those stations were earning about $600,000 each in the democratic primary which was actually good, we are pleased to see that. Certainly, West Virginia and Kentucky are now in play too, so we’re looking for that to be relatively strong for the next couple of weeks.

Turning quickly to a couple of comments on the balance sheet; total debt at the end of the quarter was $922.7 million. We had cash of $15.3 million which was basically consistent to where we ended up at the end of ’07. Leverage on a trailing 8-quarter basis was approximately 8 times. CapEx was very modest in Q1 at $2.9 million. I expect it to be modest again in Q2 and ramp up a little bit as we get late in the year and matched the CapEx with the political dollars. We had, for those that usually ask, cash taxes were negligible, $46,000; so that’s not an issue – on a total year basis, it’s about a million dollars for us this year. Bob, with that I’ll turn it over back to you.

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