Gray Media - 10-Q quarterly report FY

 

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(in thousands)

GRAY TELEVISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited)
(in thousands)

(in thousands except for number of shares)

(in thousands)

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 nine month periods ended September 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.

     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):

NOTE A—BASIS OF PRESENTATION (Continued)

     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 nine months ended September 30, 2005 and 2004 (in thousands):

     For the three months and nine months ended September 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):

     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 FASB issued Statement of Financial Accounting Standard 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 stock options and restricted stock beginning

NOTE A—BASIS OF PRESENTATION (Continued)

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 $125,000 and $175,000 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.

     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 nine months ended September 30, 2004, $289,000 and $1,043,000, 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.

     On August 22, 2005, Gray announced that it had entered into an agreement with Emmis Communications Corp. to acquire the assets of WSAZ-TV, the NBC affiliate in Charleston-Huntington, West Virginia for $186 million. The agreement is subject to certain conditions and regulatory approval. Gray currently anticipates, but can not assure, that the acquisition will be completed before December 31, 2005.

     In connection with this acquisition, Gray has obtained a financing commitment from Wachovia Bank, National Association for a senior secured credit facility in an aggregate principal amount of up to $600 million; a portion of this facility may be used to finance the acquisition of WSAZ-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.

     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 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 fair values of the assets acquired and the liabilities assumed at the date of acquisition for KKCO (in thousands):

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 $721,000 and operating income of $55,000 to the Company’s operating results for the three months ended September 30, 2005. KKCO contributed revenue of $1.9 million and operating income of $148,000 to the Company’s operating results for the nine months ended September 30, 2005.

     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 ratios are 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 a 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.

     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 September 30, 2005 was $373.5 million and was allocated as follows: revolving loan of $74 million, term loan A of $100 million and term loan B of $199.5 million. As of September 30, 2005, Gray had $26 million of available credit under the senior credit facility.

     On October 28, 2005, Gray further amended the senior credit facility to modify certain covenants of the agreement to be less restrictive for Gray. The capacity and interest rates of the agreement remained unchanged. Gray did not incur any fees associated with this amendment.

     Effective August 19, 2005, a lender of Gray issued an irrevocable $18.6 million stand by letter of credit on behalf of Gray in lieu of an earnest money deposit for the pending acquisition of WSAZ-TV.

     During the nine months ended September 30, 2005, Gray repurchased $21.5 million, face amount, of its Senior Subordinated Notes due 2011 (the “9¹/4% Notes”) in the open market. Associated with this repurchase, Gray recorded a loss upon 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 9¹/4% Notes, Gray paid $749,000 in accrued interest. Gray used cash on hand of $24.3 million for the repurchase of its 9¹/4% Notes which included amounts for the face amount of the 9¹/4% Notes, premium and accrued interest. As of September 30, 2005, Gray’s 9¹/4% Notes had a balance outstanding of $257.6 million excluding unaccreted discount of $0.8 million.

     The 9¹/4% 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 9¹/4% 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 9¹/4% 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.

     The following table provides the components of net periodic benefit cost for Gray’s pension plans for the three and nine months ended September 30, 2005 and 2004, respectively (in thousands):

     During the quarter ended September 30, 2005, Gray contributed $3.7 million to its pension plans. During the remainder of 2005, Gray expects to contribute an additional $717,000 to its pension plans.

     The Company operates in three business segments: broadcasting, publishing and paging. As of September 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):

     Corporate and administrative expenses as well as amortization of restricted stock are allocated to operating income based on segment net revenues.

     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 Court of Appeals, and on October 3, 2005, the U.S. Supreme Court denied Tarzian’s petition 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 the District Court denied Tarzian’s motion. Tarzian’s appeal of the District Court’s denial of its motion for new trial and entry of final judgment for the Estate is pending before the Seventh Circuit Court of Appeals. 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 alleges that Bull Run Corporation and the Company 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.

     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 September 30, 2005 and December 31, 2004, Gray had $1.2 million and $1.4 million respectively, recorded as a related party receivable for payments made in 2003 and earlier years.

     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 in the cost of the license fees.

     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 to distribute cash to Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

     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”.

     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.

     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 nine months ended September 30, 2005 were generated from local advertising, 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.

     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.

     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 to distribute cash to Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

     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”.

     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.

     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):

     Revenues. Total revenues for the three months ended September 30, 2005 decreased 13% to $75.1 million as compared to the same period of the prior year.

     Operating expenses. Operating expenses increased 8% to $61.4 million from $57.0 million in the same period of the prior year.

     Interest expense. Interest expense increased 7% to $11.1 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 9¹/4% Notes were 6.73% and 5.93% for the three months ended September 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 9¹/4% Notes during the second quarter of 2005.

     Income tax expense. An income tax expense of $1.2 million was recorded for the three months ended September 30, 2005 as compared to an income tax expense of $7.6 million for the three months ended September 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.

     Revenues. Total revenues for the nine months ended September 30, 2005 decreased 7% to $227.9 million as compared to the same period of the prior year.

     Operating expenses. Operating expenses increased 8% to $178.4 million from $165.7 million in the same period of the prior year.

     Interest expense. Interest expense increased 7% to $33.5 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 9¹/4% Notes were 6.72% and 6.05% for the nine months ended September 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 9¹/4% 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 9¹/4% Notes and the amendment of Gray’s senior credit facility.

     Gray repurchased $21.5 million, face amount, of its 9¹/4% Notes in the open market. Associated with this repurchase, Gray recorded a loss upon 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 9¹/4% 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 $4.7 million was recorded for the nine months ended September 30, 2005 as compared to an income tax expense of $19.0 million for the nine months ended September 30, 2004. The decreased expense in the current year as compared to that of the prior year was attributable to having less 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.

     The following tables present certain data that Gray believes is helpful in evaluating its liquidity and capital resources (in thousands).

     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 $43.2 million in the nine months ended September 30, 2005 as compared to the same period of 2004. The decrease was due primarily to a decrease in net income, deferred income taxes and changes in operating liabilities.

     Net cash used in investing activities increased $17.9 million. The increase was due primarily to the acquisition of KKCO-TV representing a use of cash totaling $13.9 million and the acquisition of a partnership whose primary

assets were television production equipment, land, and a television studio building in Tallahassee, Florida for $4.8 million.

     Net cash used in financing activities increased $30.4 million. The Company repurchased 398,400 shares of Common Stock for $5.5 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 9¹/4% Notes. These transactions are described in more detail below. No similar purchases were made in the prior year. Dividends paid increased $5.9 million due to the payment in January 2005 of a special dividend that was declared in the fourth quarter of 2004.

     Set forth below is the Company’s capital expenditure activity for the nine months ended September 30, 2005 and 2004 (in thousands):

     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.

     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 September 30, 2005, the balance outstanding and the balance available under Gray’s senior credit facility were $373.5 million and $26 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.

     On October 28, 2005, Gray further amended the senior credit facility to modify certain covenants of the agreement to be less restrictive for Gray. The capacity and interest rates of the agreement remained unchanged. Gray did not incur any fees associated with this amendment.

     Effective August 19, 2005, a lender of Gray issued an irrevocable $18.6 million stand by letter of credit on behalf of Gray in lieu of an earnest money deposit for the pending acquisition of WSAZ-TV.

     During the nine months ended September 30, 2005, Gray repurchased $21.5 million, face amount, of its Senior Subordinated Notes due 2011 (the “9¹/4% Notes”) in the open market. Associated with this repurchase, Gray recorded a loss upon 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 9¹/4% 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 9¹/4% Notes which included amounts for the face amount of the 9¹/4% 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 September 30, 2005, Gray’s 9¹/4% Notes had a balance outstanding of $257.6 million excluding unaccreted discount of $0.8 million.

     Gray makes semiannual interest payments on the 9¹/4% Notes on June 15^th and December 15^th. Interest payments on the senior credit facility are made on varying dates throughout the year.

     On August 22, 2005, Gray announced that it had entered into an agreement with Emmis Communications Corp. to acquire the assets of WSAZ-TV, the NBC affiliate in Charleston-Huntington, West Virginia for $186 million. The agreement is subject to certain conditions and regulatory approval. Gray currently anticipates, but can not assure, that the acquisition will be completed before December 31, 2005.

     In connection with this acquisition, Gray has obtained a financing commitment from Wachovia Bank, National Association for a senior secured credit facility in an aggregate principal amount of up to $600 million; a portion of this facility may be used to finance the acquisition of WSAZ-TV.

     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 September 30, 2005 and December 31, 2004, Gray had $1.2 million and $1.4 million respectively, recorded as a related party receivable for payments made in 2003 and earlier years.

     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 in the cost of the license fees.

     During the quarter ended September 30, 2005, Gray contributed $3.7 million to its pension plans. During the remainder of 2005, Gray expects to contribute an additional $717,000 to its pension plans.

     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.

     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 FASB issued Statement of Financial Accounting Standard 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 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 $125,000 and $175,000 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.

     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, (vi) the proposed spin-off of the publishing and paging business and (vii) 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.

     Gray believes that the market risk of its financial instruments as of September 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.

     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 third 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.

     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.

     Issuer Purchases of Equity Securities

     The following tables provide information about Gray’s repurchase of its common stock (ticker: GTN) and its class A common stock (ticker: GTN.A) during the quarter ended September 30, 2005.

Exhibit 10.1 This first amendment to the loan agreement is made and entered into as of this 28^th day of October, 2005, by and among Gray Television Inc., Wachovia Bank, National Association, Bank of America, N.A., and Deutsche Bank Trust Company Americas.

Exhibit 31.1 Rule 13 (a) — 14(a) Certificate of Chief Executive Officer

Exhibit 31.2 Rule 13 (a) — 14(a) Certificate of Chief Financial Officer

Exhibit 32.1 Section 1350 Certificate of Chief Executive Officer

Exhibit 32.2 Section 1350 Certificate of Chief Financial Officer

     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.