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GRAY TELEVISION INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

Executive Overview Introduction The following analysis of the financial condition and results of operations of Gray Television, Inc. and its consolidated subsidiaries (except as the context otherwise provides, "Gray," the "Company," "we," "us" or "our") should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in this report and our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the "2013 Form 10-K"). Gray's consolidated financial condition and results of operations include the accounts of Excalibur Broadcasting, LLC (collectively with its subsidiaries, "Excalibur"), a variable interest entity that Gray is required to consolidate under generally accepted accounting principles. Included in Gray's results of operations for the six months ended June 30, 2014 and 2013 is net revenue of $0.9 million and $0.0 million, respectively, of Excalibur. Overview We are a television broadcast company headquartered in Atlanta, Georgia, that owns and operates television stations and digital properties in markets throughout the United States. As described in more detail elsewhere herein, during the six months ended June 30, 2014, we completed the acquisition of a number of television stations. As of June 30, 2014, we owned and/or operated television stations in 42 television markets broadcasting a total of 139 programming streams, including 27 affiliates of the CBS Network ("CBS"), 24 affiliates of the NBC Network ("NBC"), 14 affiliates of the ABC Network ("ABC") and ten affiliates of the FOX Network ("FOX"). Within a market, we broadcast secondary digital channels that are in addition to our primary broadcast channels. Our secondary broadcast channels are generally affiliated with networks different from those affiliated with our primary broadcast channels, and they are operated by us to make better use of our broadcast spectrum by providing supplemental and/or alternative programming to our primary channels. Certain of our secondary channels are affiliated with more than one network simultaneously. In addition to affiliations with ABC, CBS and FOX, our secondary channels are affiliated with the following networks: the CW Network or the CW Plus Network (collectively, "CW"), MyNetworkTV ("MyNet."), the MeTV Network ("MeTV"), This TV Network ("This TV"), Antenna TV ("Ant."), Live Well Network ("LW") and Telemudo ("Tel."). We also broadcast nine local news/weather channels in certain of our existing markets. Our combined TV station group reaches approximately 7.3% of total United States households.



As of the date hereof, we have pending acquisitions of television stations broadcasting a total of four programming streams. We operate six stations pursuant to various agreements including local marketing agreements, ad representation agreements and/or shared service agreements.

Recent Acquisitions During the six-month period ended June 30, 2014, we completed four acquisitions that are described in Note 2, "Acquisitions," of the notes to our unaudited condensed consolidated financial statements included elsewhere herein: the Hoak Acquisition, the KNDX Acquisition, the KEVN Acquisition and the WQCW Acquisition (collectively, the "2014 Acquisitions"). We began providing services to one new full-power station ("KJCT-TV") on October 31, 2013 and began operating additional stations in three new markets (the "Yellowstone Stations") on November 1, 2013. The stations acquired in the 2014 Acquisitions, KJCT-TV and the Yellowstone Stations are collectively referred to as the "Acquired Stations." 23

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Television Industry Background

The Federal Communications Commission (the "FCC") grants broadcast licenses to television stations. Historically, there have been a limited number of channels available for broadcasting in any one geographic area. Television station revenue is derived primarily from local and national advertising. Television station revenue is derived to a much lesser extent from retransmission consent fees; network compensation; studio and tower space rental; and commercial production activities. "Advertising" refers primarily to advertisements broadcast by television stations, but it also includes advertisements placed on a television station's website and sponsorships of television programming and off-line content (such as email messages, mobile applications, and other electronic content distributed by stations). Advertising rates are based upon: (i) the size of a station's market, (ii) a station's overall ratings, (iii) a program's popularity among targeted viewers, (iv) the number of advertisers competing for available time, (v) the demographic makeup of the station's market, (vi) the availability of alternative advertising media in the market, (vii) the presence of effective sales forces and (viii) the development of projects, features and programs that tie advertiser messages to programming. Rates can also be determined in part by a station's overall ratings and in-market share, as well as the station's ratings and market share among particular demographic groups that an advertiser may be targeting. Advertisers' budgets, which can be affected by broad economic trends, can affect the broadcast industry in general and the revenue of individual broadcast television stations.



Revenues, Cyclicality and Seasonality

Broadcast stations like ours rely on advertising revenue and this revenue is sensitive to cyclical changes in the economy. As a result, improvement in general economic conditions resulted in improvements of our non-political advertising revenue in the six-month period ended June 30, 2014 compared to the six-month period ended June 30, 2013. Broadcast advertising revenue is generally highest in the second and fourth quarters each year. This seasonality results partly from increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Broadcast advertising revenue is also typically higher in even-numbered years due to increased spending by political candidates, political parties and special interest groups in advance of elections. This political spending typically is heaviest during the fourth quarter. For the six-month period ended June 30, 2014, our largest advertising customer category was automotive. For each of the six-month periods ended June 30, 2014 and 2013, we earned approximately 24% of our total broadcast advertising revenue from our automotive customers. Our business and operating results could be materially adversely affected if advertising revenue from automotive customers decreases. Our business and operating results could also be materially adversely affected if revenue decreased from one or more other significant advertising categories, such as the medical, restaurant, communications, furniture and appliances, entertainment, or financial service industries.



Please see our "Results of Operations" and "Liquidity and Capital Resources" sections below for further discussion of our operating results.

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Revenue Set forth below are the principal types of revenue, less agency commissions, earned by us for the periods indicated and the percentage contribution of each type of revenue to our total revenue (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Revenue: Local $ 56,678 52.8 % $ 50,869 60.4 % $ 107,722 54.3 % $ 97,297 59.9 % National 14,826 13.8 % 15,052 17.9 % 28,174 14.2 % 28,476 17.5 % Internet 7,206 6.7 % 6,257 7.4 % 13,245 6.7 % 11,963 7.4 % Political 8,616 8.0 % 751 0.9 % 11,408 5.7 % 1,392 0.9 % Retransmission consent 17,659 16.5 % 9,396 11.1 % 33,776 17.0 % 19,088 11.7 % Other 2,264 2.2 % 1,960 2.3 % 4,221 2.1 % 4,238 2.6 % Total $ 107,249 100.0 % $ 84,285 100.0 % $ 198,546 100.0 % $ 162,454 100.0 % Results of Operations



Three Months Ended June 30, 2014 ("2014 three-month period") Compared to Three Months Ended June 30, 2013 ("2013 three-month period")

Revenue. Total revenue increased $23.0 million, or 27%, to $107.2 million in the 2014 three-month period primarily due to increases in local advertising revenue, internet advertising revenue and retransmission consent revenue, as well as an expected increase in political advertising revenue. The Acquired Stations accounted for approximately $8.9 million of our total revenue in the 2014 three-month period. Political advertising revenue increased $7.9 million to $8.6 million due to 2014 being the "on year" of the two year election cycle which resulted in increased spending by political candidates, political parties and special interest groups in the 2014 three-month period. Retransmission consent revenue increased $8.3 million, or 88%, to $17.7 million primarily due to increased subscriber rates. Local advertising revenue increased approximately $5.8 million, or 11%, to $56.7 million due to increased spending by our advertisers in a gradually improving economic environment. National advertising revenue decreased approximately $0.2 million, or 2%, to $14.8 million. Internet advertising revenue increased $0.9 million, or 15%, to $7.2 million. Excluding revenue attributable to the Acquired Stations and political advertisers, our five largest advertising categories on a combined local and national basis by customer type demonstrated the following changes during the 2014 three-month period compared to the 2013 three-month period: automotive increased 6%; medical increased less than 1%; restaurant increased less than 1%; communications decreased 2%; and furniture and appliances decreased 10%. 25 -------------------------------------------------------------------------------- Broadcast expenses. Broadcast expenses (before depreciation, amortization and loss (gain) on disposal of assets) increased $14.2 million, or 27%, to $66.0 million in the 2014 three-month period, due primarily to increases in compensation expense of $8.1 million and non-compensation expense of $6.1 million. Compensation expense increased primarily due to increases in non-cash paid-time-off of $3.8 million, salaries of $2.6 million, healthcare costs of $2.1 million and non-cash stock-based compensation of $0.3 million offset, in part, by a decrease in pension expense of $0.6 million. The non-cash increase in expense for paid-time-off was due largely to a change in our employee benefit policy. The increase in salaries resulted primarily from the addition of the Acquired Stations. The increase in healthcare costs was due to increased claims activity. Non-compensation expense increased primarily due to increases in network affiliation fees of $2.4 million (reflecting in part, increased fees payable to the ABC network for our affiliation agreements that renewed December 31, 2013) and to a lesser extent increases in other programming costs, software license fees, consulting fees, bad debt expense and other professional fees. During the 2014 three-month period and the 2013 three-month period, we recorded total broadcast non-cash stock-based compensation expense of $0.3 million and $0.0 million, respectively. Broadcast non-cash stock-based compensation expense increased due to a grant of restricted common stock to certain employees in 2014. The Acquired Stations accounted for approximately $6.2 million of aggregate broadcast expense increase in the 2014 three-month period. Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and loss (gain) on disposal of assets) increased $4.6 million, or 86%, to $9.8 million in the 2014 three-month period due primarily to increases in non-compensation expense of $4.5 million and compensation expense of $0.1 million. Non-compensation expense increased primarily due to increases in legal and other professional fees associated with our completed and pending acquisitions. Compensation expense increased primarily due to routine increases in salary expense offset, in part, by a decrease in non-cash stock-based compensation expenses. During the 2014 three-month period and the 2013 three-month period, we recorded corporate non-cash stock-based compensation expense of $0.7 million and $1.3 million, respectively. Non-cash stock-based compensation expense decreased primarily due to the vesting of restricted stock of an employee upon his termination in the 2013 three-month period. A similar event did not occur in the 2014 three-month period. Depreciation. Depreciation of property and equipment increased $1.0 million, or 18%, to $7.0 million during the 2014 three-month period compared to the 2013 three-month period. Depreciation increased due to additional property and equipment being placed in service as a result of routine purchases and the acquisition of the Acquired Stations. Amortization of intangible assets. Amortization of intangible assets increased approximately $1.2 million to $1.2 million during the 2014 three-month period compared to the 2013 three-month period. Amortization expense increased due to amortization of the additional definite lived intangible assets of the Acquired Stations. Interest expense. Interest expense increased $3.2 million, or 26%, to $15.8 million for the 2014 three-month period. This increase was attributable to an increase in average interest rates and an increase in average borrowings outstanding. Our average debt balance was $961.9 million and $835.0 million during the 2014 and 2013 three-month periods, respectively. The average interest rate on our total debt balances was approximately 6.5% and 5.7% during the 2014 and 2013 three-month periods, respectively. Loss from early extinguishment of debt. On June 13, 2014, we entered into an amendment and restatement of our 2012 Senior Credit Facility in the form of a new agreement (the "2014 Senior Credit Facility). In connection with the entry into the 2014 Senior Credit Facility, we incurred loan issuance costs of approximately $7.1 million, including bank fees and other professional fees. The amendment and restatement of the 2012 Senior Credit Facility was determined to be a significant modification and, as a result, we recorded a related loss from early extinguishment of debt of $4.9 million in the three-month period ended June 30, 2014. Income tax expense. We recognized income tax expense of $0.9 million and $3.6 million for the 2014 and 2013 three-month periods, respectively. For the 2014 and 2013 three-month periods, our effective income tax rate was 35.5% and 41.0%, respectively. We estimate our differences between taxable income and recorded income on an annual basis. Our tax provision for each interim reporting period is based upon these full year projections which are revised each interim reporting period. These projections incorporate estimates of permanent differences between U.S. GAAP income and taxable income, state income taxes, adjustments to our liability for unrecognized tax benefits and other items as necessary to adjust our statutory Federal income tax rate of 35.0% to our effective income tax rate. Our effective income tax rate for the 2014 three-month period as compared to the 2013 three-month period decreased primarily due to a decrease in state income taxes for the 2014 three-month period as compared to the 2013 three-month period. 26 --------------------------------------------------------------------------------



Six Months Ended June 30, 2014 ("2014 six-month period") Compared to Six Months Ended June 30, 2013 ("2013 six-month period")

Revenue. Total revenue increased $36.1 million, or 22%, to $198.5 million in the 2014 six-month period primarily due to increases in local advertising revenue, internet advertising revenue and retransmission consent revenue, as well as an expected increase in political advertising revenue. The Acquired Stations accounted for approximately $12.6 million of our total revenue in the 2014 six-month period. Political advertising revenue increased $10.0 million, or 720%, to $11.4 million due to 2014 being the "on year" of the two year election cycle which resulted in increased spending by political candidates, political parties and special interest groups in the 2014 six-month period. Retransmission consent revenue increased $14.7 million, or 77%, to $33.8 million primarily due to increased subscriber rates. Local advertising revenue increased approximately $10.4 million, or 11%, to $107.7 million. National advertising revenue decreased approximately $0.3 million, or 1%, to $28.2 million. Local and national advertising revenue in the 2014 six-month period benefited from approximately $3.8 million earned from the broadcast of the 2014 Winter Olympic Games on our fourteen NBC affiliated stations. There was no corresponding Olympic Games advertising revenue during the 2013 six-month period. Local and national advertising revenue included the broadcast of the 2014 Super Bowl on our five FOX channels, which earned us approximately $0.2 million, a decrease of approximately $0.9 million compared to the broadcast of the 2013 Super Bowl on our then 20 CBS channels that earned us approximately $1.1 million. Internet advertising revenue increased $1.3 million, or 11%, to $13.2 million. Excluding revenue attributalbe to the Acquired Stations and political advertisers, our five largest advertising categories on a combined local and national basis by customer type demonstrated the following changes during the 2014 six-month period compared to the 2013 six-month period: automotive increased 8%; medical increased 7%; restaurant decreased 12%; communications decreased 4%; and furniture and appliances decreased 6%. Broadcast expenses. Broadcast expenses (before depreciation, amortization and loss (gain) on disposal of assets) increased $21.1 million, or 20%, to $126.4 million in the 2014 six-month period, due primarily to an increase in non-compensation expense of $11.5 million and compensation expense of $9.6 million. Non-compensation expense increased primarily due to increases in network affiliation fees of $4.5 million (reflecting in part, increased fees payable to the ABC network for our affiliation agreements that renewed December 31, 2013) and to a lesser extent increases in programming costs, software license fees, consulting fees, bad debt expense and other professional fees. Compensation expense increased primarily due to increases in salaries of $4.7 million, non-cash paid-time-off of $3.9 million, health care costs of $0.9 million and non-cash stock-based compensation of $1.0 million offset, in part, by a decrease in pension expense of $1.2 million. The increase in salaries resulted primarily from the addition of the Acquired Stations. The non-cash increase in expense for paid-time-off was due largely to a change in our employee benefit policy. During the six-months ended June 30, 2014 and 2013, we recorded total broadcast non-cash stock-based compensation expense of $1.0 million and $0.0 million, respectively. Broadcast non-cash stock-based compensation expense increased due to a grant of restricted common stock to certain employees in 2014. The Acquired Stations accounted for approximately $9.5 million of aggregate broadcast expense increase in the 2014 six-month period. Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and loss (gain) on disposal of assets) increased $7.2 million, or 79%, to $16.3 million for the 2014 six-month period due primarily to increases in compensation expense of $1.7 million and non-compensation expense of $5.5 million. Non-compensation expense increased primarily due to increases in legal and other professional fees associated with our completed and pending acquisitions. Compensation expense increased primarily due to routine increases in salary expense and non-cash stock-based compensation expenses. We recorded non-cash stock-based compensation expense during the six-month periods ended June 30, 2014 and 2013 of $2.1 million and $1.5 million, respectively. Corporate non-cash stock-based compensation expense increased due to a grant of restricted common stock to certain employees in 2014. 27 -------------------------------------------------------------------------------- Depreciation. Depreciation of property and equipment increased $1.6 million, or 14%, to $13.4 million for the 2014 six-month period. Depreciation increased due to additional property and equipment being placed in service due to routine purchases and the acquisition of the Acquired Stations. Amortization of intangible assets. Amortization of intangible assets increased $1.4 million to $1.5 million during the 2014 six-month period compared to the 2013 six-month period. Amortization increased due to amortization of the additional definite lived intangible assets of the Acquired Stations. Interest expense. Interest expense increased $6.0 million, or 24%, to $31.1 million for the 2014 six-month period. This increase was attributable to an increase in average interest rates and an increase in average borrowings outstanding. Our average debt balance was $899.4 million and $835.0 million during the 2014 and 2013 six-month periods, respectively. The average interest rates on our total debt balances were 6.7% and 5.7% during the 2014 and 2013 six-month periods, respectively. Loss from early extinguishment of debt. In connection with entering into the 2014 Senior Credit Facility, we incurred loan issuance costs of approximately $7.1 million, including bank fees and other professional fees. The amendment and restatement of the 2012 Senior Credit Facility was determined to be a significant modification and, as a result, we recorded a related loss upon early extinguishment of debt of $4.9 million in the six-month period ended June 30, 2014. Income tax expense. We recognized income tax expense of $1.7 million and $5.2 million in the 2014 and 2013 six-month periods, respectively. For the 2014 and 2013 six-month periods, our effective income tax rate was 37.7% and 46.5%, respectively. We estimate our differences between taxable income and recorded income on an annual basis. Our tax provision for each interim reporting period is based upon these full year projections which are revised each interim reporting period. These projections incorporate estimates of permanent differences between U.S. GAAP income and taxable income, state income taxes, adjustments to our liability for unrecognized tax benefits and other items as necessary to adjust our statutory Federal income tax rate of 35.0% to our effective income tax rate. Our effective income tax rate for the 2014 six-month period as compared to the 2013 six-month period decreased primarily due to an adjustment resulting from the expiration of certain unexercised stock options in the 2013 six-month period. 28

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Liquidity and Capital Resources

General



The following table presents data that we believe is helpful in evaluating our liquidity and capital resources (in thousands).

Six Months Ended June 30, 2014 2013



Net cash provided by operating activities $ 29,339$ 25,919 Net cash used in investing activities

(335,323 ) (13,669 ) Net cash provided by financing activities 358,576 87 Increase in cash $ 52,592$ 12,337 As of December 31, June 30, 2014 2013 Cash $ 66,070$ 13,478 Long-term debt $



1,202,845 $ 842,650 Borrowing availability under the 2014 Senior Credit Facility $ 40,000 $

- Borrowing availability under the 2012 Senior Credit Facility $ - $ 30,000 Senior Credit Facility As described above, on June 13, 2014 (the "Closing Date"), Gray entered into an amendment and restatement of its then existing senior credit facility (the "2012 Senior Credit Facility") in the form of the 2014 Senior Credit Facility. The 2014 Senior Credit Facility provides total commitments of $575.0 million, consisting of a $525.0 million term loan facility (the "2014 Term Loan") and a $50.0 million revolving credit facility (the " 2014 Revolving Credit Facility"). On the Closing Date, we borrowed $525.0 million under the 2014 Term Loan. Proceeds from borrowings under the 2014 Term Loan were used to repay all amounts outstanding under the 2012 Senior Credit Facility, to fund the cash purchase price to complete the Hoak Acquisition and to pay related fees and expenses, as well as for general corporate purposes. 2014 Term Loan borrowings bear interest, at our option, at either the Base Rate (as defined below) plus 1.75% to 2.0% or the London Interbank Offered Rate ("LIBOR") plus 2.75% to 3.0%, subject to a LIBOR floor of 0.75%, in each case based on a first lien leverage ratio test as set forth in the 2014 Senior Credit Facility (the "First Lien Ratio Test"). The 2014 Term Loan also requires us to make quarterly principal repayments equal to 0.25% of the outstanding principal amount of the 2014 Term Loan beginning September 30, 2014. Borrowings under the 2014 Revolving Credit Facility bear interest, at our option, based on the Base Rate plus 1.0% to 1.5% or LIBOR plus 2.0% to 2.5%, in each case based on the First Lien Ratio Test. Base Rate is defined as the greatest of (i) the administrative agent's prime rate, (ii) the overnight federal funds rate plus 0.50% and (iii) one-month LIBOR plus 1.0%. We are required to pay a commitment fee on the average daily unused portion of the 2014 Revolving Credit Facility, which rate may range from 0.375% to 0.50% on an annual basis, based on the First Lien Ratio Test.



The 2014 Revolving Credit Facility matures on June 13, 2019 and the 2014 Term Loan matures on June 13, 2021.

29 -------------------------------------------------------------------------------- Excluding accrued interest, the amount outstanding under our 2014 Senior Credit Facility as of June 30, 2014 consisted solely of a 2014 Term Loan balance of $525.0 million. Our maximum borrowing availability was limited under the 2014 Senior Credit Facility by our required compliance with certain restrictive covenants, including a first lien net leverage ratio covenant. Also as of June 30, 2014, we had a $10.0 million letter of credit outstanding under the 2014 Revolving Credit Facility, which reduced our borrowing availability thereunder to $40.0 million as of that date. The interest rate on the balance outstanding under the 2014 Senior Credit Facility was 3.8% as of June 30, 2014, and we had a deferred loan cost balance, net of accumulated amortization of $5.8 million related to the 2014 Senior Credit Facility at that date. Prior to its amendment and restatement, the 2012 Senior Credit Facility consisted of a revolving loan ( the "2012 Revolving Credit Facility") and a term loan (the "2012 Term Loan"). Excluding accrued interest, the amount outstanding under our 2012 Senior Credit Facility as of December 31, 2013 consisted solely of a 2012 Term Loan balance of $159.0 million. Also as of December 31, 2013, we had a $10.0 million letter of credit outstanding under the 2012 Revolving Credit Facility, which reduced our borrowing availability thereunder to $30.0 million as of that date. As of December 31, 2013, the interest rate on the balance outstanding under the 2012 Senior Credit Facility was 4.8%, and we had a deferred loan cost balance, net of accumulated amortization, of $3.9 million related to the 2012 Senior Credit Facility at that date. In connection with the entry into the 2014 Senior Credit Facility, we incurred loan issuance costs of approximately $7.1 million, including bank fees and other professional fees. The amendment and restatement of the 2012 Senior Credit Facility was determined to be a significant modification and, as a result, we recorded a related loss upon early extinguishment of debt of $4.9 million in the six-month period ended June 30, 2014.



7% Senior Notes due 2020 (the "2020 Notes")

As of June 30, 2014 and December 31, 2013, we had $675.0 million of our 2020 Notes outstanding; the coupon interest rate and the yield on the 2020 Notes was 7.5% and 7.3%, respectively, on each date, and we had a deferred loan cost balance, net of accumulated amortization, of $12.3 million and $13.2 million, respectively, related to our 2020 Notes. Excalibur Loan The Excalibur Loan is a term loan between a third party and Excalibur, a VIE whose financial condition and results we consolidate with ours in accordance with U.S. GAAP. As of June 30, 2014 and December 31, 2013, the balance outstanding of the Excalibur Loan was $2.9 million and $3.0 million, respectively. As of each of June 30, 2014 and December 31, 2013, the interest rate on the balance outstanding under the Excalibur Loan was 4.75%. The deferred loan cost balance, net of accumulated amortization, of the Excalibur Loan as of June 30, 2014 and December 31, 2013 was $0.2 million.



Collateral, Covenants and Restrictions

Our obligations under the 2014 Senior Credit Facility are secured by substantially all of the assets, including real estate, of Gray and substantially all of its subsidiaries. In addition, substantially all of Gray's subsidiaries are joint and several guarantors of those obligations and Gray's ownership interests in those subsidiaries are pledged to collateralize its obligations under the 2014 Senior Credit Facility. Excalibur is not a guarantor of, and its assets are not pledged to secure our obligations under, the 2014 Senior Credit Facility. Gray Television, Inc. is a holding company with no independent assets or operations. For all periods presented, the 2020 Notes have been fully and unconditionally guaranteed, on a joint and several, senior unsecured basis, by substantially all of Gray Television, Inc.'s subsidiaries. Any subsidiaries that do not guarantee such notes are "minor" (as defined in Rule 3-10(h) of Regulation S-X). As of June 30, 2014, there were no significant restrictions on the ability of Gray Television, Inc.'s subsidiaries to distribute cash to Gray or to the guarantor subsidiaries. Excalibur is not a guarantor of the 2020 Notes. The Excalibur Loan is secured by substantially all of Excalibur's assets, and we have jointly and severally guaranteed Excalibur's obligations under the Excalibur Loan, including the payment of all unpaid principal and interest. 30

-------------------------------------------------------------------------------- The 2014 Senior Credit Facility contains affirmative and restrictive 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, payments on certain other debt and share repurchases, (g) limitations on mergers, and (h) at all times at which amounts are outstanding under the 2014 Revolving Credit Facility, maintenance of a total leverage ratio not to exceed certain maximum limits, as well as other customary covenants for credit facilities of this type. The 2020 Notes include covenants with which we must comply and the Excalibur Loan includes covenants with which Excalibur must also comply, each of which are typical for borrowing transactions of their respective nature. As of June 30, 2014 and December 31, 2013, we and Excalibur were in compliance with all required covenants under our respective debt obligations.



Net Cash Provided By (Used In) Operating, Investing and Financing Activities

Net cash provided by operating activities was $29.3 million in the 2014 six-month period compared to $25.9 million in the 2013 six-month period. The increase in cash provided by operations was due primarily to an increase in revenue offset, in part, by increases in broadcast and corporate and administrative expenses.

Net cash used in investing activities was $335.3 million in the 2014 six-month period compared to net cash used in investing activities of $13.7 million for the 2013 six-month period. The increase in cash used in investing activities was largely due to the funding of the 2014 Acquisitions which were completed in the 2014 six-month period. Net cash provided by financing activities in the 2014 six-month period was $358.6 million compared to net cash provided by financing activities of $0.1 million in the 2013 six-month period. This increase in cash provided by financing activities was due primarily to an increase in borrowings of long-term debt, net of repayments, in the 2014 six-month period compared to the 2013 six-month period. On June 13, 2014, we borrowed $525.0 million under the 2014 Senior Credit Facility, using the funds as follows: $309.5 million to complete the Hoak Acquisition, including fees, and fund a down payment on the Parker Acquisition; $159.5 million to pay off existing debt and related accrued interest; $6.5 million for payment of fees resulting from the amendment and restatement of the 2012 Senior Credit Facility; and $49.5 million in cash for general corporate purposes. Liquidity As of June 30, 2014, required debt principal repayments over the next twelve months consisted primarily of $5.3 million due under the 2014 Senior Credit Facility and $0.2 million due under the Excalibur Loan. As of June 30, 2014, we estimate that we will make approximately $70.8 million in debt interest payments over the next twelve months immediately following June 30, 2014. Capital expenditures may increase to between $25.0 million and $28.0 million during the twelve months immediately following June 30, 2014. We also estimate as of June 30, 2014 that we will be required to pay approximately $4.2 million to complete currently pending acquisitions. These acquisitions are subject to a number of conditions, some of which may be out of our control, and which include, in some instances, FCC approval. No assurances of the timing of the satisfaction of these conditions can be provided. Although our cash flows from operations are subject to a number of risks and uncertainties, we anticipate that our cash on hand, future cash expected to be generated from operations, borrowings from time to time under the 2014 Senior Credit Facility (or any such other credit facility as may be in place at the appropriate time) and, potentially, external equity or debt financing, will be sufficient to fund these debt service obligations, estimated capital expenditures and acquisition-related obligations. Any potential equity or debt financing would depend upon, among other things, the costs and availability of such financing at the appropriate time. We also presently believe that our future cash expected to be generated from operations and borrowing availability under the 2014 Senior Credit Facility (or any such other credit facility) will be sufficient to fund our future capital expenditures and long-term debt service obligations until at least June 13, 2021, which is the maturity date of the 2014 Term Loan. Capital Expenditures Capital expenditures in the 2014 and 2013 six-month periods were $10.5 million and $12.5 million, respectively. We anticipate that our capital expenditures for the remainder of 2014 will be approximately $19.5 million. 31 --------------------------------------------------------------------------------

Other 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 June 30, 2014, 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 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.

During the six-month period ended June 30, 2014, we contributed $2.7 million to our pension plans. During the remainder of the year ending December 31, 2014, we expect to contribute an additional $3.4 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 2013 Form 10-K.



Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of 1934. Forward-looking statements are all statements other than those of historical fact. When used in this Quarterly Report, the words "believes," "expects," "anticipates," "estimates," "will," "may," "should" and similar words and expressions are generally intended to identify forward-looking statements. Among other things, statements that describe our expectations regarding our results of operations, general and industry-specific economic conditions, future pension plan contributions and capital expenditures are 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 contained in the forward-looking statements as a result of various factors including, but not limited to, those listed under the heading "Risk Factors" in our 2013 Form 10-K and as may be described in subsequently filed quarterly reports on Form 10-Q, as well as the other factors described from time to time in our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update such forward-looking statements to reflect subsequent events or circumstances.


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