**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 

| **ý****    QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                               |   |
| **For the quarterly period ended  June 30, 2003**                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                               |   |
| **OR**                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                               |   |
| **o****    TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                       |
|                                                                                                                                                                                                                                                               |   |
| **For the transition period from                      to                    ** |
|                                                                                                                                                                                                                                                               |   |
| **Commission File Number  0-19728**                                                                                                                                                                                                                           |

 
| **GRANITE  BROADCASTING CORPORATION**                            |
|------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)          |
|                                                             |   |   |
| **DELAWARE**                                                     |   | **13-3458782** |
| (State or other jurisdiction of  incorporation or organization)  |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |   |
|                                                             |   |   |
| **767 Third Avenue  34th Floor  New York, New York  10017** |
| (address of principal executive offices)  (zip code)             |
|                                                             |   |   |
| **(212) 826-2530**                                               |
| (registrant’s telephone number, including  area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the act). Yes o    No ý

 

(APPLICABLE ONLY TO CORPORATE ISSUERS:)

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.  Class A Voting Common Stock, par value $.01per share - 178,500 shares outstanding at July 31, 2003; Common Stock(Nonvoting), par value $.01 per share –18,832,779 shares outstanding atJuly 31, 2003.

 

 

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GRANITE BROADCASTING CORPORATION

Form 10-Q

Table of Contents

 
| PART I     | FINANCIAL INFORMATION                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                             |
| Item 1     | Financial Statements                                                                                             |
|       |                                                                                                             |
|       | Consolidated Balance Sheets as of June 30, 2003 (unaudited) and  December 31, 2002                     |
|       | Consolidated Statement of Operations for  the Three and Six Months ended June 30, 2003 and 2002 (unaudited) |
|       | Consolidated Statement of Stockholders’  Deficit for the Six Months ended June 30, 2003 (unaudited)    |
|       | Consolidated Statement of Cash Flows for  the Six Months ended June 30, 2003 and 2002 (unaudited)           |
|       | Notes to Consolidated Financial Statements                                                                       |
|       |                                                                                                             |
| Item 2     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      |
|       |                                                                                                             |
| Item 3     | Quantitative and Qualitative Disclosures  About Market Risk                                                      |
|       |                                                                                                             |
| Item 4     | Controls and Procedures                                                                                          |
|       |                                                                                                             |
| PART II    | OTHER INFORMATION                                                                                                |
|       |                                                                                                             |
| Item 4     | Submission of Matters to a Vote of Security  Holders                                                             |
|       |                                                                                                             |
| Item 6     | Exhibits and Reports on Form 8-K                                                                                 |
|       |                                                                                                             |
| Signatures |                                                                                                             |

 

----

 

**PART I.  FINANCIALINFORMATION**

** **

*Item 1.  FinancialStatements*

 

GRANITE BROADCASTINGCORPORATIONCONSOLIDATED BALANCE SHEET

 
|                                                                                                                                                                                                                                                                                                                                                                  |   | **June 30,  2003** |        | **December  31,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|-------------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                  |   | **(Unaudited)**    |        |                    | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                                                                                            |   |               |        |                    |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                       |   |               |        |                    |       |
| Cash and cash equivalents (including  $1,777,115 of restricted cash at December 31, 2002)                                                                                                                                                                                                                                                                        |   | $                  | 30,289,994  |                    | $          | 54,319,597 |   |
| Accounts receivable, less allowance for  doubtful accounts ($870,623 at June 30, 2003 and $747,520 at  December 31, 2002)                                                                                                                                                                                                                                   |   | 21,597,095         |        | 23,211,637              |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                  |   | 12,665,552         |        | 19,713,849              |       |
| Income tax receivable                                                                                                                                                                                                                                                                                                                                                 |   | 12,908,572         |        | 5,334,846               |       |
| Other current assets                                                                                                                                                                                                                                                                                                                                                  |   | 6,081,636          |        | 4,781,201               |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                  |   | 83,542,849         |        | 107,361,130             |       |
|                                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                           |   | 46,754,338         |        | 41,813,349              |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                  |   | 8,662,018          |        | 12,918,123              |       |
| Other non current assets                                                                                                                                                                                                                                                                                                                                              |   | 3,404,376          |        | 3,461,975               |       |
| Deferred financing fees, less accumulated  amortization ($9,757,901 at June 30, 2003 and $7,612,443 at  December 31, 2002)                                                                                                                                                                                                                                  |   | 4,132,392          |        | 5,630,704               |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                         |   | 83,051,302         |        | 83,051,302              |       |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                               |   | 127,331,829        |        | 127,331,829             |       |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                             |   | 88,605,611         |        | 90,345,315              |       |
| Other intangibles, net                                                                                                                                                                                                                                                                                                                                                |   | 250,000            |        | 3,250,000               |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                          |   | $                  | 445,734,715 |                    | $          | 475,163,727 |   |
|                                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| **Liabilities and Stockholders’ Deficit**                                                                                                                                                                                                                                                                                                                        |   |               |        |                    |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                      |   | $                  | 2,174,336   |                    | $          | 2,807,730 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                      |   | 3,097,349          |        | 3,158,876               |       |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                             |   | 6,285,468          |        | 6,941,220               |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                          |   | 22,249,239         |        | 26,601,355              |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                             |   | 3,263,660          |        | 3,581,243               |       |
| Senior debt                                                                                                                                                                                                                                                                                                                                                           |   | 115,000,000        |        | —                  |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                             |   | 152,070,052        |        | 43,090,424              |       |
|                                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                        |   | 197,809,176        |        | 312,791,038             |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                          |   | 26,258,993         |        | 33,379,694              |       |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                |   | 45,779,491         |        | 45,779,491              |       |
| Accrued dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                       |   | 31,934,807         |        | 19,160,885              |       |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                         |   | 10,187,301         |        | 11,195,374              |       |
|                                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                            |   | 198,302,950        |        | 198,125,314             |       |
|                                                                                                                                                                                                                                                                                                                                                                  |   |               |        |                    |       |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                                           |   |               |        |                    |       |
| Common stock: 41,000,000 shares authorized  consisting of 1,000,000 shares of Class A Voting Common Stock, $.01 par  value, and 40,000,000 shares of Common Stock (Nonvoting), $.01 par value;  178,500 shares of Class A Voting Common Stock and 18,832,779 shares of Common  Stock (Novoting) (18,581,510 shares at December 31, 2002) issued and  outstanding |   | 190,112            |        | 187,600                 |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                   |   | (215,147,231       | )           | (186,842,835            | )          |
| Less:                                                                                                                                                                                                                                                                                                                                                                 |   |               |        |                    |       |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                                 |   | (775,261           | )           | (851,334                | )          |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                               |   | (875,675           | )           | (851,924                | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                      |   | (216,608,055       | )           | (188,358,493            | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                      |   | $                  | 445,734,715 |                    | $          | 475,163,727 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |        |                    |             |                         |            |  |  |  |

 

See accompanying notes.

 

1

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GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
|                                                                                             |   | **Three  Months Ended June 30,** |        | **Six Months  Ended June 30,** |       |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|-------------|-------------------------------------|------------|
|                                                                                             |   | **2003**                              |        | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net revenues                                                                                     |   | $                                     | 28,467,458  |                                | $          | 32,553,314 |   | $ | 53,124,651 |   | $ | 76,095,671 |   |
| Station operating expenses                                                                       |   | 23,028,963                            |        | 24,855,105                          |       | 45,134,504 |   | 54,939,905 |   |
| Depreciation expense                                                                             |   | 1,553,446                             |        | 1,524,064                           |       | 3,084,475 |   | 3,258,092 |   |
| Amortization expense                                                                             |   | 2,369,850                             |        | 4,759,622                           |       | 4,739,704 |   | 14,238,048 |   |
| Corporate expense                                                                                |   | 2,672,088                             |        | 2,319,169                           |       | 5,492,505 |   | 4,616,314 |   |
| Non-cash compensation expense(1)                                                                 |   | 164,787                               |        | 325,707                             |       | 550,524 |   | 654,871 |   |
| Operating loss                                                                                   |   | (1,321,676                            | )           | (1,230,353                          | )          | (5,877,061 | ) | (1,611,559 | ) |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |
| Other expenses (income)                                                                          |   |                                  |        |                                |       |   |   |   |   |
| Interest expense                                                                                 |   | 7,688,428                             |        | 7,881,455                           |       | 15,315,152 |   | 20,468,637 |   |
| Interest income                                                                                  |   | (176,832                              | )           | (196,218                            | )          | (391,118 | ) | (314,726 | ) |
| Non-cash interest expense                                                                        |   | 1,204,044                             |        | 3,089,470                           |       | 2,275,161 |   | 10,954,152 |   |
| Gain on station sale                                                                             |   | —                                |        | (192,406,138                        | )          | — |   | (192,406,138 | ) |
| Loss on extinguishment of debt                                                                   |   | —                                |        | 15,096,641                          |       | — |   | 15,096,641 |   |
| Other                                                                                            |   | 121,801                               |        | 154,168                             |       | 260,249 |   | 303,128 |   |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |
| (Loss) income before income taxes and  cumulative****effect of a change in  accounting principle |   | (10,159,117                           | )           | 165,150,269                         |       | (23,336,505 | ) | 144,286,747 |   |
| (Benefit) provision for income taxes:                                                            |   |                                  |        |                                |       |   |   |   |   |
| Current                                                                                          |   | (3,288,394                            | )           | 36,177,174                          |       | (7,498,945 | ) | 33,295,980 |   |
| Deferred                                                                                         |   | —                                |        | 39,155,936                          |       | — |   | 34,229,121 |   |
| Total (benefit) provision for income taxes                                                       |   | (3,288,394                            | )           | 75,333,110                          |       | (7,498,945 | ) | 67,525,101 |   |
| (Loss) income before cumulative effect of a  change in accounting principle                      |   | (6,870,723                            | )           | 89,817,159                          |       | (15,837,560 | ) | 76,761,646 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                       |   | —                                |        | —                              |       | — |   | 150,478,583 |   |
| Net (loss) income                                                                                |   | $                                     | (6,870,723  | )                                   | $          | 89,817,159 |   | $ | (15,837,560 | ) | $ | (73,716,937 | ) |
| Net (loss) income attributable to common  shareholders                                           |   | $                                     | (13,346,502 | )                                   | $          | 110,493,506 |   | $ | (28,789,118 | ) | $ | (61,684,476 | ) |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |   |   |   |   |
| Per basic common share:                                                                          |   |                                  |        |                                |       |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                      |   | $                                     | (0.70       | )                                   | $          | 5.89 |   | $ | (1.52 | ) | $ | 4.74 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                       |   | —                                |        | —                              |       | — |   | (8.03 | ) |
| Basic net (loss) income per share                                                                |   | $                                     | (0.70       | )                                   | $          | 5.89 |   | $ | (1.52 | ) | $ | (3.29 | ) |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |
| Weighted average common shares outstanding                                                       |   | 18,998,975                            |        | 18,752,243                          |       | 18,969,759 |   | 18,740,108 |   |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |
| Per diluted common share:                                                                        |   |                                  |        |                                |       |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                      |   | $                                     | (0.70       | )                                   | $          | 5.83 |   | $ | (1.52 | ) | $ | 4.70 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                       |   | —                                |        | —                              |       | — |   | (7.97 | ) |
| Diluted net (loss) income per share                                                              |   | $                                     | (0.70       | )                                   | $          | 5.83 |   | $ | (1.52 | ) | $ | (3.27 | ) |
|                                                                                             |   |                                  |        |                                |       |   |   |   |   |
| Weighted average common shares outstanding                                                       |   | 18,998,975                            |        | 18,965,401                          |       | 18,969,759 |   | 18,883,107 |   |

 

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| (1) Allocation of non-cash compensation  expense to other operating expenses: |   |   |    |   |   |    |   |    |    |
|-------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|---------|---------|
| Corporate expense                                                             |   | $      | 134,245 |   | $      | 231,088 |   | $       | 489,439 |   | $ | 532,095 |   |
| Station operating expenses                                                    |   | 30,542 |    | 94,619 |   | 61,085  |   | 122,776 |    |
| Non-cash compensation expense                                                 |   | $      | 164,787 |   | $      | 325,707 |   | $       | 550,524 |   | $ | 654,871 |   |

 

See accompanying notes.

 

2

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GRANITE BROADCASTING CORPORATION

CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 
|                                                                            |   | **Class A  Common  Stock** |   | **Common  Stock  (Nonvoting)** |   | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** **   | **Treasury  Stock** | ** ** | **Total  Stockholders’  Deficit** | ** ** |
|---------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------------|--------|----------------------------------|------------|--------------------------|------------|----------------------------|--------------|---------------------|------------|----------------------------------------|------------|
|                                                                            |   |                       |   |                           |   |                             |       |                     |       |                       |         |                |       |                                   |       |
| Balance at December 31, 2002                                               |   | $                          | 1,785  |                           | $      | 185,815                          |       | —                   |       | $                          | (186,842,835 | )                   | $          | (851,334                               | )          | $ | (851,924 | ) | $ | (188,358,493 | ) |
| Dividends on redeemable preferred stock                                         |   |                       |   |                           |   | (307,086                         | )          | (12,466,836              | )          |                       |         |                |       | (12,773,922                            | )          |
| Accretion of offering costs related to Cumulative  Exchangeable Preferred Stock |   |                       |   |                           |   | (177,636                         | )          |                     |       |                       |         |                |       | (177,636                               | )          |
| Issuance of Common Stock (Nonvoting)                                            |   |                       |   | 2,337                          |   | (2,337                           | )          |                     |       |                       |         |                |       | —                                 |       |
| Repurchase of 11,700 shares of Common Stock                                     |   |                       |   |                           |   |                             |       |                     |       |                       |         | (23,751             | )          | (23,751                                | )          |
| Grant of stock award under stock plans                                          |   |                       |   |                           |   | 229,500                          |       |                     |       | (229,500                   | )            |                |       | —                                 |       |
| Exercise of stock options                                                       |   |                       |   | 175                            |   | 26,075                           |       |                     |       |                       |         |                |       | 26,250                                 |       |
| Stock expense related to stock plans                                            |   |                       |   |                           |   | 231,484                          |       |                     |       | 207,846                    |         |                |       | 439,330                                |       |
| Discount on loans to officers                                                   |   |                       |   |                           |   |                             |       |                     |       | 97,727                     |         |                |       | 97,727                                 |       |
| Net loss                                                                        |   |                       |   |                           |   |                             |       | (15,837,560              | )          |                       |         |                |       | (15,837,560                            | )          |
|                                                                            |   |                       |   |                           |   |                             |       |                     |       |                       |         |                |       |                                   |       |
| Balance at June 30, 2003                                                   |   | $                          | 1,785  |                           | $      | 188,327                          |       | —                   |       | $                          | (215,147,231 | )                   | $          | (775,261                               | )          | $ | (875,675 | ) | $ | (216,608,055 | ) |

 

See accompanying notes.

 

3

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GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                         |   | **Six Months  ended June 30,** | ** **  |
|------------------------------------------------------------------------------|--------|-------------------------------------|-------------|
|                                                                         |   | **2003**                            |        | **2002** | ** ** |
| Cash flows from operating activities:                                        |   |                                |        |   |   |
| Net loss                                                                     |   | $                                   | (15,837,560 | ) | $ | (73,716,937 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                |        |   |   |
| Amortization of intangible assets                                            |   | 4,739,704                           |        | 14,238,048 |   |
| Depreciation                                                                 |   | 3,084,475                           |        | 3,258,092 |   |
| Non-cash compensation expense                                                |   | 550,524                             |        | 654,871 |   |
| Non-cash interest expense                                                    |   | 2,275,161                           |        | 10,954,152 |   |
| Deferred tax benefit                                                         |   | —                              |        | (24,121,825 | ) |
| Loss on extinguishment of debt                                               |   | —                              |        | 15,096,641 |   |
| Gain on station sale                                                         |   | —                              |        | (192,406,138 | ) |
| Cumulative effect of a change in accounting  principle                       |   | —                              |        | 208,829,529 |   |
|                                                                         |   |                                |        |   |   |
| Change in assets and liabilities:                                            |   |                                |        |   |   |
| Decrease (increase) in accounts receivable                                   |   | 1,614,542                           |        | (33,320,014 | ) |
| (Decrease) increase in accrued liabilities                                   |   | (717,279                            | )           | 568,689 |   |
| (Decrease) increase in accounts payable                                      |   | (633,394                            | )           | 11,304,395 |   |
| WB affiliation payment                                                       |   | (1,057,532                          | )           | (1,057,532 | ) |
| Increase in income tax receivable                                            |   | (7,573,726                          | )           | (2,943,694 | ) |
| Decrease (increase) in film contract rights  and other assets                |   | 9,936,534                           |        | (3,694,334 | ) |
| (Decrease) increase in film contract rights  payable and other liabilities   |   | (11,740,941                         | )           | 33,943,704 |   |
| Net cash used in operating activities                                        |   | (15,359,492                         | )           | (32,412,353 | ) |
|                                                                         |   |                                |        |   |   |
| Cash flows from investing activities:                                        |   |                                |        |   |   |
| Proceeds from sale of station                                                |   | —                              |        | 265,018,849 |   |
| Capital expenditures                                                         |   | (8,025,464                          | )           | (4,159,616 | ) |
| Net cash (used in) provided by investing  activities                         |   | (8,025,464                          | )           | 260,859,233 |   |
|                                                                         |   |                                |        |   |   |
| Cash flows from financing activities:                                        |   |                                |        |   |   |
| Repayment of bank debt                                                       |   | —                              |        | (170,000,000 | ) |
| Repurchase of cumulative exchangeable  preferred stock                       |   | —                              |        | (53,264,005 | ) |
| Payment of deferred financing fees                                           |   | (647,146                            | )           | (6,238,593 | ) |
| Repurchase of common stock                                                   |   | (23,751                             | )           | — |   |
| Exercise of stock options                                                    |   | 26,250                              |        | — |   |
| Net cash used in financing activities                                        |   | (644,647                            | )           | (229,502,598 | ) |
|                                                                         |   |                                |        |   |   |
| Net decrease in cash and cash equivalents                                    |   | (24,029,603                         | )           | (1,055,718 | ) |
| Cash and cash equivalents, beginning of  period                              |   | 54,319,597                          |        | 29,426,856 |   |
|                                                                         |   |                                |        |   |   |
| Cash and cash equivalents, end of period                                     |   | $                                   | 30,289,994  |   | $ | 28,371,138 |   |
|                                                                         |   |                                |        |   |   |
| Supplemental information:                                                    |   |                                |        |   |   |
| Cash paid for interest                                                       |   | $                                   | 15,375,000  |   | $ | 26,996,000 |   |
| Cash paid for income taxes                                                   |   | 114,000                             |        | 173,000 |   |
| Non-cash capital expenditures                                                |   | —                              |        | 396,000 |   |
| Cumulative exchangeable preferred stock dividend                             |   | 12,774,000                          |        | 16,652,000 |   |
| Cancellation of warrants                                                     |   | —                              |        | 12,150,000 |   |

 

See accompanying notes.

 

4

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GRANITE BROADCASTING CORPORATION

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of presentation 

 

The accompanying unaudited consolidated financial statements includethe accounts of Granite Broadcasting Corporation and its subsidiaries (the“Company”), and have been prepared in accordance with the instructions to Form10-Q and do not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  Operating resultsfor the three and six-month periods ended June 30, 2003 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2003.  For furtherinformation, refer to the Company’s consolidated financial statements and notesthereto for the year ended December 31, 2002, which were included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2002.  All significant inter-companyaccounts and transactions have been eliminated.  Data at, and for the year ended, December 31, 2002 arederived from the Company’s audited consolidated financial statements.  In the opinion of management, alladjustments of a normal recurring nature, which are necessary for a fairpresentation of the results for the interim periods, have been made.

 

Note 2 – Intangible Assets

 

The Company adopted Statement of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets (“Statement 142”), on January 1,2002.  Upon adoption of Statement 142,the Company recorded a one-time non-cash charge to reduce the carrying value ofgoodwill and other indefinite lived intangible assets by $95,000,000 and$114,000,000 respectively during 2002. Such charge was non-operational in nature and is reflected as acumulative effect of a change in accounting principle in the statement ofoperations for the six months ended June 30, 2002.

 

As of June 30, 2003 and December 31, 2002, the Company’sintangible assets and related accumulated amortization consisted of thefollowing:

 
|                                            |   | **June 30,  2003**   | ** **  | **December 31,  2002**   | ** ** |
|-------------------------------------------------|--------|---------------------------|-------------|-------------------------------|------------|
|                                            |   | **Gross  Carrying Value** |        | **Accumulated  Amortization** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** |
| Intangible assets subject to amortization:      |   |                      |        |                          |       |   |   |   |   |
| WB affiliation agreements                       |   | $                         | 32,256,034  |                          | $          | (18,134,330 | ) | $ | 32,256,034 |   | $ | (16,394,626 | ) |
| Covenant not to compete                         |   | 30,000,000                |        | (29,750,000                   | )          | 30,000,000 |   | (26,750,000 | ) |
|                                            |   |                      |        |                          |       |   |   |   |   |
|                                            |   | $                         | 62,256,034  |                          | $          | (47,884,330 | ) | $ | 62,256,034 |   | $ | (43,144,626 | ) |
|                                            |   |                      |        |                          |       |   |   |   |   |
| Intangible assets not subject to  amortization: |   |                      |        |                          |       |   |   |   |   |
| Goodwill                                        |   | $                         | 111,252,372 |                          | $          | (28,201,070 | ) | $ | 111,252,372 |   | $ | (28,201,070 | ) |
| Broadcast licenses                              |   | 159,647,594               |        | (32,315,765                   | )          | 159,647,594 |   | (32,315,765 | ) |
| Network affiliation agreements                  |   | 95,366,707                |        | (20,882,800                   | )          | 95,366,707 |   | (20,882,800 | ) |
|                                            |   |                      |        |                          |       |   |   |   |   |
|                                            |   | $                         | 366,266,673 |                          | $          | (81,399,635 | ) | $ | 366,266,673 |   | $ | (81,399,635 | ) |

 

The Company recorded amortization expense of $4,739,704 and $14,238,048during the six months ended June 30, 2003 and 2002, respectively.  Based on the current amount of intangibleassets subject to amortization, the estimated amortization expense for each ofthe succeeding 5 years are as follows: remaining amount for 2003: $1,989,000;2004: $3,310,000; 2005: $3,031,000; 2006: $3,031,000 and 2007: $3,031,000.  As acquisitions and dispositions occur inthe future these amounts may vary.

 

5

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Note 3 – Stock Options

 

The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation” (“SFAS 123”). Accordingly, no compensation expense has been recognized for the stockoption plans.  For purposes of SFAS 123pro forma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period; therefore, the impact on pro formanet loss for the three and six months ended June 30, 2003 may not berepresentative of the impact in future years.

 

The Company’s pro forma information for the three and six months endedJune 30, follows:

 
|                                              |   | **Three  Months Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                                              |   | **2003**                              |       | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                              |   |                                  |       |                                |       |   |   |   |   |
| Net (loss) income, as reported                    |   | $                                     | (6,870,723 | )                                   | $          | 89,817,159 |   | $ | (15,837,560 | ) | $ | (73,716,937 | ) |
| Pro forma compensation expense                    |   | (337,587                              | )          | (558,388                            | )          | (665,575 | ) | (1,027,711 | ) |
| Pro forma net (loss) income                       |   | $                                     | (7,208,310 | )                                   | $          | 89,258,771 |   | $ | (16,503,135 | ) | $ | (74,744,648 | ) |
|                                              |   |                                  |       |                                |       |   |   |   |   |
| Basic net (loss) income per share, as  reported   |   | $                                     | (0.70      | )                                   | $          | 5.89 |   | $ | (1.52 | ) | $ | (3.29 | ) |
| Pro forma compensation expense                    |   | (0.02                                 | )          | (0.03                               | )          | (0.04 | ) | (0.06 | ) |
| Pro forma basic net (loss) income per share       |   | $                                     | (0.72      | )                                   | $          | 5.86 |   | $ | (1.56 | ) | $ | (3.35 | ) |
|                                              |   |                                  |       |                                |       |   |   |   |   |
| Diluted net (loss) income per share, as  reported |   | $                                     | (0.70      | )                                   | $          | 5.83 |   | $ | (1.52 | ) | $ | (3.27 | ) |
| Pro forma compensation expense                    |   | (0.02                                 | )          | (0.03                               | )          | (0.04 | ) | (0.05 | ) |
| Pro forma diluted net (loss) income per  share    |   | $                                     | (0.72      | )                                   | $          | 5.80 |   | $ | (1.56 | ) | $ | (3.32 | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black-Scholes options pricing model. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions, which have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility.  The Company’s employeestock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affectthe fair value estimate.  

 

Note 4 – Related Party 

 

On February 25, 2003, the Compensation Committee recommended andthe Board of Directors approved a stock incentive award to certain officers tobe paid only upon the refinancing, with a maturity of at least two years, ofthe Company’s current senior debt due April 15, 2004.  The incentive award would be used to repayin full the officer’s outstanding loans from the Company.

 

Note 5 – Recent Accounting Pronouncements

 

On April 30, 2002, the FASB issued Statement No. 145, Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections (“Statement 145”). Statement 145 updates, clarifies andsimplifies existing accounting pronouncements. Statement 145 rescinds Statement 4, which required all gains and lossesfrom extinguishments of debt to be aggregated and, if material, classified asan extraordinary item, net of related income tax effect. Statement 145 iseffective for fiscal years beginning after June 15, 2002. All priorextraordinary items relating to the extinguishments of debt have beenretroactively adjusted and reclassified to income from continuingoperations.  The impact of adoptingStatement 145 reduced income from continuing operations by $15,097,000 duringthe three and six month periods ended June 30, 2002.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146, Accounting for Costs Associated with Exit or DisposalActivities (“Statement 146”).  Statement146 addresses financial accounting and reporting for costs associated with exitor disposal activities and nullifies Emerging Issues Task Force (“EITF”) issueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).”  The provisions ofStatement 146 are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  The adoption of Statement 146 did not have asignificant impact on the Company’s financial position, results of operations,or cash flows.

 

6

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In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity (“Statement 150”).  Statement 150 establishes standards forclassifying and measuring as liabilities certain financial instruments thathave characteristics of both liabilities and equity.  The provisions of Statement 150 are effective beginning with thefirst interim period after June 15, 2003. Upon adoption of Statement 150, the Company’s 12 3/4% CumulativeExchangeable Preferred Stock will be reclassified on the Company’s consolidatedbalance sheet as a long-term liability and the accrual of dividends will berecorded as a charge to expense on the consolidated statement ofoperations.  The impact of adoptingStatement 150 will result in a reduction of income before income taxes by$12,774,000 for the year ended December 31, 2003.

 

Note 6 – Per Share Calculations

 

The per-share calculations shown on the income statement for the threeand six month periods ended June 30, 2003 and 2002 are computed inaccordance with Statement of Financial Accounting Standards No. 128, EarningsPer Share.  The following table setsforth the computation of basic and diluted earnings per share:

 

7

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GRANITE BROADCASTING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 
|                                                                        |   | **Three  Months Ended June 30,** | ** **  | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|--------|---------------------------------------|-------------|-------------------------------------|------------|
|                                                                        |   | **2003**                              |        | **2002**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                     | (6,870,723  | )                                   | $          | 89,817,159 |   | $ | (15,837,560 | ) | $ | 76,761,646 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                |        | —                              |       | — |   | 150,478,583 |   |
| Net (loss) income                                                           |   | (6,870,723                            | )           | 89,817,159                          |       | (15,837,560 | ) | (73,716,937 | ) |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| LESS:                                                                       |   |                                  |        |                                |       |   |   |   |   |
| Cumulative exchangeable preferred stock  dividends                          |   | 6,386,961                             |        | 8,133,304                           |       | 12,773,922 |   | 16,652,153 |   |
| Accretion on exchangeable preferred stock                                   |   | 88,818                                |        | 105,120                             |       | 177,636 |   | 230,157 |   |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| ADD:                                                                        |   |                                  |        |                                |       |   |   |   |   |
| Gain on repurchase of cumulative  exchangeable preferred stock              |   | —                                |        | 28,914,771                          |       | — |   | 28,914,771 |   |
| Net (loss) income attributable to common  shareholders                      |   | $                                     | (13,346,502 | )                                   | $          | 110,493,506 |   | $ | (28,789,118 | ) | $ | (61,684,476 | ) |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| (in shares)                                                                 |   |                                  |        |                                |       |   |   |   |   |
| Basic weighted average common shares  outstanding                           |   | 18,998,975                            |        | 18,752,243                          |       | 18,969,759 |   | 18,740,108 |   |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| ADD:                                                                        |   |                                  |        |                                |       |   |   |   |   |
| Stock options                                                               |   | —                                |        | 213,158                             |       | — |   | 142,999 |   |
| Diluted weighted average common shares  outstanding                         |   | 18,998,975                            |        | 18,965,401                          |       | 18,969,759 |   | 18,883,107 |   |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| Per basic common share:                                                     |   |                                  |        |                                |       |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                     | (0.70       | )                                   | $          | 5.89 |   | $ | (1.52 | ) | $ | 4.74 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                |        | —                              |       | — |   | (8.03 | ) |
| Basic net (loss) income per share                                           |   | $                                     | (0.70       | )                                   | $          | 5.89 |   | $ | (1.52 | ) | $ | (3.29 | ) |
|                                                                        |   |                                  |        |                                |       |   |   |   |   |
| Per diluted common share:                                                   |   |                                  |        |                                |       |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                     | (0.70       | )                                   | $          | 5.83 |   | $ | (1.52 | ) | $ | 4.70 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                |        | —                              |       | — |   | (7.97 | ) |
| Diluted net (loss) income per share                                         |   | $                                     | (0.70       | )                                   | $          | 5.83 |   | $ | (1.52 | ) | $ | (3.27 | ) |

 

 

8

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# *Item 2.  Management’s Discussion and Analysisof Financial Conditions and Results of Operations*

# * *

The following discussion should be read in conjunction with theconsolidated financial statements and related notes appearing in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.  Certain sections of this Form 10-Q containvarious forward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, which represent the Company’s expectations orbeliefs concerning future events.  Theforward-looking statements include, without limitation, the Company’s abilityto meet its future liquidity needs. These forward-looking statements reflect the plans and beliefs ofmanagement as of the date of this report. The Company cautions that these forward-looking statements are furtherqualified by important factors that could cause actual results to differmaterially from those in the forward-looking statements.  Such factors include, without limitation,general economic conditions, competition in the markets in which the Company’sstations are located, technological change and innovation in the broadcastingindustry and proposed legislation.  Consequently,these cautionary statements and the cautionary language set forth in theCompany’s most recent Form 10-K report and other documents filed with theSecurities and Exchange Commission qualify all forward-looking statements madeherein.

 

**Introduction**

 

The Company owns and operates eight network-affiliated televisionstations in geographically diverse markets reaching over 6% of the nation’stelevision households.  Three stationsare affiliated with the NBC Television Network (NBC), two with the ABCTelevision Network (ABC), one with the CBS Television Network (CBS), and twowith the Warner Brothers Television Network (WB).  The NBC affiliates are KSEE-TV, Fresno-Visalia, California,WEEK-TV, Peoria-Bloomington, Illinois, and KBJR-TV, Duluth, Minnesota andSuperior, Wisconsin.  The ABC affiliatesare WKBW-TV, Buffalo, New York, and WPTA-TV, Fort Wayne, Indiana.  The CBS affiliate is WTVH-TV, Syracuse, NewYork.  The WB affiliates are KBWB-TV,San Francisco-Oakland-San Jose, California, and WDWB-TV, Detroit, Michigan.

 

The Company’s operating revenues are generally lower in the firstcalendar quarter and generally higher in the fourth calendar quarter than inthe other two quarters, due in part to increases in retail advertising in thefall months in preparation for the holiday season, and in election years due toincreased political advertising.

 

The Company’s revenues are derived principally from local and nationaladvertising and, to a lesser extent, from network compensation for thebroadcast of programming and revenues from studio rental and commercialproduction activities.  The primaryoperating expenses involved in owning and operating television stations areemployee salaries, depreciation and amortization, programming, advertisingand promotion.

 

Comparisons of the Company’s consolidated financial statements betweenthe three and six months ended June 30, 2003 and 2002 have been affectedby the Company’s sale of KNTV on April 30, 2002.  We believe that inflation has not had a material impact on ourresults of operations for the three and six months ended June 30, 2003 and2002.  However, there can be noassurance that future inflation would not have an adverse impact on ouroperating results and financial condition.

 

**Results of Operations**

 

# *Three months endedJune 30, 2003 and 2002*

# * *

Net revenue totaled $28,467,000 for the three months endedJune 30, 2003; a decrease of $4,086,000 or 13% as compared to $32,553,000for the three months ended June 30, 2002. Included in the three months ended June 30, 2002 is $5,463,000 ofnet revenue related to KNTV, which was sold on April 30, 2002.  Net revenue at the remaining stationsincreased $1,377,000 or 5% due primarily to increases in local and nationalrevenue, offset by a $243,000 reduction in political revenue in a non-electionyear.

 

Station operating expenses totaled $23,029,000 for the three monthsended June 30, 2003; a decrease of $1,826,000 or 7% as compared to$24,855,000 for the three months ended June 30, 2002.  Included in the three months endedJune 30, 2002 is $3,080,000 of operating expenses related to KNTV.  The remaining stations’ operating expensesincreased $1,254,000 or 6% primarily due to increases in sales and newsexpense.

 

Amortization expense totaled $2,370,000 for the three months endedJune 30, 2003; a decrease of $2,390,000 or 50% compared to $4,760,000 forthe three months ended June 30, 2002. Included in the three months ended June 30, 2002 is $2,258,000 ofamortization expense related to KNTV. Corporate expense increased $353,000 or 15% during the three monthsended June 30, 2003 compared to the same period a year earlier primarilydue to increased compensation and officers’ and directors’ liabilityinsurance.  Non-cash compensationexpense decreased $161,000 or 49% due to a reduction in stock awards granted tocertain executives.

 

9

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Interest income decreased $19,000 or 10% during the three months endedJune 30, 2003 compared to the same period a year earlier primarily due tolower interest rates.  Non-cash interestexpense totaled $1,204,000 for the three months ended June 30, 2003; adecrease of $1,885,000 or 61% compared to $3,089,000 the same period a yearearlier.  Included in non-cash interestexpense for the three months ended June 30, 2002 is $1,884,000 related tothe imputation of interest on KNTV’s NBC affiliation agreement.

 

The Company recorded a gain on the sale of KNTV of $192,406,000 duringthe three-month period ended June 30, 2002.

 

The Company recorded a loss on the early extinguishment of debt of$15,097,000 during the three months ended June 30, 2002 due to thewrite-off unamortized deferred financing fees associated with the extinguisheddebt.

 

During the three months ended June 30, 2003, the Company recordeda benefit for income taxes of $3,288,000 compared to a provision for incometaxes of $75,333,000 during the three months ended June 30, 2002.  The provision for taxes in 2002 resultedfrom the gain on the sale of KNTV.

 

*Six months endedJune 30, 2003 and 2002*

 

Net revenue totaled $53,125,000 for the six months ended June 30,2003; a decrease of $22,971,000 or 30% as compared to $76,096,000 for the sixmonths ended June 30, 2002. Included in the six months ended June 30, 2002 is $25,295,000 of netrevenue related to KNTV, which was sold on April 30, 2002.  Net revenue at the remaining stationsincreased $2,324,000 or 4% due to increases in local and national ad spendingoffset by a $1,473,000 reduction in political revenue in a non-election year.

 

Station operating expenses totaled $45,135,000 for the six months endedJune 30, 2003; a decrease of $9,805,000 or 18% as compared to $54,940,000for the six months ended June 30, 2002. Included in the six months ended June 30, 2002 is $12,694,000 of operatingexpenses related to KNTV.  The remainingstations’ operating expenses increased $2,889,000 or 7% primarily due toincreases in sales and news expense and programming expense at the Company’s WBaffiliates.

 

Amortization expense totaled $4,740,000 for the six months endedJune 30, 2003; a decrease of $9,498,000 or 67% compared to $14,238,000 forthe six months ended June 30, 2002. Included in the six months ended June 30, 2002 is $9,033,000 ofamortization expense related to KNTV. Corporate expense increased $876,000 or 19% during the six months ended June 30,2003 compared to the same period a year earlier primarily due to increasedcompensation and officers’ and directors’ liability insurance.  Non-cash compensation expense decreased$104,000 or 16% due to a reduction in stock awards granted to certainexecutives.

 

Interest expense decreased $5,153,000 or 25% during the six monthsended June 30, 2003 as compared to the same period a year earlierprimarily due to lower average debt balances and lower interest rates on theCompany’s senior credit facility. Interest income increased $76,000 or 24% during the six months endedJune 30, 2003 compared to the same period a year earlier primarily due tohigher average cash balances.  Non-cashinterest expense totaled $2,275,000 for the six months ended June 30,2003; a decrease of $8,679,000 or 79% compared to $10,954,000 the same period ayear earlier.  Included in non-cashinterest expense for the six months ended June 30, 2002 is $7,537,000related to the imputation of interest on KNTV’s NBC affiliation agreement.  The remaining decrease in non-cash interestexpense is related to reduced amortization of deferred financing feesassociated with the current senior credit facility.

 

The Company recorded a gain on the sale of KNTV of $192,406,000 duringthe six-month period ended June 30, 2002.

 

The Company recorded a loss on the early extinguishment of debt of$15,097,000 during the six months ended June 30, 2002 due to the write-offof unamortized deferred financing fees associated with the extinguished debt.

 

During the six months ended June 30, 2003, the Company recorded abenefit for income taxes of $7,499,000 compared to a provision for income taxesof $67,525,000 during the six months ended June 30, 2002.  The provision for taxes in 2002 resultedfrom the gain on the sale of KNTV.

 

Upon adoption of Statement 142 as of January 1, 2002, the Companyrecorded a one-time, non-cash charge to reduce the carrying value of itsgoodwill and other indefinite lived intangible assets, net of tax benefit, by$150,479,000.  The decline in thecarrying value of goodwill and other indefinite-lived intangible assets relatessolely to the Company’s WB affiliates. Such charge was non-operational in nature and is reflected as acumulative effect of an accounting change in the accompanying consolidatedstatement of operations during the six months ended June 30, 2002.

 

10

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## ***Liquidity and Capital Resources***

## * *

On April 30, 2002, the Company entered into an amended andrestated senior credit agreement (the “Credit Agreement”).  The Credit Agreement consists of (i) acommitted $60,000,000 Tranche A term loan facility, (ii) a committed$80,000,000 Tranche B term loan facility, and (iii) an uncommitted $10,000,000Tranche C supplemental term loan facility. The obligations of the Company with respect to all of the loanfacilities are secured by substantially all of the assets of the Company andits subsidiaries. As of June 30, 2003, $35,000,000 of the Tranche A loanfacility and the entire Tranche B loan facility was outstanding.  Proceeds from Tranche A and Tranche B termloans can be used for working capital and general corporate purposes.  The Tranche A loans bear interest at thegreater of 6.50% or LIBOR plus 4.50% and the Tranche B loans bear interest atthe greater of 11% or LIBOR plus 9%. All interest is payable monthly in arrears.  The Credit Agreement matures on April 15, 2004, at whichtime the Company must repay the principal amount of all outstanding loans andall other obligations then due and owing under the Credit Agreement.  The Company expects to refinance its seniordebt on or before April 15, 2004. There can be no assurance that the Company will be successful inrefinancing its senior debt.  TheCompany is currently considering selling certain assets and, if necessary, willexplore selling equity.  The CreditAgreement requires the Company, among other matters, to maintain compliancewith certain financial tests, including but not limited to, minimum netrevenue, broadcast cash flow, EBITDA, working capital and cash balances.  The Company is in compliance with allcovenants under the Credit Agreement.

 

Under the terms of the Certificate of Designations for the Company’s 123/4% Cumulative Exchangeable Preferred Stock (the “Preferred Stock”), theCompany was required to make the semi-annual dividends on such shares in cashbeginning October 1, 2002.  Thecash payment of dividends is restricted by the terms of the indenturesgoverning the Company’s senior subordinated bonds and is prohibited under theterms of the Credit Agreement. Consequently the Company did not pay thesemi-annual dividend due to the holders of the Preferred Stock onOctober 1, 2002 and April 1, 2003. If three or more semi-annual dividend payments (whether or not consecutive)are not paid, the holders of the Preferred Stock will have the right to electthe lesser of two directors or that number of directors constituting 25% of themembers of the Board of Directors.  Theright of the holders of the Preferred Stock to elect members of the Board ofDirectors as set forth above would continue until such time as all accumulateddividends that are required to be paid in cash and that are in arrears on thePreferred Stock are paid in full in cash. The Company does not anticipatepaying cash dividends on its Preferred Stock in the foreseeable future.

 

Net cash used in operating activities was $15,359,000 during the sixmonths ended June 30, 2003, compared to $32,412,000 during the six monthsended June 30, 2002.  The change from2002 to 2003 was primarily the result of a decrease in interest paid, offset inpart by an increase in net assets and by a decrease in operating cash flow.

 

Net cash used in investing activities was $8,025,000 during the sixmonths ended June 30, 2003, compared to net cash provided by investingactivities of $260,859,000 during the six months ended June 30, 2002.  The change from 2002 to 2003 was due to thesale of KNTV on April 30, 2002 offset by increased capital expenditures asthe Company continue to complete its digital conversions.

 

Net cash used in financing activities was $645,000 during the sixmonths ended June 30, 2003 compared to $229,503,000 during the six monthsended June 30, 2002.  The changefrom 2002 to 2003 was primarily due to the repayment of long-term debt and therepurchase of redeemable preferred stock in 2002.

 

As of July 31, 2003, the Company had approximately $28,465,000 ofcash on hand and $25,000,000 in available borrowings under the CreditAgreement.  The Company expects to spenda total of approximately $15,000,000 in 2003 in capital expenditures of which$8,000,000 was spent during the six months ended June 30, 2003.  The Company believes that borrowings underthe current Credit Agreement together with internally generated funds fromoperations, and cash on hand will be sufficient to satisfy the Company’s cashrequirements until April 15, 2004, when the Company’s senior creditagreement matures.  As mentioned above,the Company expects to refinance its senior debt on or before April 15,2004.  There can be no assurance thatthe Company will be successful in refinancing its senior debt.  The Company is currently considering sellingcertain assets and, if necessary, will explore selling equity.

 

# *Item 3.*            Quantitative and Qualitative Disclosuresabout Market Risk

# * *

The Company’s earnings may be affected by changes in short-terminterest rates as a result of its new senior Credit Agreement.  Under the Credit Agreement, the Company paysinterest at the greater of LIBOR plus 4.50% or 6.50%, currently 6.50% for itsTranche A facility and the Tranche B loans bear interest at the greater ofLIBOR plus 9% or 11%, currently 11%.  Asof July 31, 2003, the one-month LIBOR rate was 1.1%.  The Companyhas not entered into any agreements to hedge the risk of potential interestrate increases.  Based on borrowingsoutstanding at June 30, 2003 a 2% increase in the LIBOR rate wouldincrease interest expense on an annual basis by approximately $1,273,000.  This analysis does not consider the effects ofthe reduced level of overall economic activity that could exist in suchenvironment.

 

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*Item 4.**            Controls and Procedures*

 

As of June 30, 2003, an evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls andprocedures.  Based on that evaluation,the Company’s management, including the CEO and CFO, concluded that theCompany’s disclosure control and procedures were effective as of June 30,2003.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to June 30, 2003.

 

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**PARTII.  OTHERINFORMATION**

 

# *ITEM 4.*                             Submission of Matters to a Vote ofSecurity Holders

# * *

On May 5, 2003, the holders of all of the Company’s Voting CommonStock adopted resolutions by unanimous written consent in lieu of an annualmeeting electing W. Don Cornwell, Stuart J. Beck, James L. Greenwald, Martin F.Beck, Edward Dugger III, Thomas R. Settle, Charles J. Hamilton, Jr., Robert E.Selwyn, Jr., Jon E. Barfield, Milton Frederick Brown and Veronica Pollard asdirectors of the Company.

 

# *ITEM 6.*                             Exhibits and Reports on Form 8-K

## * *

a.               Exhibits

 
| 31.1   |   | Certification of Chief Executive Officer Pursuant to Section 302 of  the Sarbanes-Oxley  Act of 2002 |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002       |
|   |   |                                                                                                      |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002       |
|   |   |                                                                                                      |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002       |

 

b.              Reportson Form 8-K

 
| On April 28, 2003, we filed a Current Report on Form 8K  furnishing our press release dated April 28, 2003, which announced our  financial results for the quarter ended March 31, 2003. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | GRANITE BROADCASTING CORPORATION                                                           |   |
|---------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------|
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Registrant                                                                                 |   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                       |   |
| Date       August 11, 2003 | /s/                                                                                  W.  DON CORNWELL   |                                                                                       |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (W. Don Cornwell)                                                                          |   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Chief Executive Officer                                                                    |   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                       |   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                       |   |
| Date       August 11, 2003 | /s/                                                                                  LAWRENCE  I. WILLS |                                                                                       |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (Lawrence I. Wills)                                                                        |   |
|                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Senior Vice President – Chief  Administrative Officer  (Principal Accounting Officer) |   |

 

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