**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2002**

 

**OR**

** **

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES 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) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes  ý        No o

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.Class AVoting Common Stock, par value $.01 per share - 178,500 shares outstanding atNovember 3, 2002; Common Stock (Nonvoting), par value $.01 per share –18,581,160 shares outstanding at November 8, 2002.

 

 

----

 

**PART I.  FINANCIALINFORMATION**

 

*Item1.  Financial Statements*

GRANITE BROADCASTINGCORPORATION

CONSOLIDATED BALANCESHEET

 
|                                                                                                                                                                                                                                                                                                                                                                     |   | **September  30,  2002** |        | **December  31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                     |   | **(Unaudited)**          |        |                    |   |
| ASSETS                                                                                                                                                                                                                                                                                                                                                                   |   |                     |        |                    |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                          |   |                     |        |                    |   |
| Cash and cash  equivalents (including $3,964,188 and $9,286,326 of restricted cash at  September 30, 2002 and December 31, 2001 respectively)                                                                                                                                                                                                                            |   | $                        | 82,195,127  |                    | $      | 29,426,856 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                                                                                                                                |   | 20,047,616               |        | 22,411,572              |   |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                    |   | 23,131,726               |        | 16,077,027              |   |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                    |   | 4,407,369                |        | 6,131,223               |   |
| Net assets held  for sale                                                                                                                                                                                                                                                                                                                                                |   | —                   |        | 33,201,988              |   |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                    |   | 129,781,838              |        | 107,248,666             |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Non-current  assets:                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                             |   | 37,037,948               |        | 33,611,468              |   |
| Film contract  rights and other non-current assets                                                                                                                                                                                                                                                                                                                       |   | 20,537,391               |        | 51,874,512              |   |
| Deferred  financing fees, net                                                                                                                                                                                                                                                                                                                                            |   | 6,656,692                |        | 14,887,940              |   |
| Intangible  assets, net                                                                                                                                                                                                                                                                                                                                                  |   | 307,467,209              |        | 523,474,666             |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                             |   | $                        | 501,481,078 |                    | $      | 731,097,252 |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                                                                                                               |   |                     |        |                    |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                    |   |                     |        |                    |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                         |   | $                        | 1,655,488   |                    | $      | 1,704,626 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                         |   | 7,879,437                |        | 4,255,195               |   |
| Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                               |   | 7,648,605                |        | 2,943,466               |   |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                            |   | 29,855,522               |        | 25,133,014              |   |
| Income taxes  payable                                                                                                                                                                                                                                                                                                                                                    |   | 13,463,293               |        | 69,874                  |   |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                               |   | 4,787,655                |        | 5,738,440               |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                               |   | 65,290,000               |        | 39,844,615              |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Non-current  liabilities:                                                                                                                                                                                                                                                                                                                                                |   |                     |        |                    |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                           |   | 312,781,969              |        | 401,206,439             |   |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                            |   | 33,684,510               |        | 22,859,716              |   |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                  |   | 45,125,024               |        | 68,868,284              |   |
| Other  non-current liabilities                                                                                                                                                                                                                                                                                                                                           |   | 24,931,267               |        | 24,353,351              |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| Cumulative  exchangeable preferred stock, net of offering costs                                                                                                                                                                                                                                                                                                          |   | 198,036,496              |        | 272,108,759             |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                     |        |                    |   |
| 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 18,581,160 shares of Common  Stock (Nonvoting) (18,447,927 shares at December 31, 2001) issued and  outstanding |   | 187,596                  |        | 186,264                 |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                     |   | (177,690,144             | )           | (96,703,997             | )      |
| Less: Unearned  compensation                                                                                                                                                                                                                                                                                                                                             |   | (523,549                 | )           | (1,329,179              | )      |
| Treasury stock                                                                                                                                                                                                                                                                                                                                                           |   | (342,091                 | )           | (297,000                | )      |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                        |   | (178,368,188             | )           | (98,143,912             | )      |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                        |   | $                        | 501,481,078 |                    | $      | 731,097,252 |   |
|                                                                                                                                                                                                                                                                                                                                                                          |        |                          |             |                         |        |  |  |  |  |  |  |  |

 

See accompanying notes

 

1

----

 

GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFOPERATIONS

 
|                                                                                                               |   | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                                                                                                               |   | **2002**                              |       | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                                               |   | **(Unaudited)**                       |       | **(Unaudited)**                      |   |
| Net revenues                                                                                                       |   | $                                     | 26,083,671 |                                 | $      | 25,502,449 |   | $ | 102,179,342 |   | $ | 82,856,948 |   |
| Station  operating expenses                                                                                        |   | 21,220,434                            |       | 27,024,257                           |   | 76,160,339 |   | 80,363,013 |   |
| Depreciation  expense                                                                                              |   | 1,350,113                             |       | 1,693,037                            |   | 4,608,205 |   | 4,706,482 |   |
| Amortization  expense                                                                                              |   | 2,377,515                             |       | 6,413,798                            |   | 16,615,563 |   | 19,242,400 |   |
| Corporate  expense                                                                                                 |   | 2,330,923                             |       | 2,102,659                            |   | 6,947,237 |   | 7,140,345 |   |
| Non-cash  compensation expense                                                                                     |   | 410,619                               |       | 331,809                              |   | 1,065,490 |   | 1,130,994 |   |
| Operating loss                                                                                                     |   | (1,605,933                            | )          | (12,063,111                          | )      | (3,217,492 | ) | (29,726,286 | ) |
| Other expenses  (income):                                                                                          |   |                                  |       |                                 |   |   |   |   |   |
| Interest expense                                                                                                   |   | 6,670,880                             |       | 12,723,097                           |   | 27,139,517 |   | 34,623,542 |   |
| Interest income                                                                                                    |   | (281,119                              | )          | (511,878                             | )      | (595,845 | ) | (1,172,227 | ) |
| Non-cash  interest expense                                                                                         |   | 974,635                               |       | 2,211,492                            |   | 11,928,787 |   | 5,281,435 |   |
| Gain on station  sale                                                                                              |   | —                                |       | —                               |   | (192,406,138 | ) | — |   |
| Other                                                                                                              |   | 239,153                               |       | (126,715                             | )      | 542,281 |   | 409,772 |   |
| (Loss) income  before income taxes, extraordinary item, and cumulative effect of a change in  accounting principle |   | (9,209,482                            | )          | (26,359,107                          | )      | 150,173,906 |   | (68,868,808 | ) |
| (Benefit)  provision for income taxes:                                                                             |   |                                  |       |                                 |   |   |   |   |   |
| Current                                                                                                            |   | (6,936,357                            | )          | 50,520                               |   | 32,398,279 |   | 144,470 |   |
| Deferred                                                                                                           |   | 378,565                               |       | (9,529,610                           | )      | 34,607,686 |   | (26,112,261 | ) |
| Total (benefit)  provision for income taxes                                                                        |   | (6,557,792                            | )          | (9,479,090                           | )      | 67,005,965 |   | (25,967,791 | ) |
| (Loss) income  before extraordinary item and cumulative effect of a change in accounting  principle                |   | (2,651,690                            | )          | (16,880,017                          | )      | 83,167,941 |   | (42,901,017 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                               |   | —                                |       | —                               |   | 9,057,985 |   | 1,207,081 |   |
| Cumulative  effect of a change in accounting principle, net of benefit for income taxes                            |   | —                                |       | —                               |   | 150,478,583 |   | — |   |
| Net loss                                                                                                           |   | $                                     | (2,651,690 | )                                    | $      | (16,880,017 | ) | $ | (76,368,627 | ) | $ | (44,108,098 | ) |
|                                                                                                               |   |                                  |       |                                 |   |   |   |   |   |
| Net loss  attributable to common shareholders                                                                      |   | $                                     | (7,385,551 | )                                    | $      | (25,019,958 | ) | $ | (69,070,027 | ) | $ | (68,028,188 | ) |
|                                                                                                               |   |                                  |       |                                 |   |   |   |   |   |
| Per basic common  share:                                                                                           |   |                                  |       |                                 |   |   |   |   |   |
| (Loss) income  before extraordinary item, and cumulative effect of a change in accounting  principle               |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | 4.83 |   | $ | (3.60 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                               |   | —                                |       | —                               |   | (0.48 | ) | (0.07 | ) |
| Cumulative  effect of a change in accounting principle, net of deferred income tax  benefit                        |   | —                                |       | —                               |   | (8.03 | ) | — |   |
| Basic net loss  per share                                                                                          |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | (3.68 | ) | $ | (3.67 | ) |
|                                                                                                               |   |                                  |       |                                 |   |   |   |   |   |
| Basic weighted  average common shares outstanding                                                                  |   | 18,757,441                            |       | 18,622,044                           |   | 18,745,885 |   | 18,539,443 |   |
|                                                                                                               |   |                                  |       |                                 |   |   |   |   |   |
| Per fully  diluted common share:                                                                                   |   |                                  |       |                                 |   |   |   |   |   |
| (Loss) income  before extraordinary item, and cumulative effect of a change in accounting  principle               |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | 4.76 |   | $ | (3.60 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                               |   | —                                |       | —                               |   | (0.48 | ) | (0.07 | ) |
| Cumulative  effect of a change in accounting principle, net of deferred income tax  benefit                        |   | —                                |       | —                               |   | (7.91 | ) | — |   |
| Fully diluted  net loss per share                                                                                  |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | (3.63 | ) | $ | (3.67 | ) |
| Fully diluted  weighted average common shares outstanding                                                          |   | 18,757,441                            |       | 18,622,044                           |   | 19,017,490 |   | 18,539,443 |   |

 

See accompanying notes

 

2

----

 

GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ DEFICIT

(Unaudited)

 
|                                                                            |   | **Class A  Voting Common  Stock** |   | **Common  Stock  (Nonvoting)** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Unearned  Compensation** |   | **Treasury  Stock** |   | **Total  Stockholders’  Deficit** |       |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------|--------|----------------------------------|--------|--------------------------|--------|----------------------------|--------|---------------------|--------|----------------------------------------|------------|
|                                                                            |   |                              |   |                           |   |                             |   |                     |   |                       |   |                |   |                                   |       |
| Balance at December 31, 2001                                                    |   | $                                 | 1,785  |                           | $      | 184,479                          |   | $                        | — |                       | $      | (96,703,997         | )      | $                                      | (1,329,179 | ) | $ | (297,000 | ) | $ | (98,143,912 | ) |
| Dividends on Cumulative Exchangable Preferred Stock                             |   |                              |   |                           |   | (18,063,941                      | )      | (4,617,520               | )      |                       |   |                |   | (22,681,461                            | )          |
| Gain on retirement of Cumulative Exchangeable Preferred Stock                   |   |                              |   |                           |   | 30,299,037                       |   |                     |   |                       |   |                |   | 30,299,037                             |       |
| Accretion of offering costs related to Cumulative Exchangeable  Preferred Stock |   |                              |   |                           |   | (318,976                         | )      |                     |   |                       |   |                |   | (318,976                               | )          |
| Grant of stock award under stock plans                                          |   |                              |   |                           |   | 96,560                           |   |                     |   | (96,560                    | )      |                |   | —                                 |       |
| Exercise of stock options                                                       |   |                              |   | 20                             |   | 2,980                            |   |                     |   |                       |   |                |   | 3,000                                  |       |
| Issuance of Common Stock (Nonvoting)                                            |   |                              |   | 1,312                          |   | (1,312                           | )      |                     |   |                       |   |                |   | —                                 |       |
| Repurchase of Common Stock                                                      |   |                              |   |                           |   |                             |   |                     |   |                       |   | (45,091             | )      | (45,091                                | )          |
| Stock expense related to stock plans                                            |   |                              |   |                           |   | 135,532                          |   |                     |   | 755,601                    |   |                |   | 891,133                                |       |
| Cancellation of warrants                                                        |   |                              |   |                           |   | (12,149,880                      | )      |                     |   |                       |   |                |   | (12,149,880                            | )          |
| Discount on loans to officers                                                   |   |                              |   |                           |   |                             |   |                     |   | 146,589                    |   |                |   | 146,589                                |       |
| Net loss                                                                        |   |                              |   |                           |   |                             |   | (76,368,627              | )      |                       |   |                |   | (76,368,627                            | )          |
|                                                                            |   |                              |   |                           |   |                             |   |                     |   |                       |   |                |   |                                   |       |
| Balance at September 30, 2002                                                   |   | $                                 | 1,785  |                           | $      | 185,811                          |   | $                        | — |                       | $      | (177,690,144        | )      | $                                      | (523,549   | ) | $ | (342,091 | ) | $ | (178,368,188 | ) |

 

See accompanying notes

 

3

----

 

GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFCASH FLOWS

 
|                                                                         |   | **Nine  Months ended September 30,** |        |
|------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                         |   | **2002**                             |        | **2001** |   |
|                                                                         |   | **(Unaudited)**                      |        |
| Cash flows from  operating activities:                                       |   |                                 |        |   |   |
| Net loss                                                                     |   | $                                    | (76,368,627 | ) | $ | (44,108,098 | )  |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                 |        |   |   |
| Amortization of  intangible assets                                           |   | 16,615,563                           |        | 19,242,400 |   |
| Depreciation                                                                 |   | 4,608,205                            |        | 4,706,482 |   |
| Non-cash  compensation expense                                               |   | 1,065,490                            |        | 1,130,994 |   |
| Non-cash  interest expense                                                   |   | 11,928,787                           |        | 5,281,435 |   |
| Deferred tax  benefit                                                        |   | (23,743,260                          | )           | (26,916,980 | ) |
| Extraordinary loss                                                           |   | 15,096,641                           |        | 2,011,801 |   |
| Gain on station  sale                                                        |   | (192,406,138                         | )           | — |   |
| Cumulative  effect of a change in accounting principle                       |   | 208,829,529                          |        | — |   |
| Change in assets  and liabilities, net of amounts for sale of KNTV:          |   |                                 |        |   |   |
| (Increase)  decrease in accounts receivable, net                             |   | (31,806,036                          | )           | 5,606,666 |   |
| Increase in  accounts payable and accrued liabilities                        |   | 8,135,013                            |        | 6,022,338 |   |
| Increase in film  contract rights and other non-current assets               |   | (15,695,417                          | )           | (1,756,473 | ) |
| Increase in film  contract rights payable and other current liabilities      |   | 33,362,976                           |        | 4,091,122 |   |
| NBC network  affiliation payment                                             |   | —                               |        | (27,778,694 | ) |
| WB Network  affiliation payment                                              |   | (3,688,389                           | )           | (3,892,571 | ) |
| (Decrease)  increase in other non-current liabilities                        |   | (7,732,705                           | )           | 1,099,780 |   |
| Decrease in income  tax receivable                                           |   | —                               |        | 19,431,046 |   |
| Increase in  other assets                                                    |   | (250,853                             | )           | (1,237,806 | ) |
| Net cash used in  operating activities                                       |   | (52,049,221                          | )           | (37,066,558 | ) |
|                                                                         |   |                                 |        |   |   |
| Cash flows from  investing activities:                                       |   |                                 |        |   |   |
| Proceeds from  sale of station                                               |   | 265,018,849                          |        | — |   |
| Capital  expenditures                                                        |   | (8,121,595                           | )           | (1,976,741 | ) |
| Net cash  provided by (used in) investing activities                         |   | 256,897,254                          |        | (1,976,741 | ) |
|                                                                         |   |                                 |        |   |   |
| Cash flows from  financing activities:                                       |   |                                 |        |   |   |
| Proceeds from  long-term debt                                                |   | 80,000,000                           |        | 205,000,000 |   |
| Repayment of  bank debt                                                      |   | (170,000,000                         | )           | (113,672,428 | ) |
| Repurchase of  cumulative exchangeable preferred stock                       |   | (53,264,005                          | )           | — |   |
| Repurchase of  common stock                                                  |   | (45,091                              | )           | — |   |
| Payment of  deferred financing fees                                          |   | (8,770,666                           | )           | (9,884,055 | ) |
| Net cash (used  in) provided by financing activities                         |   | (152,079,762                         | )           | 81,443,517 |   |
|                                                                         |   |                                 |        |   |   |
| Net increase in  cash and cash equivalents                                   |   | 52,768,271                           |        | 42,400,218 |   |
| Cash and cash  equivalents, beginning of period                              |   | 29,426,856                           |        | 9,209,249 |   |
|                                                                         |   |                                 |        |   |   |
| Cash and cash  equivalents, end of period                                    |   | $                                    | 82,195,127  |   | $ | 51,609,467 |   |
| Supplemental  information:                                                   |   |                                 |        |   |   |
| Cash paid for  interest                                                      |   | $                                    | 28,166,000  |   | $ | 25,492,000 |   |
| Income taxes  paid                                                           |   | 15,912,000                           |        | 197,000 |   |
| Non-cash capital  expenditures                                               |   | 534,000                              |        | 406,000 |   |
| Non-cash  dividend                                                           |   | 21,293,000                           |        | 23,545,000 |   |
| Fair value of  warrants                                                      |   | —                               |        | 2,065,000 |   |
| Cancellation of  warrants                                                    |   | 12,150,000                           |        | — |   |

 

See accompanying notes

 

4

----

 

GRANITE BROADCASTINGCORPORATION

NOTES TO CONSOLIDATEDFINANCIAL 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 nine-month period ended September 30, 2002 are not necessarilyindicative of the results that may be expected for the year ended December 31,2002.  For further information, refer tothe Company’s consolidated financial statements and notes thereto for the yearended December 31, 2001 which were included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2001.  All significant inter-company accounts and transactions have beeneliminated.  Data at, and for the yearended December 31, 2001 are derived from the Company’s audited consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments of a normal recurring nature, which are necessaryfor a fair presentation of the results for the interim periods, have been made.

 

Note 2 – Asset Disposition

 

On April 30, 2002 the Company completed the sale of KNTV to theNational Broadcasting Company, Inc. (“NBC”) for $230,000,000, plus workingcapital and other adjustments of $14,545,000. In addition, NBC refunded the Company $20,473,000 of the January 1, 2002affiliation payment due to NBC under the terms of the KNTV NBC affiliationagreement (the “San Francisco Affiliation Agreement”), which the Companyprepaid on March 6, 2001.  The Companyrepaid $170,000,000 of outstanding senior debt and $14,763,000 of deferredinterest and other fees associated with the senior credit facility and thecredit agreement discussed below upon consummation of the sale.  The Company also recorded an extraordinaryloss on the early extinguishment of debt, net of a current tax benefit, of$9,058,000 due to the write-off of unamortized deferred financing feesassociated with the old senior credit facility.  The San Francisco Affiliation Agreement terminated upon theclosing of the sale and the Company is not required to make any furtheraffiliation payments to NBC.  The4,500,000 warrants issued to NBC as part of the San Francisco AffiliationAgreement have been returned to the Company. The Company’s affiliation agreements for KSEE-TV, WEEK-TV, and KBJR-TV,which involve no payment obligations, will remain in effect until theirexpiration on December 31, 2011.  Duringthe second quarter of 2002 the Company recorded a pre-tax book gain of$192,406,000 on the sale of KNTV.

 

Note 3 – Long-term debt

 

On April 30, 2002, the Company entered into an amended and restatedsenior credit agreement (the “Credit Agreement”).  The Credit Agreement consists of (i) a committed $60,000,000Tranche A term loan facility, (ii) a committed $80,000,000 Tranche B term loanfacility and (iii) an uncommitted $10,000,000 Tranche C supplemental term loanfacility. 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.  During the secondquarter of 2002 the Company rolled over existing outstanding loans under theprior loan facility into an initial Tranche A borrowing in the amount of$35,000,000.  The Company also borrowedthe entire $80,000,000 Tranche B term loan facility during the third quarter of2002.

 

Proceeds from Tranche A and Tranche B term loans are used for workingcapital and general corporate purposes. The Tranche A loans bear interest atthe greater of LIBOR plus 4.50% or 6.50% and the Tranche B loans bear interestat the greater of LIBOR plus 9% or 11%. All interest is payable monthly in arrears.  The Credit Agreement matures on April 15,2004, at which time the Company must repay the principal amount of alloutstanding loans and all other obligations then due and owing under the CreditAgreement.  The Credit Agreement requiresthe Company, among other matters, to maintain compliance with certain financialtests, including but not limited to, minimum net revenue, broadcast cash flow,EBITDA, working capital and cash balances. As of September 30, 2002, the Company was in compliance with allcovenants under the Agreement.

 

Note 4 – 12.75% Cumulative Exchangeable PreferredStock

 

During the second quarter of 2002 the Company repurchased and retired atotal of 83,920 shares of its $1,000 face amount 12.75% Cumulative ExchangeablePreferred Stock (the “Shares”) for $53,264,000.  The Shares were repurchased at an average price of $634.70 pershare, generating a gain, after transaction related expenses and the write offof a portion of the initial offering costs, of $30,299,000.  The gain was recorded in additional paid incapital.

 

5

----

 

Note 5 – Treasury Stock

 

On September 16, 2002, the Company announced a program to repurchaseshares of its outstanding common stock utilizing up to $2,000,000 cash on hand,as permitted by the Credit Agreement. During the third quarter of 2002 the Company repurchased 20,200 sharesfor $45,000. During October 2002, the Company repurchased 227,500 shares for$490,000.  The Company recorded thecosts of the repurchases made during the third quarter 2002 in Treasury Stockon the Balance Sheet and will account for subsequent stock repurchases in thesame manner.

 

Note 6 – Recent Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets (“Statement 142”), effective January 1, 2002.  Under the new rules, goodwill and otherindefinite lived intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests inaccordance with Statement 142.

 

Under Statement 142, goodwill and other indefinite lived intangibleassets are deemed to be impaired if their net book value exceeds theirestimated fair value.  Upon adoption ofStatement 142 as of January 1, 2002, the Company recorded a one-time, non-cashcharge to reduce the carrying value of its goodwill and other indefinite livedintangible assets by $95,000,000 and $114,000,000, respectively, during thefirst quarter.  The decline in thecarrying value of goodwill and other indefinite-lived intangible assets relatessolely to the Company’s WB affiliates. Such charge is non-operational in nature and is reflected as acumulative effect of an accounting change in the accompanying consolidatedstatement of operations.  In calculatingthe impairment charge, the fair value was estimated using a discounted cashflow methodology.

 

As of September 30, 2002, the Company’s intangible assets and relatedaccumulated amortization consisted of the following:

 
|                                            |   | **As of  September 30, 2002** |        |
|-------------------------------------------------|--------|-------------------------------|-------------|
|                                            |   | **Gross  Carrying Value**     |        | **Accumulated  Amortization** |   |
|                                            |   |                          |        |   |   |
| Intangible  assets subject to amortization:     |   |                          |        |   |   |
| Network  affiliation agreements                 |   | $                             | 33,374,951  |   | $ | (15,524,780 | ) |
| Covenant not to  compete                        |   | 30,000,000                    |        | (25,250,000 | ) |
|                                            |   |                          |        |   |   |
|                                            |   | $                             | 63,374,951  |   | $ | (40,774,780 | ) |
|                                            |   |                          |        |   |   |
| Intangible  assets not subject to amortization: |   |                          |        |   |   |
| Goodwill                                        |   | $                             | 111,252,372 |   | $ | (28,201,070 | ) |
| Broadcast  licenses                             |   | 159,647,594                   |        | (32,315,765 | ) |
| Network  affiliation agreements                 |   | 95,366,707                    |        | (20,882,800 | ) |
|                                            |   |                          |        |   |   |
|                                            |   | $                             | 366,266,673 |   | $ | (81,399,635 | ) |

 

The Company recorded amortization expense of $16,616,000 during thenine months ended September 30, 2002. If Statement 142 had been adopted effective January 1, 2001,amortization expense would have been $7,455,000 during the nine months endedSeptember 30, 2001.  Based on thecurrent amount of intangible assets subject to amortization, the estimatedamortization expense for each of the succeeding 5 years are as follows:  2002: $19,016,000; 2003: $6,850,000; 2004:$3,167,000; 2005: $2,684,000 and 2006: $2,684,000.  As acquisitions and dispositions occur in the future and aspurchase price allocations are finalized, these amounts may vary.

 

The 2001 results on a historical basis do not reflect the provisions ofStatement 142.  Had the Company adoptedStatement 142 on January 1, 2001, the historical net loss and basic and dilutednet loss per common share would have changed to the adjusted amounts indicatedbelow:

 

6

----

 
|                               |   | **Three  Months Ended September 30, 2001** |        | **Nine  Months Ended September 30, 2001** |   |
|------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|--------|
|                               |   |                                       |        | **Per basic  and diluted  common share**  |   |   |   | **Per basic  and diluted  common share** |   |
|                               |   |                                       |        |                                      |   |   |   |   |   |
| Loss before  extraordinary item    |   | $                                          | (16,880,017 | )                                         | $      | (1.34 | ) | $ | (42,901,017 | ) | $ | (3.60 | ) |
| Add:  Goodwill amortization   |   | 1,474,700                                  |        | 0.08                                      |   | 4,424,100 |   | 0.24 |   |
| Add:  Intangible amortization |   | 2,454,393                                  |        | 0.13                                      |   | 7,363,179 |   | 0.40 |   |
| Extraordinary  loss                |   | —                                     |        | —                                    |   | (1,207,081 | ) | (0.07 | ) |
|                               |   |                                       |        |                                      |   |   |   |   |   |
| Adjusted net  loss                 |   | $                                          | (12,950,924 | )                                         | $      | (1.13 | ) | $ | (32,320,819 | ) | $ | (3.03 | ) |

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 143, Accounting for Asset Retirement Obligations (“Statement143”), effective for fiscal years beginning after June 15, 2002. This standardprovides the accounting for the cost of legal obligations associated with theretirement of long-lived assets. Statement 143 requires that companiesrecognize the fair value of a liability for asset retirement obligations in theperiod in which the obligations are incurred and capitalize that amount as apart of the book value of the long-lived asset. That cost is then depreciatedover the remaining life of the underlying long-lived asset. The Company is currentlyevaluating the impact that this new standard will have on future results ofoperations and financial position.

 

In August 2001, the FASB issued Statement No. 144, Accounting for theImpairment or Disposal of Long-Lived Assets (“Statement 144”). Statement 144addresses financial accounting and reporting for the impairment or disposal oflong-lived assets and supercedes Financial Accounting Standards Board StatementNo. 121, Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of, and the accounting and reporting provisions ofAccounting Principles Board Opinion No. 30, Reporting the Results of Operationfor a disposal of a segment of a business. Statement 144 was required to beadopted by the Company on January 1, 2002 and its adoption did not have asignificant impact on its financial position, results of operations, or cashflows.

 

On April 30, 2002, the FASB issued Statement No. 145, Rescission ofFASB 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. The Company willadopt the Statement for the year ended December 31, 2003.  All prior extraordinary items relating tothe extinguishments of debt will be retroactively adjusted and reclassified toincome from continuing operations.

 

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 Company does not believe the adoption ofStatement 146 will have a significant impact on its financial position, resultsof operations, or cash flows.

 

Note 7 – Per Share Calculations

 

The per-share calculations shown on the income statement for the threeand nine month periods ended September 30, 2002 and 2001 are computed inaccordance with Statement of Financial Accounting Standards No. 128, EarningsPer Share.  The following table setsforth the computation of basic and fully diluted earnings per share:

 

7

----

 
|                                                                                                 |   | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                                                                                                 |   | **2002**                              |       | **2001**                             |   | **2002** |   | **2001** |   |
|                                                                                                 |   | **(Unaudited)**                       |       | **(Unaudited)**                      |   |
| (Loss) income  before extraordinary item, and cumulative effect of a change in accounting  principle |   | $                                     | (2,651,690 | )                                    | $      | (16,880,017 | ) | $ | 83,167,941 |   | $ | (42,901,017 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                 |   | —                                |       | —                               |   | 9,057,985 |   | 1,207,081 |   |
| Cumulative  effect of a change in accounting principle, net of deferred income tax  benefit          |   | —                                |       | —                               |   | 150,478,583 |   | — |   |
| Net loss                                                                                             |   | (2,651,690                            | )          | (16,880,017                          | )      | (76,368,627 | ) | (44,108,098 | ) |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| LESS:                                                                                                |   |                                  |       |                                 |   |   |   |   |   |
| Cumulative  exchangeable preferred stock dividends                                                   |   | 6,029,308                             |       | 8,014,904                            |   | 22,681,461 |   | 23,544,979 |   |
| Accretion of  costs on cumulative exchangeable Preferred stock                                       |   | 88,819                                |       | 125,037                              |   | 318,976 |   | 375,111 |   |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| ADD:                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| Gain on  repurchase of cumulative exchangeable Preferred stock                                       |   | 1,384,266                             |       | —                               |   | 30,299,037 |   | — |   |
| Net loss  attributable to common shareholders                                                        |   | $                                     | (7,385,551 | )                                    | $      | (25,019,958 | ) | $ | (69,070,027 | ) | $ | (68,028,188 | ) |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| (in shares)                                                                                          |   |                                  |       |                                 |   |   |   |   |   |
| Basic weighted  average common shares outstanding                                                    |   | 18,757,441                            |       | 18,622,044                           |   | 18,745,885 |   | 18,539,443 |   |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| ADD:                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| Stock options  and management stock grants                                                           |   | —                                |       | —                               |   | 271,605 |   | — |   |
| Fully diluted  weighted average common shares outstanding                                            |   | 18,757,441                            |       | 18,622,044                           |   | 19,017,490 |   | 18,539,443 |   |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| Per basic common  share:                                                                             |   |                                  |       |                                 |   |   |   |   |   |
| (Loss) income  before extraordinary item, and cumulative effect of a change in accounting  principle |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | 4.83 |   | $ | (3.60 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                 |   | —                                |       | —                               |   | (0.48 | ) | (0.07 | ) |
| Cumulative  effect of a change in accounting principle, net of deferred income tax  benefit          |   | —                                |       | —                               |   | (8.03 | ) | — |   |
| Basic net loss  per share                                                                            |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | (3.68 | ) | $ | (3.67 | ) |
|                                                                                                 |   |                                  |       |                                 |   |   |   |   |   |
| Per fully  diluted common share:                                                                     |   |                                  |       |                                 |   |   |   |   |   |
| (Loss) income  before extraordinary item, and cumulative effect of a change in accounting  principle |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | 4.76 |   | $ | (3.60 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                 |   | —                                |       | —                               |   | (0.48 | ) | (0.07 | ) |
| Cumulative  effect of a change in accounting principle, net of deferred income tax  benefit          |   | —                                |       | —                               |   | (7.91 | ) | — |   |
| Fully diluted  net loss per share                                                                    |   | $                                     | (0.39      | )                                    | $      | (1.34 | ) | $ | (3.63 | ) | $ | (3.67 | ) |

 

8

----

 

*Item2.  Management’s Discussion and Analysisof Financial Condition 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, 2001.  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 languageset forth in the Company’s most recent Form 10-K report and other documentsfiled with the Securities and Exchange Commission qualify all forward-lookingstatements made herein.

 

Introduction

 

The Company is a group broadcaster that operates eightnetwork-affiliated television stations. 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 and advertisingand promotion expenses.  Numbersreferred to in the following discussion have been rounded to the nearestthousand.  The Company’s operatingrevenue are generally lower in the first calendar quarter and generally higherin the fourth calendar quarter than in the other two quarters, due in part toincreases in retail advertising in the fall months in preparation for theholiday season, and in election years due to increased political advertising.  Operating results for the nine-month periodended September 30, 2002 are not necessarily indicative of the results that maybe expected for the year ended December 31, 2002.

 

Comparisons of the Company’s consolidated financial statements betweenthe three and nine months ended September 30, 2002 and the same period lastyear have been affected by the sale of KNTV on April 30, 2002, and thereduction in amortization expense of certain goodwill and otherindefinite-lived intangible assets in accordance with FASB Statement 142.  The Company anticipates that comparisons ofthe Company’s consolidated financial statements between the years endedDecember 31, 2002 and 2001 will also be impacted by the aforementioned factors.

 

The following table sets forth certain operating data for the three andnine months ended September 30, 2002 and 2001:

 
|                           |   | **Three  Months Ended September 30,** |       | **Nine  Months Ended September 30,** |   |
|--------------------------------|--------|---------------------------------------|------------|--------------------------------------|--------|
|                           |   | **2002**                              |       | **2001**                             |   | **2002** |   | **2001** |   |
|                           |   | **(Unaudited)**                       |       | **(Unaudited)**                      |   |
|                           |   |                                  |       |                                 |   |   |   |   |   |
| Operating loss                 |   | $                                     | (1,606,000 | )                                    | $      | (12,063,000 | ) | $ | (3,217,000 | ) | $ | (29,726,000 | ) |
| Add:                           |   |                                  |       |                                 |   |   |   |   |   |
| Depreciation and  amortization |   | 3,728,000                             |       | 8,107,000                            |   | 21,224,000 |   | 23,949,000 |   |
| Corporate  expense             |   | 2,331,000                             |       | 2,103,000                            |   | 6,947,000 |   | 7,140,000 |   |
| Non-cash  compensation         |   | 411,000                               |       | 332,000                              |   | 1,065,000 |   | 1,131,000 |   |
| Program  amortization          |   | 5,881,000                             |       | 5,552,000                            |   | 17,710,000 |   | 19,186,000 |   |
| Program payments               |   | (6,267,000                            | )          | (6,014,000                           | )      | (17,227,000 | ) | (18,324,000 | ) |
| Broadcast cash  flow           |   | $                                     | 4,478,000  |                                 | $      | (1,983,000 | ) | $ | 26,502,000 |   | $ | 3,356,000 |   |

 

“Broadcast cash flow,” as defined by the Company, is operating lossplus depreciation, amortization, corporate expense, non-cash compensation andprogram amortization, less program payments. The Company has included broadcast cash flow data because such data arecommonly used as a measure of performance for broadcast companies and are alsoused by investors to measure a company’s ability to service debt.  Broadcast cash flow is not, and should notbe used as, an indicator or alternative to operating income, net income or cashflow as reflected in the consolidated financial statements.  Broadcast cash flow is not a measure offinancial performance under accounting principles generally accepted in theUnited States and should not be considered in isolation or as a substitute formeasures of performance prepared in accordance with accounting principlesgenerally accepted in the United States.

 

9

----

 

Results of Operations

 

*Threemonths ended September 30, 2002 and 2001*

 

Net revenue totaled $26,084,000 for the three months ended September30, 2002; an increase of $582,000 or 2% compared to $25,502,000 for the threemonths ended September 30, 2001. Included in the three months ended September 30, 2001 is $2,652,000 ofnet revenue related to KNTV, which was sold to NBC on April 30, 2002.  Net revenue at the remaining stationsincreased $3,234,000 primarily due to increases in local and nationalnon-political advertising revenue and increased political revenue in anelection year.

 

Station operating expenses totaled $21,220,000 for the three monthsended September 30, 2002; a decrease of $5,804,000 or 21% compared to$27,024,000 for the three months ended September 30, 2001. Included in thethree months ended September 30, 2001 is $5,708,000 of operating expensesrelated to KNTV.  The remaining stationsoperating expenses decreased $96,000 or less than 1%.

 

Amortization expense decreased $4,036,000 or 63% during the threemonths ended September 30, 2002 compared to the same period a year earlierprimarily due to the elimination of amortization of goodwill and otherindefinite-lived intangible assets in conjunction with the adoption ofStatement 142.  Corporate expenseincreased $228,000 or 11% during the three months ended September 30, 2002compared to the same period a year earlier primarily due to increasedprofessional fees and insurance expense.

 

Interest expense decreased $6,052,000 or 48%during the three months ended September 30, 2002 compared to the same period ayear earlier primarily due to lower average debt balances and lower interestrates on the Company’s new senior credit facility.  Interest income decreased $231,000, during the three months endedSeptember 30, 2002 compared to the same period a year earlier primarily due tolower average cash balances and lower interest rates.  Non-cash interest expense decreased $1,237,000 for the threemonths ended September 30, 2002 compared to the same period a year earlierprimarily due to reduced amortization of deferred financing fees associatedwith the new senior credit facility.

 

During the three months ended September 30, 2002, the Company recordeda benefit for income taxes of $6,558,000 of which $6,936,000 is a current taxbenefit and $379,000 is a deferred tax provision.

 

*Ninemonths ended September 30, 2002 and 2001*

 

Net revenue totaled $102,179,000 for the nine months ended September30, 2002; an increase of $19,322,000 or 23% as compared to $82,857,000 for thenine months ended September 30, 2001. Of this increase $17,777,000 relates toKNTV from its switch from an independent television station to an NBCaffiliate.  The remaining increase of$1,545,000 was due to increased national and political revenue offset by lowerlocal non-political revenue and network compensation.

 

Station operating expenses totaled $76,160,000 for the nine monthsended September 30, 2002; a decrease of $4,203,000 or 5% as compared to$80,363,000 for the nine months ended September 30, 2001.   Of this decrease, $3,735,000 relates toKNTV, primarily due to lower news expense. The remaining stations operating expenses decreased $468,000 or lessthan 1%.

 

Amortization expense decreased $2,627,000 or 14% due to the eliminationof amortization of goodwill and other indefinite-lived intangible assets inconjunction with the adoption of Statement 142, offset by the amortization ofthe NBC affiliation agreement at KNTV prior to the sale of KNTV on April 30,2002.  Corporate expense decreased$193,000 or 3% primarily due to decreased professional fees.

 

Interest expense decreased $7,484,000 or 22% during the nine monthsended September 30, 2002 as compared to the same period a year earlierprimarily due to lower average debt balances and lower interest rates on theCompany’s new senior credit facility.  Interest income decreased $576,000, primarily due to lower averagecash balances and lower interest rates. Non-cash interest expense increased $6,647,000, primarily due to theimputation of interest related to KNTV’s NBC affiliation agreement offset, in part,by reduced amortization of deferred financing fees associated with the newsenior credit facility.

 

In connection with the sale of KNTV, the Company recorded a pre-taxgain on the sale of $192,406,000 in the second quarter.  The Company recorded a provision for incometaxes of $67,006,000, consisting of a current portion of $32,398,000 and adeferred portion of $34,608,000 during the nine months ended September 30,2002.

 

The Company recorded an extraordinary loss on the early extinguishmentof debt, net of a current tax benefit, of $9,058,000 due to the write-off ofunamortized deferred financing fees associated with the old senior creditfacility.

 

10

----

 

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 is non-operational in nature and is reflected as acumulative effect of an accounting change in the accompanying consolidatedstatement of operations.

 

*Liquidity and Capital Resources*

 

On April 30, 2002, the Company completed the sale of KNTV to NBC.  NBC paid the Company $230,000,000, plus aworking capital and other adjustments of $14,545,000.  In addition, NBC refunded the Company $20,473,000 of the January1, 2002 affiliation payment due to NBC under the terms of the KNTV NBCaffiliation agreement (“San Francisco Affiliation Agreement”), which theCompany prepaid on March 6, 2001.  TheCompany repaid $170,000,000 of outstanding senior debt and $14,763,000 ofdeferred interest and other fees associated with the senior credit facility andthe amended credit agreement discussed below upon consummation of the sale. TheCompany anticipates incurring a cash tax liability for the year ofapproximately $25,000,000 of which $15,400,000 has been paid to date.  The remainder is to be paid in December2002.  The San Francisco AffiliationAgreement terminated upon the closing of the sale and the Company is not requiredto make any further affiliation payments to NBC.  The 4,500,000 warrants issued to NBC as part of the San FranciscoAffiliation Agreement have been returned to the Company.  The Company’s affiliation agreements forKSEE-TV, WEEK-TV, and KBJR-TV, which involve no payment obligations, will remainin effect until their expiration on December 31, 2011.

 

Simultaneously with the closing of the sale of KNTV, the Companyentered into an amended and restated senior credit agreement (the “CreditAgreement”).  The Credit Agreementconsists of (i) a committed $60,000,000 Tranche A term loan facility, (ii) acommitted $80,000,000 Tranche B term loan facility, and (iii) an uncommitted$10,000,000 Tranche C supplemental term loan facility.  The obligations of the Company with respectto all of the loan facilities are secured by substantially all of the assets ofthe Company and its subsidiaries. During the second quarter the Company rolledover existing outstanding loans under the prior loan facility into an initialTranche A borrowing in the amount of $35,000,000.  The Company also borrowed the entire $80,000,000 Tranche B termloan facility during the third quarter. Proceeds from Tranche A and Tranche B term loans can be used for workingcapital and general corporate purposes. The Tranche A loans bear interest atthe greater of LIBOR plus 4.50% or 6.50% and the Tranche B loans bear interestat the greater of LIBOR plus 9% or 11%. All interest is payable monthly in arrears.   The Credit Agreement matures on April 15,2004, at which time the Company must repay the principal amount of all outstandingloans and all other obligations then due and owing under the CreditAgreement.  The Credit Agreementrequires the Company, among other matters, to maintain compliance with certainfinancial tests, including but not limited to, minimum net revenue, broadcastcash flow, EBITDA, working capital and cash balances.  At September 30, 2002 the Company was in compliance with allcovenants under the Credit Agreement.

 

During the second quarter, the Company repurchased and retired a totalof 83,920 shares of the 12.75% Cumulative Exchangeable Preferred Stock (the“Preferred Stock”) for $53,264,000.  ThePreferred Stock was repurchased at an average price of $634.70 per sharegenerating a gain, after transaction related expenses and the write off of aportion of the initial offering costs of $30,299,000.  The gain was recorded in additional paid in capital. The CreditAgreement restricts the payment of any cash dividend.  Consequently the Company did not pay the semi-annual dividend dueto the holders of the Preferred Stock on October 1, 2002.  If three or more semi-annual dividendpayments (whether or not consecutive) are not paid, the holders of thePreferred Stock will have the right to elect the lesser of two directors or thatnumber of directors constituting 25% of the members of the Board ofDirectors.  The right of the holders ofthe Preferred Stock to elect members of the Board of Directors as set forthabove would continue until such time as all accumulated dividends that arerequired to be paid in cash and that are in arrears on the Preferred Stock arepaid in full in cash.

 

Net cash used in operating activities was $52,049,000 during the ninemonths ended September 30, 2002, compared to $37,067,000 during the nine monthsended September 30, 2001.  The changefrom 2001 to 2002 was primarily the result of higher income taxes paid, and anincrease in net operating assets, offset in part by an increase in operatingcash flow.

 

Net cash provided by investing activities was $256,897,000 during thenine months ended September 30, 2002, compared to net cash used in investingactivities of $1,977,000 during the nine months ended September 30, 2001. Thechange from 2001 to 2002 was due to proceeds from the sale of KNTV offset byincreased capital expenditures.

 

Net cash used in financing activities was $152,080,000 during the ninemonths ended September 30, 2002 compared to net cash provided by financingactivities of $81,444,000 during the nine months ended September 30, 2001. Thechange from 2001 to 2002 was primarily due to a decrease in net borrowings, andthe repurchase of Cumulative Exchangeable Preferred Stock.

 

11

----

 

As of November 8, 2002, the Company had approximately $81,415,000 ofcash on hand, of which $2,532,000 is restricted for payment of Tranche Binterest, with $25,000,000 in available borrowings under the CreditAgreement.  The Company expects to spendapproximately $16,000,000 in 2002 in capital expenditures of which $8,182,000was spent during the nine months ended September 30, 2002.  The Company believes that borrowings underits amended Credit Agreement, together with internally generated funds fromoperations and cash on hand will be sufficient to satisfy the Company’s cashrequirements for its existing operations for at least the next twelve months.

 

*Item3.  Quantitative and QualitativeDisclosures about 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, Tranche A loans bear interest at the greater ofLIBOR plus 4.50% or 6.50%, currently 6.50%, and the Tranche B loans bearinterest at the greater of LIBOR plus 9% or 11%, currently 11%.  As of November 8, 2002, the six-month LIBORrate was 1.40000%.  The Company has not entered into anyagreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding at September30, 2002, a 2% increase in the LIBOR rate would increase interest expense on anannual basis by approximately $1,610,000. This analysis does not consider the effects of the reduced level ofoverall economic activity that could exist in such environment.

 

*Item4.  Internal Control Disclosure*

 

As of September 30, 2002, an evaluation was performed under thesupervision and with the participation of the Company’s management, includingthe Chief Executive and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s disclosurecontrol and procedures were effective as of September 30, 2002.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to September 30, 2002.

 

12

----

 

**PART II.  OTHERINFORMATION**

 

*Item 5.    Other Information*

 

Nasdaq has on two occasions since September 9, 2002notified the Company that it’s common Stock (Nonvoting) had, for the previous10 consecutive trading days, not complied with the $35 million marketcapitalization requirement (or the alternative tests of either havingstockholders’ equity of at least $2.5 million or $500,000 in annual net income)for continued listing on the Nasdaq Small Cap Market.  In such notifications, Nasdaq indicated that to continue to belisted, the market capitalization must be $35 million or more for a minimum often consecutive business days on or before a date certain, failing which NasdaqStaff will notify the Company that its Common Stock (Nonvoting) will bedelisted.  The Company is currently incompliance with the listing requirements for the Nasdaq Small Cap Market.  There can be no assurance that the Companywill continue to comply with the listing requirements for the Nasdaq Small CapMarket.

 

*Item 6.     Exhibits and Reports on Form 8-K*

 

(i)                       Exhibits

 

a.                                       99.1                          Certificationof Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of

2002

 

99.2                          Certificationof Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of

2002

 

b.                                      Reportson Form 8-K

 

Current Report on Form8-K filed on September 13, 2002, reporting that the Company had received aletter from Nasdaq stating that its nonvoting common stock did not comply withthe $35,000,000 market capitalization requirement for continued listing on theNasdaq Small Cap Market.

 

13

----

 

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   November 14, 2002 | /s/                                                                                        | W. DON CORNWELL |
|                          | (W. Don Cornwell)                                                                          |
|                          | Chief Executive Officer                                                                    |
|                          |                                                                                       |
| Date   November 14, 2002 | /s/                                                                                        | LAWRENCE I. WILLS |
|                          | (Lawrence I. Wills)                                                                        |
|                          | Senior Vice President –  Chief Administrative Officer  (Principal Accounting Officer) |
|                               |                                                                                            |  |  |

 

14

----

 

**Certificationof**

**Chief Executive Officer**

**of Granite Broadcasting Corporation**

 

I, W. Don Cornwell, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Granite BroadcastingCorporation (the “Company”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of,and for, the periods presented in this quarterly report;

 

4.                                       TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Company and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the Company’s disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       TheCompany’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of theCompany’s board of directors (or persons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the Company’s ability to record, process, summarize and reportfinancial data and have identified for the Company’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the Company’s internal controls; and

 

6.                                       TheCompany’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: November 14, 2002 |                       |
|-------------------------|----------------------------|
|                    |                       |
|                    | /s/  W. Don  Cornwell |   |
|                    | W. Don Cornwell            |
|                    | Chief Executive Officer    |

 

15

----

 

**Certificationof**

**ChiefFinancial Officer**

**ofGranite Broadcasting Corporation**

 

I, Ellen McClain, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Granite BroadcastingCorporation (the “Company”);

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of,and for, the periods presented in this quarterly report;

 

4.                                       TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Company and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the Company’s disclosure controls and procedures as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       TheCompany’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of theCompany’s board of directors (or persons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the Company’s ability to record, process, summarize and reportfinancial data and have identified for the Company’s auditors any materialweaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the Company’s internal controls; and

 

6.                                       TheCompany’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: November 14, 2002 |                     |
|-------------------------|--------------------------|
|                    |                     |
|                    | /s/  Ellen  McClain |   |
|                    | Ellen McClain            |
|                    | Chief Financial Officer  |

 

16

----