#### **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 thequarterly period ended September 30, 2001**

 

**OR**

 

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

 

**For thetransition period from ____________ to _____________**

** **

** **

**CommissionFile Number  0-19728**

 

**GRANITE BROADCASTINGCORPORATION**

(exactname 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**                              |
|                                                             |   |                                   |
| Telephone  number:  **(212) 826-2530**                      |

 

 

        Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter 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

 

(APPLICABLEONLY TO CORPORATE ISSUERS:)

 

 

        Indicate the number of sharesoutstanding of each of the issuer's classes of common stock, as of the latestpracticable date.

                ClassA Voting Common Stock, par value $.01 per share - 178,500 shares outstanding atNovember 9, 2001; Common Stock (Nonvoting), par value $.01 per share –18,447,577 shares outstanding at November 9, 2001.

 

 

 

 PART I. FINANCIAL INFORMATION

GRANITEBROADCASTING CORPORATION

CONSOLIDATEDBALANCE SHEET

 
|                                                                                                                                                                                                                                                                                                                                                                     |                           | **September  30, 2001** |                                       | **December  31, 2000** |                                       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|-------------------------|--------------------------------------------|------------------------|--------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                     |                           | (**Unaudited**)         |                                       |                   |                                       |
| ASSETS                                                                                                                                                                                                                                                                                                                                                                   |                           |                    |                                       |                   |                                       |
| Current  assets:                                                                                                                                                                                                                                                                                                                                                         |                           |                    |                                       |                   |                                       |
| Cash  and cash equivalents (including $12,001,995 of restricted cash at September  30, 2001)                                                                                                                                                                                                                                                                             |                           | $                       | 51,609,467                                 |         | $                                          | 9,209,249 |       |
| Accounts  receivable, net                                                                                                                                                                                                                                                                                                                                                |                           | 23,166,954              |                                       | 28,773,620             |                                       |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                    |                           | 18,729,016              |                                       | 17,835,745             |                                       |
| Other  current assets                                                                                                                                                                                                                                                                                                                                                    |                           | 9,581,732               |                                       | 29,719,328             |                                       |
| Total  current assets                                                                                                                                                                                                                                                                                                                                                    |                           | 103,087,169             |                                       | 85,537,942             |                                       |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Non-current  assets:                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Property  and equipment, net                                                                                                                                                                                                                                                                                                                                             |                           | 42,090,312              |                                       | 42,682,736             |                                       |
| Film  contract rights and other non-current assets                                                                                                                                                                                                                                                                                                                       |                           | 50,375,471              |                                       | 23,856,896             |                                       |
| Deferred  financing fees, net                                                                                                                                                                                                                                                                                                                                            |                           | 15,739,158              |                                       | 5,027,846              |                                       |
| Intangible  assets, net                                                                                                                                                                                                                                                                                                                                                  |                           | 555,765,424             |                                       | 574,986,006            |                                       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                            |                           | $                       | 767,057,534                                |                   | $                                          | 732,091,426 |   |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| LIABILITIES  AND STOCKHOLDERS' (DEFICIT) EQUITY                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                    |                           |                    |                                       |                   |                                       |
| Accounts  payable                                                                                                                                                                                                                                                                                                                                                        |                           | $                       | 1,824,759                                  |                   | $                                          | 3,744,779 |   |
| Accrued  interest                                                                                                                                                                                                                                                                                                                                                        |                           | 8,726,380               |                                       | 2,903,984              |                                       |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                |                           | 5,048,989               |                                       | 3,050,888              |                                       |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                    |                           | 25,666,702              |                                       | 25,504,608             |                                       |
| Other  current liabilities                                                                                                                                                                                                                                                                                                                                               |                           | 5,012,210               |                                       | 5,085,295              |                                       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                |                           | 46,279,040              |                                       | 40,289,554             |                                       |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Non-current  liabilities:                                                                                                                                                                                                                                                                                                                                                |                           |                    |                                       |                   |                                       |
| Long-term  debt                                                                                                                                                                                                                                                                                                                                                          |                           | 401,039,278             |                                       | 311,390,915            |                                       |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                    |                           | 16,813,813              |                                       | 16,582,412             |                                       |
| Deferred  tax liability                                                                                                                                                                                                                                                                                                                                                  |                           | 69,707,472              |                                       | 96,624,452             |                                       |
| Other  non-current liabilities                                                                                                                                                                                                                                                                                                                                           |                           | 26,905,775              |                                       | 19,843,495             |                                       |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Cumulative  exchangeable preferred stock, net of offering costs                                                                                                                                                                                                                                                                                                          |                           | 263,464,873             |                                       | 239,544,783            |                                       |
|                                                                                                                                                                                                                                                                                                                                                                     |                           |                    |                                       |                   |                                       |
| Stockholders'  (deficit) equity:                                                                                                                                                                                                                                                                                                                                         |                           |                    |                                       |                   |                                       |
| 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 18,447,577 shares of Common  Stock (Nonvoting) (18,030,811 shares at December 31, 2000) issued and  outstanding |                           | 186,260                 |              | 182,093                |              |
| Additional  paid in capital                                                                                                                                                                                                                                                                                                                                              |                           | -                       |                                       | 2,295,136              |                                       |
| (Accumulated  deficit) retained earnings                                                                                                                                                                                                                                                                                                                                 |                           | (55,448,415             | )                                          | 7,614,114              |                                       |
| Less:                                                                                                                                                                                                                                                                                                                                                                    | Unearned  compensation         |                    | (1,593,562                                 | )                      | (1,091,653                                 | ) |
|                                                                                                                                                                                                                                                                                                                                                                     | Treasury  stock                |                    | (297,000                                   | )                      | (297,000                                   | ) |
|                                                                                                                                                                                                                                                                                                                                                                     | Notes  receivable from officer |                    | -                                          |                   | (886,875                                   | ) |
| Total  stockholders' (deficit) equity                                                                                                                                                                                                                                                                                                                                    |                           | (57,152,717             | )                                          | 7,815,815              |                                       |
| Total  liabilities and stockholders’ (deficit) equity                                                                                                                                                                                                                                                                                                               |                           | $                       | 767,057,534                                |                   | $                                          | 732,091,426 |   |

 

 

Seeaccompanying notes.

 

 

GRANITEBROADCASTING CORPORATION

CONSOLIDATEDSTATEMENT OF OPERATIONS

 
|                                                         |   | **Three  Months Ended September 30,** |          | **Nine  Months Ended September 30,** |          |
|--------------------------------------------------------------|--------|--------------------------------------------|---------------|-------------------------------------------|---------------|
|                                                         |   | **2001**                                   |          | **2000**                                  |          | **2001** |   | **2000** |   |
|                                                         |   | **(Unaudited)**                            |          | **(Unaudited)**                           |          |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Net revenues                                                 |   | $                                          | 25,502,449    |                                      | $             | 32,238,416 |   | $ | 82,856,948 |   | $ | 103,153,475 |   |
| Station operating expenses                                   |   | 27,024,257                                 |          | 25,311,888                                |          | 80,363,013 |   | 75,065,005 |   |
| Write-off of film contracts                                  |   | -                                          |          | 1,716,535                                 |          | - |   | 1,716,535 |   |
| Depreciation expense                                         |   | 1,693,037                                  |          | 1,486,325                                 |          | 4,706,482 |   | 4,293,606 |   |
| Amortization expense                                         |   | 6,413,798                                  |          | 6,546,074                                 |          | 19,242,400 |   | 20,318,521 |   |
| Corporate  expense (excluding non-cash compensation expense) |   | 2,102,659                                  |     | 2,210,084                                 |     | 7,140,345 |     | 7,693,200 |     |
| Non-cash compensation expense                                |   | 331,809                                    |          | 215,550                                   |          | 1,130,994 |   | 646,650 |   |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Operating  loss                                              |   | (12,063,111                                | )             | (5,248,040                                | )             | (29,726,286 | ) | (6,580,042 | ) |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Other  (income) expense:                                     |   |                                       |          |                                      |          |   |   |   |   |
| Interest expense                                             |   | 12,723,097                                 |          | 7,372,615                                 |          | 34,623,542 |   | 22,126,710 |   |
| Interest income                                              |   | (511,878                                   | )             | (158,519                                  | )             | (1,172,227 | ) | (485,036 | ) |
| Non-cash interest expense                                    |   | 2,211,492                                  |          | 600,514                                   |          | 5,281,435 |   | 2,099,313 |   |
| Gain from insurance settlement                               |   | -                                          |          | -                                         |          | - |   | (1,247,105 | ) |
| Other                                                        |   | (126,715                                   | )             | 505,532                                   |          | 409,772 |   | 1,333,516 |   |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Loss  before benefit for income taxes and extraordinary item |   | (26,359,107                                | )             | (13,568,182                               | )             | (68,868,808 | ) | (30,407,440 | ) |
| Benefit  for income taxes                                    |   | (9,479,090                                 | )             | (2,728,968                                | )             | (25,967,791 | ) | (6,404,942 | ) |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Loss  before extraordinary item                              |   | (16,880,017                                | )             | (10,839,214                               | )             | (42,901,017 | ) | (24,002,498 | ) |
| Extraordinary  (loss) gain, net of tax                       |   | -                                          |          | -                                         |          | (1,207,081 | ) | 3,710,204 |   |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Net  loss                                                    |   | $                                          | (16,880,017   | )                                         | $             | (10,839,214 | ) | $ | (44,108,098 | ) | $ | (20,292,294 | ) |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Net  loss attributable to common shareholders                |   | $                                          | (25,019,958   | )                                         | $             | (18,041,457 | ) | $ | (68,028,188 | ) | $ | (41,474,897 | ) |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Per  common share:                                           |   |                                       |          |                                      |          |   |   |   |   |
| Basic and diluted loss before extraordinary  item            |   | $                                          | (1.34         | )                                         | $             | (0.98 | ) | $ | (3.60 | ) | $ | (2.45 | ) |
| Basic and diluted extraordinary (loss) gain                  |   | -                                          |          | -                                         |          | (0.07 | ) | 0.20 |   |
| Basic  and diluted net loss                                  |   | $                                          | (1.34         | )                                         | $             | (0.98 | ) | $ | (3.67 | ) | $ | (2.25 | ) |
|                                                         |   |                                       |          |                                      |          |   |   |   |   |
| Weighted average common shares outstanding                   |   | 18,622,000                                 |          | 18,438,000                                |          | 18,539,000 |   | 18,393,000 |   |

 

 

Seeaccompanying notes.

 

 

GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENT OFSTOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

 
|                                                                            |   | **Class A  Voting Common  Stock** |   | **Common  Stock********(Nonvoting)** |   | **Additional  Paid-in  Capital** |   | **Retained Earnings********(Accumulated  Deficit)** |      | **Unearned  Compensation** |   | **Notes Receivable  from Officer** |   | **Treasury  Stock** |       | **Total  Stockholders'  Equity (Deficit)** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------|--------------------------------------|--------|----------------------------------|--------|-----------------------------------------------------|-----------|----------------------------|--------|------------------------------------|--------|---------------------|------------|--------------------------------------------|--------|
|                                                                            |   |                              |   |                                 |   |                             |   |                                                |      |                       |   |                               |   |                |       |                                       |   |
| Balance at December 31, 2000                                                    |   | $                                 | 1,785  |                                 | $      | 180,308                          |   | $                                                   | 2,295,136 |                       | $      | 7,614,114                          |   | $                   | (1,091,653 | )                                          | $      | (886,875 | ) | $ | (297,000 | ) | $ | 7,815,815 |   |
| Dividends on Cumulative Exchangable  Preferred Stock                            |   |                              |   |                                 |   | (4,590,548                       | )      | (18,954,431                                         | )         |                       |   |                               |   |                |       | (23,544,979                                | )      |
| Accretion of offering costs related to  Cumulative Exchangeable Preferred Stock |   |                              |   |                                 |   | (375,111                         | )      |                                                |      |                       |   |                               |   |                |       | (375,111                                   | )      |
| Grant of stock award under stock plans                                          |   |                              |   |                                 |   | 495,687                          |   |                                                |      | (495,687                   | )      |                               |   |                |       | -                                          |   |
| Issuance of Common Stock (Nonvoting)                                            |   |                              |   | 4,167                                |   | (4,167                           | )      |                                                |      |                       |   |                               |   |                |       | -                                          |   |
| Stock expense related to stock plans                                            |   |                              |   |                                 |   | 114,243                          |   |                                                |      | 848,836                    |   |                               |   |                |       | 963,079                                    |   |
| Issuance of warrants related to new  Senior Credit Facility                     |   |                              |   |                                 |   | 2,064,759                        |   |                                                |      |                       |   |                               |   |                |       | 2,064,759                                  |   |
| Discount on loans to officers                                                   |   |                              |   |                                 |   |                             |   |                                                |      | (855,058                   | )      |                               |   |                |       | (855,058                                   | )      |
| Repayment of Note Receivable from  Officer                                      |   |                              |   |                                 |   |                             |   |                                                |      |                       |   | 886,875                            |   |                |       | 886,875                                    |   |
| Net loss                                                                        |   |                              |   |                                 |   |                             |   | (44,108,098                                         | )         |                       |   |                               |   |                |       | (44,108,098                                | )      |
| Balance at September 30, 2001                                                   |   | $                                 | 1,785  |                                 | $      | 184,475                          |   | $                                                   | -         |                       | $      | (55,448,415                        | )      | $                   | (1,593,562 | )                                          | $      | - |   | $ | (297,000 | ) | $ | (57,152,717 | ) |

 

 

SeeAccompanying Notes

 

 

 

GRANITEBROADCASTING CORPORATION

CONSOLIDATEDSTATEMENT OF CASH FLOWS

 
|                                                                                       |   | ** Nine Months ended September 30,** |          |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------------|---------------|
|                                                                                       |   | **2001**                                  | ** **    | **2000** |   |
|                                                                                       |   | **(Unaudited)**                           |          |
| Cash flows from  operating activities:                                                     |   |                                      |          |   |   |
| Net  loss                                                                                  |   | $                                         | (44,108,098   | ) | $ | (20,292,294 | ) |
| Adjustments  to reconcile net loss to net cash (used in) provided by operating activities: |   |                                      |     |   |     |
| Amortization  of intangible assets                                                         |   | 19,242,400                                |          | 20,318,521 |   |
| Depreciation                                                                               |   | 4,706,482                                 |          | 4,293,606 |   |
| Non-cash  compensation expense                                                             |   | 1,130,994                                 |          | 646,650 |   |
| Non-cash  interest expense                                                                 |   | 5,281,435                                 |          | 2,099,313 |   |
| Deferred  tax (benefit) expense                                                            |   | (26,916,980                               | )             | 134,969 |   |
| Gain  from insurance proceeds                                                              |   | -                                         |          | (1,247,105 | ) |
| Extraordinary  loss (gain)                                                                 |   | 2,011,801                                 |          | (6,183,674 | ) |
| Change  in assets and liabilities:                                                         |   |                                      |          |   |   |
| Decrease  in accounts receivable, net                                                      |   | 5,606,666                                 |          | 6,265,579 |   |
| Increase  in accounts payable and accrued liabilities                                      |   | 6,022,338                                 |          | 3,844,081 |   |
| Increase  in film contract rights and other non-current assets                             |   | (1,756,473                                | )             | (1,359,822 | ) |
| Increase  in film contract rights and other liabilities                                    |   | 4,091,122                                 |          | 3,556,989 |   |
| Increase  (decrease) in other non-current liabilities                                      |   | 1,099,780                                 |          | (1,731,938 | ) |
| Decrease  in income tax receivable                                                         |   | 19,431,046                                |          | - |   |
| Increase  in other assets                                                                  |   | (1,237,806                                | )             | (4,442,078 | ) |
|                                                                                       |   |                                      |          |   |   |
| Net  cash (used in) provided by operating activities                                       |   | (5,395,293                                | )             | 5,902,797 |   |
|                                                                                       |   |                                      |          |   |   |
| Cash  flows from investing activities:                                                     |   |                                      |          |   |   |
| NBC network affiliation prepayment                                                         |   | (27,778,694                               | )             | - |   |
| WB  Network affiliation payment                                                            |   | (3,892,571                                | )             | (4,143,582 | ) |
| Insurance  proceeds received                                                               |   | -                                         |          | 1,627,572 |   |
| Capital  expenditures                                                                      |   | (1,976,741                                | )             | (7,353,240 | ) |
| Other  investing activities                                                                |   | -                                         |          | (258,917 | ) |
| Net  cash used in investing activities                                                     |   | (33,648,006                               | )             | (10,128,167 | ) |
|                                                                                       |   |                                      |          |   |   |
| Cash  flows from financing activities:                                                     |   |                                      |          |   |   |
| Proceeds  from long-term debt                                                              |   | 205,000,000                               |          | 95,000,000 |   |
| Repayment  of bank debt                                                                    |   | (113,672,428                              | )             | (10,327,572 | ) |
| Retirement  of senior subordinated notes                                                   |   | -                                         |          | (81,019,763 | ) |
| Payment  of deferred financing fees                                                        |   | (9,884,055                                | )             | (367,416 | ) |
| Other  financing activities, net                                                           |   | -                                         |          | (3,081 | ) |
| Net  cash provided by financing activities                                                 |   | 81,443,517                                |          | 3,282,168 |   |
|                                                                                       |   |                                      |          |   |   |
| Net  increase (decrease) in cash and cash equivalents                                      |   | 42,400,218                                |          | (943,202 | ) |
| Cash  and cash equivalents, beginning of period                                            |   | 9,209,249                                 |          | 5,453,542 |   |
|                                                                                       |   |                                      |          |   |   |
| Cash  and cash equivalents, end of period                                                  |   | $                                         | 51,609,467    |   | $ | 4,510,340 |   |
|                                                                                       |   |                                      |          |   |   |
| Supplemental  information:                                                                 |   |                                      |          |   |   |
| Cash  paid for interest                                                                    |   | $                                         | 25,492,000    |   | $ | 18,111,000 |   |
| Income  taxes paid                                                                         |   | 197,000                                   |          | 190,000 |   |
| Non-cash  capital expenditures                                                             |   | 406,000                                   |          | 147,000 |   |
| Non-cash  dividend                                                                         |   | 23,545,000                                |          | 20,808,000 |   |
| Fair  value of warrants                                                                    |   | 2,065,000                                 |          | 12,150,000 |   |

 

 

Seeaccompanying notes

 

 

GRANITEBROADCASTING CORPORATION

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Note1 -  Basis of presentation 

 

Theaccompanying unaudited consolidated financial statements include the accountsof Granite Broadcasting Corporation and its subsidiaries (the"Company"), and have been prepared in accordance with theinstructions to Form 10-Q and do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. Operating results for the three-month and nine-month periods endedSeptember 30, 2001 are not necessarily indicative of the results that may beexpected for the year ended December 31, 2001. For further information, refer to the Company's consolidated financialstatements and notes thereto for the year ended December 31, 2000 which wereincluded in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2000.  All significant inter-companyaccounts and transactions have been eliminated.  Data at and for the year ended December 31, 2000 are derived fromthe Company's audited consolidated financial statements.  In the opinion of management, alladjustments of a normal recurring nature, which are necessary for a fairpresentation of the results for the interim periods have been made.

 

Note2 – Asset Sale

 

OnOctober 1, 2001, the Company announced that it would be evaluating proposals toacquire WDWB-TV, the WB affiliate serving Detroit, Michigan.  If the sale is consummated, the Companyintends to use the proceeds to reduce outstanding senior debt.

 

Note3 -  Long-term debt

 

OnMarch 6, 2001, the Company entered into an amended and restated $205,000,000Senior Credit Agreement (the “Credit Agreement”).  The Credit Agreement consists of a $110,000,000 Tranche A termloan and a $95,000,000 Tranche B term loan. The proceeds from the Credit Agreement were used (i) to repay$114,410,000 of borrowings, of which $738,000 represented interest, under theCompany’s existing senior revolving credit facility, (ii) to prepay the firstinstallment under the KNTV NBC affiliation agreement (See Note 4 below), (iii)to pay certain fees and expenses associated with the Credit Agreement and (iv)for general working capital purposes. The Tranche A and Tranche B term loans bear interest annually at thegreater of LIBOR plus 5.50% or 12% payable monthly.  In addition, the Tranche B term loan accrues simple deferredinterest at an annual rate of 6% which is payable when the Credit Agreementmatures on December 31, 2003. The Credit Agreement requires the Company tomaintain compliance with certain financial tests, including but not limited to,minimum net revenue, broadcast cash flow, EBITDA and, beginning December 31,2001, a maximum ratio of senior debt to EBITDA.  Other provisions place limitations on payments for capitalexpenditures and prohibit the incurrence of additional debt, the purchase ofthe Company’s common stock, the repurchase of subordinated debt and thedeclaration and payment of cash dividends. On October 23, 2001, the Companyamended the Credit Agreement to, among other matters, modify certain financialratios to reflect the current advertising climate. The Company was incompliance with its amended debt covenants as of September 30, 2001, andanticipates being in compliance with such covenants at December 31, 2001 andbeyond.

 

TheCompany also granted to the Tranche B lenders a warrant to purchase 753,491shares of Common Stock (Nonvoting), par value $.01 per share, at an exerciseprice of $1.75 per share.  The warrantis fully vested and remains exercisable until March 6, 2006.  The fair value of the warrants, $2,065,000,has been recorded as a discount to the amount outstanding under the CreditAgreement and will be amortized as non-cash interest expense over the life ofthe Credit Agreement.

 

Note 4 - NBC Affiliation

 

OnMay 31, 2000, the Company entered into a series of definitive agreements withNBC for KNTV to become the NBC affiliate for the San Francisco-Oakland-SanJose, California television market for a ten-year period commencing January 1,2002 (the “San Francisco Affiliation”). In consideration for the San Francisco Affiliation, the Company was topay $362,000,000 in nine annual installments, with the initial payment in theamount of $61,000,000 due on January 1, 2002. On March 6, 2001, the San Francisco Affiliation was amended to reducethe January 1, 2002 installment to $30,500,000 and defer the remaining$30,500,000 of the original initial payment until January 1, 2005.  The Company prepaid the January 1, 2002installment on March 6, 2001 by paying $27,779,000, which represents thepresent value of that installment discounted at 12%. The next payment due toNBC is on January 1, 2003 in the amount of $37,160,000.  The Company will pay, excluding theprepayment, $342,480,000 in eight annual installments. NBC has the right toterminate the San Francisco Affiliation if it acquires an attributable interest(determined under Federal Communications Commission rules and regulations) inanother station in the San Francisco-Oakland-San Jose market, other thanKKPX-TV, upon a payment to the Company of at least $14,500,000.

 

Note 5 - Related PartyTransactions

 

Between 1995 and 1998, the Company loanedan officer a total of $2,911,000 in four separate transactions.  On January 1, 2001, the Company loaned thisofficer an additional $375,000. On February 15, 2001, the Companyagreed to consolidate the five loans into one promissory note in the amount of$3,286,000.  The new promissory notematures on January 25, 2006 or, if earlier, 30 days after the officer’stermination of employment. The new promissory note does not bear interest, butinterest at an annual rate of 6.75% will be imputed as additional compensationto the officer.  Accordingly, the newpromissory note has been recorded at its present value amount, resulting in adiscount of $915,000.  The discount hasbeen recorded as unearned compensation and will be amortized as non-cashcompensation over the life of the loan. The new promissory note allows for the loan to be forgiven in one-thirdincrements if the Company’s Common Stock (Nonvoting) trades for ten consecutivetrading days at $15.00, $20.00, and $25.00, respectively, or if the per shareconsideration received by the Company’s common stockholders in a Change ofControl (as defined in the Indentures governing the Company’s seniorsubordinated notes) equals at least $15.00, $20.00 or $25.00, respectively.  In addition, on February 15, 2001 theCompany forgave $232,000 of interest accrued during the year–endedDecember 31, 2000.  TheCompany took a charge against earnings for this amount in the first quarter of2001.

 

In 1995, the Company loaned anotherofficer a total of $221,000. On February 15, 2001, the Company agreedto cancel this note and issue a new promissory note in the same amount. The newpromissory note matures on January 25, 2006 or, if earlier, 30 days after theofficer’s termination of employment. The new promissory note does not bearinterest, but interest at an annual rate of 6.75% will be imputed as additionalcompensation to the officer. Accordingly, the new promissory note has beenrecorded at its present value amount, resulting in a discount of $62,000.  The discount has been recorded as unearnedcompensation and will be amortized as non-cash compensation over the life ofthe loan.  The new promissory noteallows for the loan to be forgiven in one-third increments if the Company’sCommon Stock (Nonvoting) trades for ten consecutive trading days at $15.00,$20.00, and $25.00, respectively, or if the per share consideration received bythe Company’s common stockholders in a Change of Control (as defined in theIndentures governing the Company’s senior subordinated notes) equals at least$15.00, $20.00 or $25.00, respectively. In addition, on February 15, 2001 the Company forgave $20,000 ofinterest accrued during the year–ended December 31, 2000. TheCompany took a charge against earnings for this amount in the first quarter of2001.

 

Note 6 - Recent Accounting Pronouncements 

InJune 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginningafter December 15, 2001.  Under the newrules, goodwill and intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests in accordancewith the Statements.  Other intangibleassets will continue to be amortized over their useful lives.  The Company will apply the new rules onaccounting for goodwill and other intangible assets beginning in the firstquarter of 2002.  Application of thenon-amortization provisions of the Statement is expected to result in anincrease in after-tax income of approximately $8,000,000 or $.43 pershare.  During 2002, the Company willperform the first of the required impairment tests of goodwill and indefinitelived intangible assets as of January 1, 2002 and has not yet determined whatthe effect of these tests will be on the earnings and financial position of theCompany.

 

InOctober 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 144, Impairment of Long Lived Assets Heldfor Sale, effective for fiscal years beginning after December 15, 2001.  Under the new rules an asset to be disposedof is stated at the lower of fair value or the carrying amounts withdepreciation no longer being recognized. The Company will adopt the new rules on the impairment of long-livedassets to be disposed of after January 1, 2002 but has not determined whateffect, if any, this new accounting standard will have on earnings and thefinancial position of the Company.  

 

MANAGEMENT'SDISCUSSION AND ANALYSIS OF

FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

Certainsections of this Form 10-Q contain various forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, which representthe Company’s expectations or beliefs concerning future events.  The forward-looking statements include,without limitation, the Company’s ability to meet its future liquidity needs.  The Company cautions that theseforward-looking statements are further qualified by important factors thatcould cause actual results to differ materially from those in the forwardlooking statements.  Such factorsinclude, without limitation, general economic conditions, competition in themarkets in which the Company’s stations are located, technological change andinnovation in the broadcasting industry and proposed legislation.  Consequently, these cautionary statementsand the cautionary language set forth in the Company’s most recent Form 10-Kreport and other documents filed with the Securities and Exchange Commissionqualify all forward-looking statements made herein.

 

Introduction

 

TheCompany is a group broadcaster that operates eight network-affiliatedtelevision stations and one independent station.  The Company's revenues are derived principally from local andnational advertising 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 politicaladvertising.  Operating results for thethree and nine month periods ended September 30, 2001 are not necessarilyindicative of the results that may be expected for the year ended December 31,2001.

 

Comparisonsof the Company’s consolidated financial statements between the three and ninemonth periods ended September 30, 2001 and the same periods last year have beenaffected by the termination of the ABC affiliation agreement at KNTV on July 1,2000, significant increases in news expense at KNTV as it prepares to becomethe NBC affiliate for the San Francisco-Oakland-San Jose, California televisionmarket on January 1, 2002 and investments in syndicated programs at theCompany’s WB affiliates.  The Companyanticipates that comparisons of the Company’s consolidated financial statementsbetween the years ended December 31, 2001 and 2000 will be impacted byincreases in news and promotion expenses at KNTV and continued investment inprogramming at the WB affiliates.

 

Thefollowing table sets forth certain operating data for the three and nine monthsended September 30, 2001 and 2000:

 
|                               |   | **Three  Months Ended September 30,** |        | **Nine  Months Ended September 30,** |   |
|------------------------------------|--------|---------------------------------------|-------------|--------------------------------------|--------|
|                               |   | **2001**                              |        | **2000**                             |   | **2001** |   | **2000** |   |
|                               |   | **(Unaudited)**                       |        | **(Unaudited)**                      |   |
|                               |   |                                  |        |                                 |   |   |   |   |   |
| Operating loss                     |   | $                                     | (12,063,000 | )                                    | $      | (5,248,000 | ) | $ | (29,726,000 | ) | $ | (6,580,000 | ) |
| Add:                               |   |                                  |        |                                 |   |   |   |   |   |
| Depreciation  and amortization     |   | 8,107,000                             |        | 8,032,000                            |   | 23,949,000 |   | 24,612,000 |   |
| Write-off  of film contract rights |   | -                                     |        | 1,716,000                            |   | - |   | 1,716,000 |   |
| Corporate  expense                 |   | 2,103,000                             |        | 2,210,000                            |   | 7,140,000 |   | 7,693,000 |   |
| Non-cash  compensation             |   | 332,000                               |        | 216,000                              |   | 1,131,000 |   | 647,000 |   |
| Program  amortization              |   | 5,552,000                             |        | 5,320,000                            |   | 19,186,000 |   | 16,303,000 |   |
| Program  payments                  |   | (6,014,000                            | )           | (5,504,000                           | )      | (18,324,000 | ) | (15,128,000 | ) |
| Broadcast  cash flow               |   | $                                     | (1,983,000  | )                                    | $      | 6,742,000 |   | $ | 3,356,000 |   | $ | 29,263,000 |   |

 

"Broadcastcash flow" means operating loss plus depreciation, amortization, write-offof film contract rights, corporate expense, non-cash compensation and programamortization, 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, 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.

 

 

# *Threemonths ended September 30, 2001 and 2000*

 

Net revenue totaled $25,502,000 for thethree months ended September 30, 2001; a decrease of $6,736,000 or 21 percentas compared to $32,238,000 for the three months ended September 30, 2000.  The decrease was primarily due to a weakadvertising climate, the pre-emption of $1,100,000 of advertising revenueresulting from the September 11th terrorist attacks, a decrease inpolitical advertising in a non-election year, and the absence of Olympicrelated advertising.

 

Station operating expenses totaled$27,024,000 for the three months ended September 30, 2001; an increase of$1,712,000 or 7 percent as compared to $25,312,000 for the three months endedSeptember 30, 2000. The increase was primarily due to an increase in newsexpense at KNTV and increases in programming expense at the Company’s WBaffiliates.

 

Amortization expense decreased $132,000or 2 percent primarily due to a reduction in the book value of the WB networkaffiliation agreements. Corporate expense decreased $107,000 or 5 percentprimarily due to decreased professional fees. Non-cash compensation expense increased $116,000 primarily due to thegrant of stock awards to certain executives.

 

# *Interest expense increased$5,350,000 primarily due to higher levels of outstanding debt and a higherinterest rate on the Company's new Credit Agreement (as defined below).  Included in interest expense for the threemonths ended September 30, 2001 is approximately $1,425,000 of deferredinterest on the Credit Agreement payable on December 31, 2003.  Interest income increased $353,000 primarilydue to increased cash available for investment offset in part by theforgiveness of interest on loans to certain executives.  Non-cash interest expense increased$1,611,000 primarily due to increased deferred financing fees related to theCredit Agreement.*

# * *

# *Ninemonths ended September 30, 2001 and 2000*

 

Net revenue totaled $82,857,000 for thenine months ended September 30, 2001; a decrease of $20,297,000 or 20 percentas compared to $103,153,000 for the nine months ended September 30, 2000.  The decrease was primarily due to a weakadvertising climate, a decrease in political advertising in a non-election yearand lower revenue at KNTV as it operates on an interim basis as an independenttelevision station.

 

Station operating expenses totaled$80,363,000 for the nine months ended September 30, 2001; an increase of$5,298,000 or 7 percent as compared to $75,065,000 for the nine months endedSeptember 30, 2000. The increase was primarily due to an increase in newsexpense at KNTV, increases in programming expense at the Company’s WBaffiliates and the accelerated amortization of certain syndicated programs.

 

Amortization expense decreased $1,076,000or 5 percent primarily due to the elimination of amortization of the ABCaffiliation at KNTV and a reduction in the book value of the WB networkaffiliation agreements. Corporate expense decreased $553,000 or 7 percentprimarily due to decreased professional fees. Non-cash compensation expense increased $484,000 primarily due to theearlier recognition of certain stock based compensation awards, and the grantof stock awards to certain executives.

 

Interestexpense increased $12,497,000 or 56 percent primarily due to higher levels ofoutstanding debt and a higher interest rate on the Company's new CreditAgreement.  Included in interest expensefor the nine months ended September 30, 2001 is approximately $3,246,000 ofdeferred interest on the Credit Agreement payable on December 31, 2003.  Interest income increased $687,000 primarilydue to increased cash available for investment offset in part by theforgiveness of interest on loans to certain executives.  Non-cash interest expense increased$3,182,000 primarily due to increased deferred financing fees related to theCredit Agreement.

 

*Liquidityand Capital Resources*

 

On March 6, 2001, the Company enteredinto an amended and restated $205,000,000 Senior Credit Agreement (the “CreditAgreement”).  The Credit Agreementconsists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche B termloan.  The proceeds from the CreditAgreement were used (i) to repay $114,410,000 of borrowings, of which $738,000represented interest, under the Company’s existing senior revolving creditfacility, (ii) to prepay the first installment under the KNTV NBC affiliationagreement, (iii) to pay certain fees and expenses associated with the CreditAgreement and (iv) for general working capital purposes.  The Tranche A and Tranche B term loans bearinterest annually at the greater of LIBOR plus 5.50% or 12%, which is payablemonthly.  In addition, the Tranche Bterm loan accrues simple deferred interest at an annual rate of 6% which ispayable when the Credit Agreement matures on December 31, 2003.  The Credit Agreement requires the Company tomaintain compliance with certain financial tests, including but not limited to,minimum net revenue, broadcast cash flow, EBITDA and, beginning December 31,2001, a maximum ratio of senior debt to EBITDA. Other provisions placelimitations on payments for capital expenditures and prohibit the incurrence ofadditional debt, the purchase of the Company’s common stock, the repurchase ofsubordinated debt and the declaration and payment of cash dividends. On October23, 2001, the Company amended the Credit Agreement to, among other matters,modify certain financial ratios to reflect the current advertising climate. TheCompany was in compliance with its amended debt covenants as of September 30,2001, and anticipates being in compliance with such covenants at December 31,2001 and beyond.

 

TheCompany also granted to the Tranche B lenders a warrant to purchase 753,491shares of Common Stock (Nonvoting), par value $.01 per share, at an exerciseprice of $1.75 per share.  The warrantis fully vested and remains exercisable until March 6, 2006.  The fair value of the warrants of $2,065,000has been recorded as a discount to the amount outstanding under the CreditAgreement and will be amortized as non-cash interest expense over the life ofthe Credit Agreement. As of November 9, 2001, the Company had approximately $46,975,000 of cash on hand, of which$10,280,000 is reserved for interest payments on the Tranche B term loan.

OnMay 31, 2000, the Company entered into a series of definitive agreements withNBC for KNTV to become the NBC affiliate for the San Francisco-Oakland-SanJose, California television market for a ten-year period commencing January 1,2002 (the “San Francisco Affiliation”). In consideration for the San Francisco Affiliation, the Company was topay $362,000,000 in nine annual installments, with the initial payment in theamount of $61,000,000 due on January 1, 2002. On March 6, 2001, the San Francisco Affiliation was amended to reducethe January 1, 2002 installment to $30,500,000 and defer the remaining$30,500,000 of the original initial payment until January 1, 2005. After givingeffect to these changes, the present value of the new payment schedule issubstantially unchanged from the original terms.  The Company prepaid the January 1, 2002 installment on March 6,2001 by paying $27,779,000, which represents the present value of thatinstallment discounted at 12%. The next payment due to NBC is on January 1,2003 in the amount of $37,160,000.  TheCompany will pay, excluding the prepayment, $342,480,000 in eight annualinstallments.  NBC has the right toterminate the San Francisco Affiliation if it acquires an attributable interest(determined under Federal Communications Commission rules and regulations) inanother station in the San Francisco-Oakland-San Jose market, other thanKKPX-TV, upon a payment to the Company of at least $14,500,000.

 

Netcash used in operating activities was $5,395,000 during the nine months endedSeptember 30, 2001, compared to cash flows provided by operating activities of$5,903,000 during the nine months ended September 30, 2000.  The change from 2000 to 2001 was primarilythe result of increased interest payments and a decrease in operating cashflow, offset in part by an income tax refund received during the second quarterof 2001.

 

Netcash used in investing activities was $33,648,000 during the nine months endedSeptember 30, 2001, compared to $10,128,000 during the nine months endedSeptember 30, 2000. The change from 2000 to 2001 was primarily due to theprepayment of the first installment under the San Francisco Affiliation, offsetby lower capital expenditures.

 

Netcash provided by financing activities was $81,444,000 during the nine monthsended September 30, 2001 compared to $3,282,000 during the nine months endedSeptember 30, 2000. The change from 2000 to 2001 was primarily due to a netincrease in long-term debt, offset in part by higher deferred financing fees.

 

TheCompany expects to spend approximately $5,000,000 in 2001 and $15,000,000 in2002 in capital expenditures.  TheCompany believes that internally generated funds from operations and cash onhand will be sufficient to satisfy the Company's cash requirements for its existingoperations for the next twelve months.

 

# *Quantitativeand Qualitative Disclosures about Market Risk*

 

The Company's earningsmay be affected by changes in short-term interest rates as a result of its newsenior Credit Agreement.  Under theCredit Agreement, the Company pays interest at the greater of LIBOR plus 5.50%or 12%, currently 12%.  As of November9, 2001, the six-month LIBOR rate was 1.9700%.  The Company has not entered into anyagreements to hedge such risk.  A 2%increase in the LIBOR rate would have no impact on interest expense on anannual basis.  This analysis does notconsider the effects of the reduced level of overall economic activity thatcould exist in such environment.

 

 

PARTII.  OTHER INFORMATION

 

 

 
| ITEM  6. | Exhibits  and Reports on Form 8-K |
|----------|-----------------------------------|
|     |                              |
|     | a.  Exhibits                      |
|     |                              |
|     | None                              |
|     |                              |
|     |                              |
|     | b.  Reports on Form 8-K           |
|     |                              |
|     | None                              |

 

 

 

SIGNATURES

 

 

Pursuantto the requirements of Section 13 or 15 (d) of the Securities Exchange Act of1934, the Registrant has caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
|   |              | GRANITE BROADCASTING  CORPORATION |
|--------|-------------------|-----------------------------------|
|   |              |                              | Registrant |
|   |              |                              |   |
|   |              |                              |   |
| Date   | November 14, 2001 | /s/                               | W.  DON CORNWELL |
|   |              |                              | (W.  Don Cornwell)  Chief Executive Officer |
|   |              |                              |   |
|   |              |                              |   |
| Date   | November 14, 2001 | /s/                               | LAWRENCE  I. WILLS |
|   |              |                              | (Lawrence I.  Wills)  Senior Vice President – Chief Administrative Officer  (Principal Accounting Officer) |
|        |                   |                                   |  |  |