**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|------------|------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March31, 2002**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

** **

**For the transition period from                                          to                                            **

 

**Commission File Number  0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(exact name ofregistrant 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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý    No o

 

(APPLICABLE ONLYTO CORPORATE ISSUERS:)

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

Class A VotingCommon Stock, par value $.01 per share - 178,500 shares outstanding at May 10,2002; Common Stock (Nonvoting), par value $.01 per share - 18,573,110 sharesoutstanding at May 10, 2002.

 

 

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PART I.  FINANCIAL INFORMATION

GRANITE BROADCASTINGCORPORATION

CONSOLIDATED BALANCESHEET

 
|                                                                                                                                                                                                                                                                                                                                                                    |   | **March 31,  2002** |        | **December  31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                    |   | **(Unaudited)**     |        |                    |   |
| ASSETS                                                                                                                                                                                                                                                                                                                                                                  |   |                |        |                    |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                         |   |                |        |                    |   |
| Cash and cash  equivalents (including $6,378,931 and $9,286,326 of restricted cash at March  31, 2002 and December 31, 2001 respectively)                                                                                                                                                                                                                               |   | $                   | 23,874,402  |                    | $      | 29,426,856 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                                                                                                                               |   | 18,280,872          |        | 22,411,572              |   |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                   |   | 12,589,592          |        | 16,077,027              |   |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                   |   | 10,263,501          |        | 6,131,223               |   |
| Net assets held  for sale                                                                                                                                                                                                                                                                                                                                               |   | 63,479,256          |        | 33,201,988              |   |
| Total  current assets                                                                                                                                                                                                                                                                                                                                                   |   | 128,487,623         |        | 107,248,666             |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Non-current  assets:                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                            |   | 33,306,821          |        | 33,611,468              |   |
| Film contract  rights and other non-current assets                                                                                                                                                                                                                                                                                                                      |   | 21,618,990          |        | 51,874,512              |   |
| Deferred  financing fees, net                                                                                                                                                                                                                                                                                                                                           |   | 13,241,604          |        | 14,887,940              |   |
| Intangible  assets, net                                                                                                                                                                                                                                                                                                                                                 |   | 312,244,970         |        | 523,474,666             |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                            |   | $                   | 508,900,008 |                    | $      | 731,097,252 |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                                                                                                                              |   |                |        |                    |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                   |   |                |        |                    |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                        |   | $                   | 2,404,313   |                    | $      | 1,704,626 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                        |   | 8,794,714           |        | 4,255,195               |   |
| Other  accrued liabilities                                                                                                                                                                                                                                                                                                                                              |   | 4,328,903           |        | 3,013,340               |   |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                   |   | 24,324,466          |        | 25,133,014              |   |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                              |   | 7,324,400           |        | 5,738,440               |   |
| Total  current liabilities                                                                                                                                                                                                                                                                                                                                              |   | 47,176,796          |        | 39,844,615              |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Non-current  liabilities:                                                                                                                                                                                                                                                                                                                                               |   |                |        |                    |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                          |   | 401,373,601         |        | 401,206,439             |   |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                   |   | 19,078,487          |        | 22,859,716              |   |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                 |   | 5,590,523           |        | 68,868,284              |   |
| Other  non-current liabilities                                                                                                                                                                                                                                                                                                                                          |   | 24,932,102          |        | 24,353,351              |   |
|                                                                                                                                                                                                                                                                                                                                                                    |   |                |        |                    |   |
| Cumulative  exchangeable preferred stock, net of offering costs                                                                                                                                                                                                                                                                                                         |   | 280,752,645         |        | 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 18,573,110 shares of Common  Stock (Nonvoting) (18,447,927 shares at December 31, 2001) issued and outstanding |   | 187,516             |        | 186,264                 |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                    |   | (268,734,646        | )           | (96,703,997             | )      |
| Less:    Unearned compensation                                                                                                                                                                                                                                                                                                                           |   | (1,160,016          | )           | (1,329,179              | )      |
| Treasury stock                                                                                                                                                                                                                                                                                                                                                          |   | (297,000            | )           | (297,000                | )      |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                       |   | (270,004,146        | )           | (98,143,912             | )      |
| Total liabilities  and stockholders’ deficit                                                                                                                                                                                                                                                                                                                       |   | $                   | 508,900,008 |                    | $      | 731,097,252 |   |

 

See accompanying notes.

 

1

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GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFOPERATIONS

 
|                                                                                                                  |   | **Three  Months ended March 31,** |         |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------------|
|                                                                                                                  |   | **2002**                          |         | **2001** |   |
|                                                                                                                  |   | **(Unaudited)**                   |         |
|                                                                                                                  |   |                              |         |   |   |
| Net revenues                                                                                                          |   | $                                 | 43,542,357   |   | $ | 26,848,304 |   |
| Station  operating expenses                                                                                           |   | 30,084,800                        |         | 27,957,291 |   |
| Depreciation  expense                                                                                                 |   | 1,734,028                         |         | 1,503,394 |   |
| Amortization  expense                                                                                                 |   | 9,478,426                         |         | 6,288,495 |   |
| Corporate  expense (excluding non-cash compensation expense)                                                          |   | 2,297,145                         |         | 2,538,848 |   |
| Non-cash  compensation expense                                                                                        |   | 329,164                           |         | 467,376 |   |
|                                                                                                                  |   |                              |         |   |   |
| Operating loss                                                                                                        |   | (381,206                          | )            | (11,907,100 | ) |
|                                                                                                                  |   |                              |         |   |   |
| Other expenses:                                                                                                       |   |                              |         |   |   |
| Interest expense                                                                                                      |   | 12,587,182                        |         | 9,161,982 |   |
| Interest income                                                                                                       |   | (118,508                          | )            | (10,479 | ) |
| Non-cash  interest expense                                                                                            |   | 7,864,682                         |         | 868,589 |   |
| Other                                                                                                                 |   | 148,960                           |         | 247,313 |   |
|                                                                                                                  |   |                              |         |   |   |
| Loss before  benefit for income taxes, extraordinary item, and cumulative effect of a  change in accounting principle |   | (20,863,522                       | )            | (22,174,505 | ) |
| Benefit for  income taxes                                                                                             |   | (7,808,009                        | )            | (8,340,152 | ) |
|                                                                                                                  |   |                              |         |   |   |
| Loss before  extraordinary item, and cumulative effect of a change in accounting principle                            |   | (13,055,513                       | )            | (13,834,353 | ) |
| Extraordinary  loss, net of benefit for income taxes                                                                  |   | —                            |         | 1,207,081 |   |
| Cumulative  effect of a change in accounting principle, net of benefit for income taxes                               |   | 150,478,583                       |         | — |   |
|                                                                                                                  |   |                              |         |   |   |
| Net loss                                                                                                              |   | $                                 | (163,534,096 | ) | $ | (15,041,434 | ) |
|                                                                                                                  |   |                              |         |   |   |
| Net loss  attributable to common shareholders                                                                         |   | $                                 | (172,177,982 | ) | $ | (22,694,836 | ) |
|                                                                                                                  |   |                              |         |   |   |
| Per common  share:                                                                                                    |   |                              |         |   |   |
| Basic  and diluted loss before extraordinary item, and cumulative effect of a change  in accounting principle         |   | $                                 | (1.16        | ) | $ | (1.17 | ) |
| Basic  and diluted extraordinary loss, net of tax                                                                     |   | —                            |         | (0.06 | ) |
| Basic  and diluted cumulative effect of a change in accounting principle, net of  benefit for income taxes            |   | (8.03                             | )            | — |   |
| Basic and  diluted net loss                                                                                           |   | $                                 | (9.19        | ) | $ | (1.23 | ) |
|                                                                                                                  |   |                              |         |   |   |
| Weighted  average common shares outstanding                                                                           |   | 18,727,972                        |         | 18,403,892 |   |

 

See accompanying notes.

 

 

2

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GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY

(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                             |   |                              |   |                           |   | (22,296                          | )      | (8,496,553               | )      |                       |         |                |   | (8,518,849                             | )      |
| Accretion of offering costs related to Cumulative Exchangeable  Preferred Stock |   |                              |   |                           |   | (125,037                         | )      |                     |   |                       |         |                |   | (125,037                               | )      |
| Issuance of Common Stock (Nonvoting)                                            |   |                              |   | 1,252                          |   | (1,252                           | )      |                     |   |                       |         |                |   | —                                 |   |
| Grant  of stock award under stock plans                                         |   |                              |   |                           |   | 0                                |   |                     |   | 0                          |         |                |   | —                                 |   |
| Stock expense related to stock plans                                            |   |                              |   |                           |   | 148,585                          |   |                     |   | 120,300                    |         |                |   | 268,885                                |   |
| Discount on loans to officers                                                   |   |                              |   |                           |   |                             |   |                     |   | 48,863                     |         |                |   | 48,863                                 |   |
| Net loss                                                                        |   |                              |   |                           |   |                             |   | (163,534,096             | )      |                       |         |                |   | (163,534,096                           | )      |
|                                                                            |   |                              |   |                           |   |                             |   |                     |   |                       |         |                |   |                                   |   |   |   |   |   |   |   |
| Balance at March 31, 2002                                                       |   | $                                 | 1,785  |                           | $      | 185,731                          |   | —                   |   | $                          | (268,734,646 | )                   | $      | (1,160,016                             | )      | $ | (297,000 | ) | $ |  (270,004,146 | ) |

 

See accompanying notes.

 

3

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GRANITE BROADCASTINGCORPORATION

CONSOLIDATED STATEMENT OFCASH FLOWS

 
|                                                                         |   | **Three  Months ended March 31,** |         |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------------|
|                                                                         |   | **2002**                          |         | **2001** |   |
|                                                                         |   | **(Unaudited)**                   |         |
| Cash flows from  operating activities:                                       |   |                              |         |   |   |
| Net loss                                                                     |   | $                                 | (163,534,096 | ) | $ | (15,041,434 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                              |         |   |   |
| Amortization  of intangible assets                                           |   | 9,478,426                         |         | 6,288,495 |   |
| Depreciation                                                                 |   | 1,734,028                         |         | 1,503,394 |   |
| Non-cash  compensation expense                                               |   | 329,164                           |         | 467,376 |   |
| Non-cash  interest expense                                                   |   | 7,864,682                         |         | 868,589 |   |
| Deferred tax  benefit                                                        |   | (66,221,455                       | )            | (9,207,372 | ) |
| Extraordinary  loss                                                          |   | —                            |         | 2,011,801 |   |
| Cumulative  effect of a change in accounting principle                       |   | 208,829,529                       |         | — |   |
| Change in assets  and liabilities:                                           |   |                              |         |   |   |
| (Increase)  decrease in accounts receivable, net                             |   | (8,952,816                        | )            | 7,517,729 |   |
| Increase in  accounts payable and accrued liabilities                        |   | 8,260,700                         |         | 5,726,563 |   |
| Decrease  (increase) in film contract rights and other non-current assets    |   | 5,557,430                         |         | (22,436,526 | ) |
| Decrease in film  contract rights and other liabilities                      |   | (6,639,947                        | )            | (4,721,596 | ) |
| NBC  network affiliation prepayment                                          |   | —                            |         | (27,778,694 | ) |
| WB Network  affiliation payment                                              |   | (204,182                          | )            | (630,857 | ) |
| Increase  (decrease) in other non-current liabilities                        |   | 3,127,674                         |         | (881,902 | ) |
| (Increase)  decrease in other assets                                         |   | (3,442,601                        | )            | 27,476,205 |   |
|                                                                         |   |                              |         |   |   |
| Net cash used in  operating activities                                       |   | (3,813,464                        | )            | (28,838,229 | ) |
|                                                                         |   |                              |         |   |   |
| Cash flows from  investing activities:                                       |   |                              |         |   |   |
| Capital  expenditures                                                        |   | (1,487,438                        | )            | (176,336 | ) |
| Net cash used in  investing activities                                       |   | (1,487,438                        | )            | (176,336 | ) |
|                                                                         |   |                              |         |   |   |
| Cash flows from  financing activities:                                       |   |                              |         |   |   |
| Proceeds from  long-term debt                                                |   | —                            |         | 205,000,000 |   |
| Repayment of  bank debt                                                      |   | —                            |         | (113,672,428 | ) |
| Payment of  deferred financing fees                                          |   | (251,552                          | )            | (9,001,052 | ) |
| Net cash (used  in) provided by financing activities                         |   | (251,552                          | )            | 82,326,520 |   |
|                                                                         |   |                              |         |   |   |
| Net  (decrease) increase in cash and cash equivalents                        |   | (5,552,454                        | )            | 53,311,955 |   |
| Cash and cash  equivalents, beginning of period                              |   | 29,426,856                        |         | 9,209,249 |   |
|                                                                         |   |                              |         |   |   |
| Cash and cash  equivalents, end of period                                    |   | $                                 | 23,874,402   |   | $ | 62,521,204 |   |
|                                                                         |   |                              |         |   |   |
| Supplemental  information:                                                   |   |                              |         |   |   |
| Cash paid for  interest                                                      |   | $                                 | 6,611,250    |   | $ | 4,622,939 |   |
| Income taxes  paid                                                           |   | 73,905                            |         | 54,500 |   |
| Non-cash capital  expenditures                                               |   | 302,345                           |         | 94,000 |   |
| Non-cash  dividend                                                           |   | 8,518,849                         |         | 7,528,365 |   |
| Fair value of  warrants                                                      |   | —                            |         | 2,064,759 |   |

 

See accompanying notes

 

 

4

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GRANITEBROADCASTING CORPORATION

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis ofpresentation 

 

The accompanyingunaudited consolidated financial statements include the accounts of GraniteBroadcasting Corporation and its subsidiaries (the “Company”), and have beenprepared in accordance with the instructions to Form 10-Q and do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  Operating results for the three-month periodended March 31, 2002 are not necessarily indicative of the results that may beexpected for the year ended December 31, 2002. For further information, refer to the Company’s consolidated financialstatements and notes thereto for the year ended December 31, 2001 which wereincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.  All significantinter-company accounts and transactions have been eliminated.  Data at and for the year ended December 31,2001 are derived from the Company’s audited consolidated financialstatements.  In the opinion of management,all adjustments of a normal recurring nature, which are necessary for a fairpresentation of the results for the interim periods, have been made.

 

Note 2 – AssetDisposition

 

On December 14,2001, the Company entered into a definitive agreement with the NationalBroadcasting Company, Inc. (“NBC”) to sell KNTV.  The sale transaction was completed on April 30, 2002.  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 (the “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 Credit agreement discussed below upon consummation of the sale.  The San Francisco Affiliation Agreementterminated upon the closing of the sale and the Company is not required to makeany 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, willremain in effect until their expiration on December 31, 2011.  The Company anticipates recording in thesecond quarter a pre-tax book gain of approximately $193,000,000 on the sale ofKNTV.

 

###### Note3 - 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.

 

Upon entering into the Credit Agreement, the Company rolled overexisting outstanding loans under the prior loan facility into an initialTranche A borrowing in the amount of $35,000,000.  Proceeds from Tranche A and Tranche B term loans shall be usedfor working capital and general corporate purposes.  The Tranche A loans bear interest at the greater of LIBOR plus4.50% or 6.50% and the Tranche B loans bear interest at the greater of LIBORplus 9% or 11%.  All interest is payablemonthly in arrears.   The CreditAgreement matures on April 15, 2004, at which time the Company must repay theprincipal amount of all outstanding loans and all other obligations then dueand owing under the Credit Agreement. The Credit Agreement requires the Company, among other matters, to maintaincompliance with certain financial tests, including but not limited to, minimumnet revenue, broadcast cash flow, EBITDA, working capital and cash balances.

 

5

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Note 4 – 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.  The decline in the carrying value ofgoodwill and other indefinite-lived intangible assets relates solely to theCompany's WB affiliates.  Such charge isnon-operational in nature and is reflected as a cumulative effect of anaccounting change in the accompanying consolidated statement ofoperations.  In calculating theimpairment charge, the fair value was estimated using a discounted cash flowmethodology.

 

As of March 31, 2002, the Company’s intangible assets and relatedaccumulated amortization consisted of the following:

 
|                                            |   | **As of  March 31, 2002** |        |
|-------------------------------------------------|--------|---------------------------|-------------|
|                                            |   | **Gross  Carrying Value** |        | **Accumulated  Amortization** |   |
|                                            |   |                      |        |   |   |
| Intangible  assets subject to amortization:     |   |                      |        |   |   |
|                                            |   |                      |        |   |   |
| Network  affiliation agreements                 |   | $                         | 49,150,066  |   | $ | (15,686,069 | ) |
| Covenant not to  compete                        |   | 30,000,000                |        | (22,250,000 | ) |
|                                            |   |                      |        |   |   |
|                                            |   | $                         | 79,150,066  |   | $ | (37,936,069 | ) |
|                                            |   |                      |        |   |   |
| Intangible  assets not subject to amortization: |   |                      |        |   |   |
|                                            |   |                      |        |   |   |
| Goodwill                                        |   | $                         | 111,252,434 |   | $ | (28,201,070 | ) |
| Broadcast  licenses                             |   | 159,647,594               |        | (32,315,765 | ) |
| Network  affiliation agreements                 |   | 79,591,548                |        | (18,943,768 | ) |
|                                            |   |                      |        |   |   |
|                                            |   | $                         | 350,491,576 |   | $ | (79,460,603 | ) |

 

The Companyrecorded amortization expense of $9,478,426 during the first quarter of 2002,compared to $2,624,133 on a pro forma basis during the first quarter of2001.  Based on the current amount ofintangible assets subject to amortization, the estimated amortization expensefor each of the succeeding 5 years are as follows:  2002: $19,038,000; 2003: $6,601,000; 2004: $3,066,000; 2005:$2,684,000 and 2006: $2,684,000.  Asacquisitions and dispositions occur in the future and as purchase priceallocations are finalized, these amounts may vary.

 

6

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The 2001 resultson a historical basis do not reflect the provisions of Statement 142.  Had the Company adopted Statement 142 onJanuary 1, 2001, the historical net loss and basic and diluted net loss percommon share would have changed to the adjusted amounts indicated below:

 
|                                 |   | **Three  Months Ended March 31, 2001** |        |
|--------------------------------------|--------|----------------------------------------|-------------|
|                                 |   | **Net loss**                           |        | **Net loss  per  basic and diluted common  share** |   |
|                                 |   |                                   |        |   |   |
| As reported –  historical basis |   | $                                      | (15,041,434 | ) | $ | (1.23 | ) |
| Add:  Goodwill amortization     |   | 1,474,700                              |        | 0.08 |   |
| Add:  Intangible amortization   |   | 2,355,797                              |        | 0.13 |   |
|                                 |   |                                   |        |   |   |
| Adjusted                             |   | $                                      | (11,210,937 | ) | $ | (1.02 | ) |

 

In June 2001, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards No. 143, Accounting for Asset RetirementObligations (“Statement 143”), effective for fiscal years beginning after June15, 2002. This standard provides the accounting for the cost of legalobligations associated with the retirement of long-lived assets. Statement 143requires that companies recognize the fair value of a liability for assetretirement obligations in the period in which the obligations are incurred andcapitalize that amount as a part of the book value of the long-lived asset.That cost is then depreciated over the remaining life of the underlyinglong-lived asset. The Company is currently evaluating the impact that this newstandard will have on future results of operations and financial position.

 

In August 2001, the Financial Accounting Standards Board issuedStatement No. 144, Accounting for the Impairment or Disposal of Long-LivedAssets (“Statement 144”). Statement 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets and supercedesFinancial Accounting Standards Board Statement No. 121, Accounting for theImpairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of,and the accounting and reporting provisions of Accounting Principles BoardOpinion No. 30, Reporting the Results of Operation for a disposal of a segmentof a business. Statement 144 is required to be adopted by the Company onJanuary 1, 2002 and the Company does not believe the adoption of the standardwill have a significant impact on its financial position, results ofoperations, or cash flows.

 

On April 30, 2002,the Financial Accounting Standards Board issued Statement No. 145, Recission ofFASB Statements No. 4, 44, and 64. Amendment of FASB Statement No. 13, andTechnical Corrections ("Statement 145") Statement 145 updates,clarifies and simplifies existing accounting pronouncements. Statement 145rescinds Statement 4, which required all gains and losses from extinguishmentof debt to be aggregated and, if material, classified as an extraordinary item,net of related income tax effect. Statement 145 is effective for fiscal yearsbeginning after June 15, 2002. The Company will adopt the Statement as of andfor the year ended December 31, 2003.

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MANAGEMENT’SDISCUSSION AND ANALYSIS OF

FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

Certain sectionsof this Form 10-Q contain various forward-looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934, which represent theCompany’s expectations or beliefs concerning future events.  The forward-looking statements include,without limitation, the Company’s ability to meet its future liquidityneeds.  The Company cautions that theseforward-looking statements are further qualified by important factors thatcould cause actual results to differ materially from those in the forward lookingstatements.  Such factors include,without limitation, general economic conditions, competition in the markets inwhich the Company’s stations are located, technological change and innovationin the broadcasting industry and proposed legislation.  Consequently, these cautionary statements andthe cautionary language set forth in the Company’s most recent Form 10-K reportand other documents filed with the Securities and Exchange Commission qualifyall forward-looking statements made herein.

 

Introduction

 

The Company is agroup broadcaster that operates eight network-affiliated televisionstations.  The Company’s revenues arederived principally from local and national advertising and, to a lesserextent, from network compensation for the broadcast of programming and revenuesfrom studio rental and commercial production activities.  The primary operating expenses involved inowning and operating television stations are employee salaries, depreciationand amortization, programming and advertising and promotion expenses.  Numbers referred to in the followingdiscussion have been rounded to the nearest thousand.  The Company’s operating revenue are generally lower in the firstcalendar quarter and generally higher in the fourth calendar quarter than inthe other two quarters, due in part to increases in retail advertising in thefall months in preparation for the holiday season, and in election years due toincreased political advertising. Operating results for the three-month period ended March 31, 2002 arenot necessarily indicative of the results that may be expected for the yearended December 31, 2002.

 

Comparisons of theCompany’s consolidated financial statements between the three months endedMarch 31, 2002 and the same period last year have been affected by the switchat KNTV from an independent station to an NBC affiliate serving the SanFrancisco-Oakland-San Jose, California television market on January 1, 2002,significant increases in news expense at KNTV, investments in syndicatedprograms at the Company’s WB affiliates and the write-down of goodwill andother indefinite-lived intangible assets. The Company anticipates that comparisons of the Company’s consolidatedfinancial statements between the years ended December 31, 2002 and 2001 will beimpacted by the sale of KNTV, and continued investment in programming at the WBaffiliates.

 

The followingtable sets forth certain operating data for the three months ended March 31,2002 and 2001:

 
|                           |   | **Three  Months ended March 31,** |       |
|--------------------------------|--------|-----------------------------------|------------|
|                           |   | **2002**                          |       | **2001** |   |
|                           |   | **(Unaudited)**                   |       |
| Operating loss                 |   | $                                 | (381,000   | ) | $ | (11,907,000 | ) |
| Add:                           |   |                              |       |   |   |
| Depreciation and  amortization |   | 11,212,000                        |       | 7,792,000 |   |
| Corporate  expense             |   | 2,297,000                         |       | 2,539,000 |   |
| Non-cash  compensation         |   | 329,000                           |       | 467,000 |   |
| Program  amortization          |   | 5,402,000                         |       | 8,060,000 |   |
| Program payments               |   | (4,458,000                        | )          | (6,267,000 | ) |
|                           |   |                              |       |   |   |
| Broadcast cash  flow           |   | $                                 | 14,401,000 |   | $ | 684,000 |   |

 

“Broadcastcash flow” means operating loss plus depreciation, amortization, corporateexpense, non-cash compensation and program amortization, less programpayments.  The Company has includedbroadcast cash flow data because such data are commonly used as a measure ofperformance for broadcast companies and are also used by investors to measure acompany’s ability to service debt. Broadcast cash flow is not, and should not be used as, an indicator oralternative to operating income, net income or cash flow as reflected in theconsolidated financial statements, is not a measure of financial performanceunder accounting principles generally accepted in the United States and shouldnot be considered in isolation or as a substitute for measures of performanceprepared in accordance with accounting principles generally accepted in theUnited States.

 

8

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# *Threemonths ended March 31, 2002 and 2001*

 

Net revenue totaled $43,542,000 for thethree months ended March 31, 2002; an increase of $16,694,000 or 62 percent ascompared to $26,848,000 for the three months ended March 31, 2001.  The increase was primarily due to anincrease in revenue at KNTV of $17,400,000 as the station became an NBCaffiliate in the nation’s fifth largest television market on January 1, 2002,and an increase of political revenue of $1,300,000, offset in part by adecrease in local revenue of $1,800,000 at the Company’s WB affiliates.

 

Station operating expenses totaled$30,085,000 for the three months ended March 31, 2002; an increase of$2,128,000 or 8 percent as compared to $27,957,000 for the three months endedMarch 31, 2001. The increase was primarily due to an increase in news expenseat KNTV, an increase in promotional costs related to the NBC switch at KNTV andan increase of commissions related to increased revenue at KNTV.  These increases were offset by decreases inprogramming expense at the Company’s WB affiliates primarily due to programwrite-downs during the fourth quarter of 2001.

 

Amortization expense increased $3,190,000or 51 percent primarily due to the amortization of the NBC affiliationagreement at KNTV, offset in part by the Company’s adoption of Statement 142 asof January 1, 2002 where the Company is no longer required to amortize goodwilland other indefinite-lived intangible assets. Corporate expense decreased$242,000 or 10 percent primarily due to decreased professional fees.  Non-cash compensation expense decreased$138,000 or 30 percent primarily due to a decrease of management stock awardsgranted.

 

# *Interest expense increased$3,425,000 primarily due to a full quarter of interest on higher levels ofoutstanding debt and higher interest rates on the Company’s senior creditfacility.  Included in interest expensefor the three months ended March 31, 2002 was approximately $1,425,000 ofdeferred interest on the senior credit agreement.  Interest income increased $108,000 primarily due to theforgiveness of interest due the Company on loans to certain executives in thefirst quarter of 2001 offset in part by decreased cash balances during thefirst quarter 2002.  Non-cash interestexpense increased $6,996,000 primarily due to the imputing of interest on the obligationto NBC in connection with the affiliation agreement at KNTV.*

 

The benefit forincome taxes increased $57,014,000 primarily due to a $58,350,000 benefit onthe cumulative effect of a change in accounting principles as a result ofadopting Statement 142, offset in part by a reduction in a tax benefit on anextraordinary loss recorded in 2001.

 

## *Liquidity and Capital Resources*

 

On December 14, 2001, theCompany entered into a definitive agreement with the National BroadcastingCompany, Inc. (“NBC”) to sell KNTV.  Thesale transaction was completed on April 30, 2002.  NBC paid the Company $230,000,000, plus a working capital andother adjustments of $14,545,000.  Inaddition, 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 theamended credit agreement discussed below upon consummation of the sale.  The Company anticipates using approximately$36,000,000 for the payment of income taxes and other expenses related to thesale of KNTV. 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.

 

Simultaneously with theclosing of the sale of KNTV, the Company entered into an amended and restatedsenior credit agreement (the "Credit Agreement").  The Credit Agreement consists of (i) acommitted $60,000,000 Tranche A term loan facility, (ii) a committed$80,000,000 Tranche B term loan facility and (iii) an uncommitted $10,000,000Tranche C supplemental term loan facility. The obligations of the Company withrespect to all of the loan facilities are secured by substantially all of theassets of the Company and its subsidiaries.

 

Uponentering into the Credit Agreement, the Company rolled over existingoutstanding loans under the prior loan facility into an initial Tranche Aborrowing in the amount of $35,000,000. Proceeds from Tranche A and Tranche B term loans shall be used for workingcapital and general corporate purposes. The Tranche A loans bear interest at the greater of LIBOR plus 4.50% or6.50% and the Tranche B loans bear interest at the greater of LIBOR plus 9% or11%.  All interest is payable monthly inarrears.   The Credit Agreement matureson April 15, 2004, at which time the Company must repay the principal amount ofall outstanding loans and all other obligations then due and owing under theCredit Agreement.  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.

 

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Net cash used inoperating activities was $3,813,000 during the three months ended March 31,2002, compared to $28,838,000 during the three months ended March 31,2001.  The change from 2001 to 2002 wasprimarily the result of an increase in operating cash flow, and the NBCaffiliation pre-payment made during the first quarter 2001, offset in part byan increase in net operating assets and an increase in interest payments.

 

Net cash used ininvesting activities was $1,487,000 during the three months ended March 31,2002, compared to $176,000 during the three months ended March 31, 2001. Thechange from 2001 to 2002 was due to increased capital expenditures.

 

Net cash used infinancing activities was $252,000 during the three months ended March 31, 2002compared to net cash provided by financing activities of $82,327,000 during thethree months ended March 31, 2001. The change from 2001 to 2002 was primarilydue to a decrease in net borrowings, offset in part by a reduction in deferredfinancing fees paid.

 

As of May 10, 2002, the Companyhad approximately $71,836,000 of cash on hand. The Companyexpects to spend approximately $20,000,000 in 2002 in capitalexpenditures.  The Company believes thatborrowings under its amended Credit Agreement, together with internallygenerated funds from operations and cash on hand will be sufficient to satisfythe Company’s cash requirements for its existing operations for the next twelvemonths.

 

OnMay 10, 2002, the Company announced its intention to commence a “Modified DutchAuction” cash tender offer (the “Offer”) for up to 45,000 shares of its 12.75%Cummulative Exchangeable Preferred Stock (each share having $1,000 liquidationpreference), at a price within $590 to $670 price range per share.  The Company will utilize no more than$30,150,000 available from cash on hand and borrowings under its senior creditfacility to consummate the Offer.  Inaddition, in May 2002, the Company repurchased 37,142 shares of its 12.75%Cumulative Exchangeable Preferred Stock for $22,858,305 (or $615.43 per share)in a privately negotiated third party transaction.

 

# *Quantitativeand Qualitative Disclosures about Market Risk*

 

TheCompany’s earnings may be affected by changes in short-term interest rates as aresult of its new senior Credit Agreement. Under the Credit Agreement, the Company pays interest at the greater ofLIBOR plus 4.50% or 6.50%, currently 6.50%. As of May 2, 2002, the three-month LIBOR rate was 1.92%. The Company has not entered into any agreements to hedge such risk.  Based on current outstanding borrowings, a2% increase in the LIBOR rate would increase interest expense on an annualbasis by approximately $672,000.  Thisanalysis does not consider the effects of the reduced level of overall economicactivity that could exist in such environment.

 

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PART II.  OTHER INFORMATION

 
| ITEM 6. | Exhibits and  Reports on Form 8-K |
|---------|-----------------------------------|
|    |                              |
|    | a.                                | Exhibits |
|    |                              |   |
|    |                              | None |
|    |                              |   |
|    |                              |   |
|    | b.                                | Reports on Form 8-K |
|    |                              |   |
|    |                              | Current Report on Form 8-K filed on January 7, 2002, reporting that  the Company’s solicitation of consents to amend the indenture governing its 9  3/8% Senior Subordinated Notes due December 1, 2005 expired without all of  the conditions set forth in the Consent Solicitation Statement having been  satisfied. |
|    |                              |   |
|    |                              | Current  Report on Form 8-K filed on February 12, 2002, reporting that the Company had  filed an Opposition to Petition to Deny with the Federal Communications  Commission in connection with the application to transfer control of the  station KNTV to National Broadcasting Company, Inc. |

 

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                     | GRANITE BROADCASTING CORPORATION                                                                                                                                                                |                                       |
|--------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|
|                     |                                Registrant |                                       |
|                     |                                                                                                                                                                                            |
| Date  May 15,  2002 | /s/                                                                                                                                                                                             | W. DON CORNWELL                            |   |
|                     |                                                                                                                                                                                            | (W. Don Cornwell)  Chief Executive Officer |   |
| Date  May 15,  2002 | /s/                                                                                                                                                                                             | LAWRENCE I. WILLS                          |   |
|                     |                                                                                                                                                                                            | (Lawrence I. Wills)                        |   |
|                     | Senior Vice President -  Chief Administrative Officer  (Principal Accounting Officer)                                                                                                           |
|                          |                                                                                                                                                                                                 |                                            |  |  |

 

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