**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 September 30, 2003**                                                                                                                                    |
|                                                                                                                                                                                           |   |
| **OR**                                                                                                                                                                                         |
|                                                                                                                                                                                           |   |
| **o****      TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT  OF 1934**                                                  |
|                                                                                                                                                                                           |
| **For the transition period from****              to****            ** |
|                                                                                                                                                                                           |   |
| **Commission File Number  0-19728**                                                                                                                                                       |

** **

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý     No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the act).   Yes o     Noý

 

(APPLICABLE ONLY TO CORPORATE ISSUERS:)

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

Class A Voting Common Stock, par value $.01per share - 178,500 shares outstanding at October 31, 2003; Common Stock(Nonvoting), par value $.01 per share - 18,833,479 shares outstanding atOctober 31, 2003.

 

 

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GRANITE BROADCASTING CORPORATION

Form 10-Q

Table of Contents

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

 

----

 

**PARTI.  FINANCIAL INFORMATION**

** **

*Item1.  Financial Statements*

 

GRANITE BROADCASTING CORPORATION

CONSOLIDATED BALANCE SHEET

 
|                                                                                                                                                                                                                                                                                                                                                                   |   | **September 30,  2003** |        | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|-----------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                   |   | **(Unaudited)**              |        |                        |   |
| **Assets**                                                                                                                                                                                                                                                                                                                                                             |   |                         |        |                        |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                        |   |                         |        |                        |   |
| Cash and cash equivalents (including  $1,777,115 of restricted cash at December 31, 2002)                                                                                                                                                                                                                                                                         |   | $                            | 24,475,408  |                        | $      | 54,319,597 |   |
| Accounts receivable, less allowance for doubtful  accounts ($1,190,544 at September 30, 2003 and $747,520 at  December 31, 2002)                                                                                                                                                                                                                             |   | 19,333,102                   |        | 23,211,637                  |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                   |   | 18,553,399                   |        | 19,713,849                  |   |
| Income tax receivable                                                                                                                                                                                                                                                                                                                                                  |   | 18,654,621                   |        | 5,334,846                   |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                                   |   | 8,948,243                    |        | 4,781,201                   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                   |   | 89,964,773                   |        | 107,361,130                 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                            |   | 46,149,663                   |        | 41,813,349                  |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                   |   | 9,414,951                    |        | 12,918,123                  |   |
| Other non current assets                                                                                                                                                                                                                                                                                                                                               |   | 3,462,664                    |        | 3,461,975                   |   |
| Deferred financing fees, less accumulated  amortization ($10,917,389 at September 30, 2003 and $7,612,443 at  December 31, 2002)                                                                                                                                                                                                                             |   | 2,972,904                    |        | 5,630,704                   |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                          |   | 83,051,302                   |        | 83,051,302                  |   |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                                |   | 127,331,829                  |        | 127,331,829                 |   |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                              |   | 87,164,847                   |        | 90,345,315                  |   |
| Other intangibles, net                                                                                                                                                                                                                                                                                                                                                 |   | —                       |        | 3,250,000                   |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                           |   | $                            | 449,512,933 |                        | $      | 475,163,727 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| **Liabilities and Stockholders’ Deficit**                                                                                                                                                                                                                                                                                                                         |   |                         |        |                        |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                       |   | $                            | 1,445,786   |                        | $      | 2,807,730 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                       |   | 7,910,201                    |        | 3,158,876                   |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                              |   | 6,404,519                    |        | 6,941,220                   |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                           |   | 30,728,546                   |        | 26,601,355                  |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                              |   | 1,923,369                    |        | 3,581,243                   |   |
| Senior debt                                                                                                                                                                                                                                                                                                                                                            |   | 115,000,000                  |        | —                      |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                              |   | 163,412,421                  |        | 43,090,424                  |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                         |   | 197,818,245                  |        | 312,791,038                 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                           |   | 23,979,223                   |        | 33,379,694                  |   |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                 |   | 48,714,222                   |        | 45,779,491                  |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                             |   | 198,391,769                  |        | —                      |   |
| Accrued dividends on redeemable preferred  stock                                                                                                                                                                                                                                                                                                                       |   | 38,321,768                   |        | 19,160,885                  |   |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                          |   | 9,749,228                    |        | 11,195,374                  |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                             |   | —                       |        | 198,125,314                 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |   |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                                            |   |                         |        |                        |   |
| Common stock: 41,000,000 shares authorized  consisting of 1,000,000 shares of Class A Voting Common Stock, $.01 par  value, and 40,000,000 shares of Common Stock (Nonvoting), $.01 par value;  178,500 shares of Class A Voting Common Stock and 18,833,479 shares of Common  Stock (Nonvoting) (18,581,510 shares at December 31, 2002) issued and  outstanding |   | 190,119                      |        | 187,600                     |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                    |   | (229,469,579                 | )           | (186,842,835                | )      |
| Less:                                                                                                                                                                                                                                                                                                                                                                  |   |                         |        |                        |   |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                                  |   | (718,808                     | )           | (851,334                    | )      |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                |   | (875,675                     | )           | (851,924                    | )      |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                       |   | (230,873,943                 | )           | (188,358,493                | )      |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                       |   | $                            | 449,512,933 |                        | $      | 475,163,727 |   |

 

See accompanying notes.

 

1

----

 

GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
|                                                                                         |   | **Three  Months Ended September 30,** |        | **Nine  Months Ended September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|--------|
|                                                                                         |   | **2003**                                   |        | **2002**                                  |   | **2003** |   | **2002** |   |
| Net revenues                                                                                 |   | $                                          | 25,719,558  |                                      | $      | 26,083,671 |   | $ | 78,844,209 |   | $ | 102,179,342 |   |
| Station operating expenses                                                                   |   | 22,012,692                                 |        | 21,220,434                                |   | 67,147,196 |   | 76,160,339 |   |
| Depreciation expense                                                                         |   | 1,594,277                                  |        | 1,350,113                                 |   | 4,678,752 |   | 4,608,205 |   |
| Amortization expense                                                                         |   | 1,119,850                                  |        | 2,377,515                                 |   | 5,859,554 |   | 16,615,563 |   |
| Corporate expense                                                                            |   | 2,646,186                                  |        | 2,330,923                                 |   | 8,138,691 |   | 6,947,237 |   |
| Non-cash compensation expense(1)                                                             |   | 170,454                                    |        | 410,619                                   |   | 720,978 |   | 1,065,490 |   |
| Operating loss                                                                               |   | (1,823,901                                 | )           | (1,605,933                                | )      | (7,700,962 | ) | (3,217,492 | ) |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Other expenses (income)                                                                      |   |                                       |        |                                      |   |   |   |   |   |
| Interest expense                                                                             |   | 7,718,935                                  |        | 6,670,880                                 |   | 23,034,087 |   | 27,139,517 |   |
| Interest income                                                                              |   | (136,413                                   | )           | (281,119                                  | )      | (527,531 | ) | (595,845 | ) |
| Non-cash interest expense                                                                    |   | 1,296,233                                  |        | 974,635                                   |   | 3,571,394 |   | 11,928,787 |   |
| Non-cash preferred stock dividend                                                            |   | 6,386,961                                  |        | —                                    |   | 6,386,961 |   | — |   |
| Gain on station sale                                                                         |   | —                                     |        | —                                    |   | — |   | (192,406,138 | ) |
| Loss on extinguishments of debt                                                              |   | —                                     |        | —                                    |   | — |   | 15,096,641 |   |
| Other                                                                                        |   | 112,648                                    |        | 239,153                                   |   | 372,897 |   | 542,281 |   |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before income taxes and  cumulative effect of a change in accounting principle |   | (17,202,265                                | )           | (9,209,482                                | )      | (40,538,770 | ) | 135,077,265 |   |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| (Benefit) provision for income taxes:                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Current                                                                                      |   | (2,774,352                                 | )           | (6,936,357                                | )      | (10,273,297 | ) | 26,359,623 |   |
| Deferred                                                                                     |   | —                                     |        | 378,565                                   |   | — |   | 34,607,686 |   |
| Total (benefit) provision for income taxes                                                   |   | (2,774,352                                 | )           | (6,557,792                                | )      | (10,273,297 | ) | 60,967,309 |   |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting  principle            |   | (14,427,913                                | )           | (2,651,690                                | )      | (30,265,473 | ) | 74,109,956 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                     |        | —                                    |   | — |   | 150,478,583 |   |
| Net loss                                                                                     |   | $                                          | (14,427,913 | )                                         | $      | (2,651,690 | ) | $ | (30,265,473 | ) | $ | (76,368,627 | ) |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Net loss attributable to common  shareholders                                                |   | $                                          | (14,427,913 | )                                         | $      | (7,385,551 | ) | $ | (43,217,031 | ) | $ | (69,070,027 | ) |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Per basic common share:                                                                      |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                  |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | 4.35 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                     |        | —                                    |   | — |   | (8.03 | ) |
| Basic net loss per share                                                                     |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.68 | ) |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Weighted average common shares outstanding                                                   |   | 19,011,870                                 |        | 18,757,441                                |   | 18,983,799 |   | 18,745,885 |   |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Per diluted common share:                                                                    |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                  |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | 4.28 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                     |        | —                                    |   | — |   | (7.91 | ) |
| Diluted net loss per share                                                                   |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.63 | ) |
|                                                                                         |   |                                       |        |                                      |   |   |   |   |   |
| Weighted average common shares outstanding                                                   |   | 19,011,870                                 |        | 18,757,441                                |   | 18,983,799 |   | 19,017,490 |   |

----

| (1) Allocation of non-cash compensation  expense to other operating expenses: |   |   |    |   |   |    |   |    |    |
|-------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|---------|---------|
| Corporate expense                                                             |   | $      | 134,245 |   | $      | 350,169 |   | $       | 623,684 |   | $ | 882,264 |   |
| Station operating expenses                                                    |   | 36,209 |    | 60,450 |   | 97,294  |   | 183,226 |    |
| Non-cash compensation expense                                                 |   | $      | 170,454 |   | $      | 410,619 |   | $       | 720,978 |   | $ | 1,065,490 |   |

 

See accompanying notes.

 

2

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GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

 
|                                                                            |   | **Class A  Common  Stock** |   | **Common  Stock  (Nonvoting)** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Unearned  Compensation** |         | **Treasury  Stock** |   | **Total  Stockholders’  Deficit** |   |
|---------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------------|--------|----------------------------------|--------|--------------------------|--------|----------------------------|--------------|---------------------|--------|----------------------------------------|--------|
|                                                                            |   |                       |   |                           |   |                             |   |                     |   |                       |         |                |   |                                   |   |
| Balance at December 31, 2002                                               |   | $                          | 1,785  |                           | $      | 185,815                          |   | —                   |   | $                          | (186,842,835 | )                   | $      | (851,334                               | )      | $ | (851,924 | ) | $ | (188,358,493 | ) |
| Dividends on redeemable preferred stock                                         |   |                       |   |                           |   | (412,651                         | )      | (12,361,271              | )      |                       |         |                |   | (12,773,922                            | )      |
| Accretion of offering costs related to Cumulative  Exchangeable Preferred Stock |   |                       |   |                           |   | (177,636                         | )      |                     |   |                       |         |                |   | (177,636                               | )      |
| Issuance of Common Stock (Nonvoting)                                            |   |                       |   | 2,344                          |   | (2,344                           | )      |                     |   |                       |         |                |   | —                                 |   |
| Repurchase of 11,700 shares of Common Stock                                     |   |                       |   |                           |   |                             |   |                     |   |                       |         | (23,751             | )      | (23,751                                | )      |
| Grant of stock award under stock plans                                          |   |                       |   |                           |   | 331,500                          |   |                     |   | (331,500                   | )            |                |   | —                                 |   |
| Exercise of stock options                                                       |   |                       |   | 175                            |   | 26,075                           |   |                     |   |                       |         |                |   | 26,250                                 |   |
| Stock expense related to stock plans                                            |   |                       |   |                           |   | 235,056                          |   |                     |   | 317,436                    |         |                |   | 552,492                                |   |
| Discount on loans to officers                                                   |   |                       |   |                           |   |                             |   |                     |   | 146,590                    |         |                |   | 146,590                                |   |
| Net loss                                                                        |   |                       |   |                           |   |                             |   | (30,265,473              | )      |                       |         |                |   | (30,265,473                            | )      |
|                                                                            |   |                       |   |                           |   |                             |   |                     |   |                       |         |                |   |                                   |   |
| Balance at September 30, 2003                                              |   | $                          | 1,785  |                           | $      | 188,334                          |   | —                   |   | $                          | (229,469,579 | )                   | $      | (718,808                               | )      | $ | (875,675 | ) | $ | (230,873,943 | ) |

 

See accompanying notes.

 

3

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GRANITE BROADCASTING CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                         |   | **Nine  Months ended September 30,** |        |
|------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|
|                                                                         |   | **2003**                                  |        | **2002** |   |
| Cash flows from operating activities:                                        |   |                                      |        |   |   |
| Net loss                                                                     |   | $                                         | (30,265,473 | ) | $ | (76,368,627 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                      |        |   |   |
| Amortization of intangible assets                                            |   | 5,859,554                                 |        | 16,615,563 |   |
| Depreciation                                                                 |   | 4,678,752                                 |        | 4,608,205 |   |
| Non-cash compensation expense                                                |   | 720,978                                   |        | 1,065,490 |   |
| Non-cash interest expense                                                    |   | 3,571,394                                 |        | 11,928,787 |   |
| Preferred stock dividend                                                     |   | 6,386,961                                 |        | — |   |
| Deferred tax expense (benefit)                                               |   | —                                    |        | (23,743,260 | ) |
| Loss on extinguishment of debt                                               |   | —                                    |        | 15,096,641 |   |
| Gain on station sale                                                         |   | —                                    |        | (192,406,138 | ) |
| Cumulative effect of a change in accounting  principle                       |   | —                                    |        | 208,829,529 |   |
|                                                                         |   |                                      |        |   |   |
| Change in assets and liabilities:                                            |   |                                      |        |   |   |
| Decrease (increase) in accounts receivable                                   |   | 3,878,535                                 |        | (31,806,036 | ) |
| Increase in accrued liabilities                                              |   | 4,214,624                                 |        | 8,155,999 |   |
| Decrease in accounts payable                                                 |   | (1,361,944                                | )           | (20,986 | ) |
| WB affiliation payment                                                       |   | (1,688,389                                | )           | (3,688,389 | ) |
| Increase in income tax receivable                                            |   | (13,319,775                               | )           | — |   |
| Decrease (increase) in film contract rights  and other assets                |   | 2,160,658                                 |        | (15,946,270 | ) |
| (Decrease) increase in film contract rights  payable and other liabilities   |   | (3,754,180                                | )           | 25,630,271 |   |
| Net cash used in operating activities                                        |   | (18,918,305                               | )           | (52,049,221 | ) |
|                                                                         |   |                                      |        |   |   |
| Cash flows from investing activities:                                        |   |                                      |        |   |   |
| Proceeds from sale of station                                                |   | —                                    |        | 265,018,849 |   |
| Capital expenditures                                                         |   | (10,281,237                               | )           | (8,121,595 | ) |
| Net cash (used in) provided by investing activities                          |   | (10,281,237                               | )           | 256,897,254 |   |
|                                                                         |   |                                      |        |   |   |
| Cash flows from financing activities:                                        |   |                                      |        |   |   |
| Proceeds from long-term debt                                                 |   | —                                    |        | 80,000,000 |   |
| Repayment of bank debt                                                       |   | —                                    |        | (170,000,000 | ) |
| Repurchase of cumulative exchangeable  preferred stock                       |   | —                                    |        | (53,264,005 | ) |
| Payment of deferred financing fees                                           |   | (647,146                                  | )           | (8,770,666 | ) |
| Repurchase of common stock                                                   |   | (23,751                                   | )           | (45,091 | ) |
| Exercise of stock options                                                    |   | 26,250                                    |        | — |   |
| Net cash used in financing activities                                        |   | (644,647                                  | )           | (152,079,762 | ) |
|                                                                         |   |                                      |        |   |   |
| Net decrease in cash and cash equivalents                                    |   | (29,844,189                               | )           | 52,768,271 |   |
| Cash and cash equivalents, beginning of  period                              |   | 54,319,597                                |        | 29,426,856 |   |
|                                                                         |   |                                      |        |   |   |
| Cash and cash equivalents, end of period                                     |   | $                                         | 24,475,408  |   | $ | 82,195,127 |   |
|                                                                         |   |                                      |        |   |   |
| Supplemental information:                                                    |   |                                      |        |   |   |
| Cash paid for interest                                                       |   | $                                         | 18,280,000  |   | $ | 28,166,000 |   |
| Cash paid for income taxes                                                   |   | 138,000                                   |        | 15,912,000 |   |
| Non-cash capital expenditures                                                |   | 79,000                                    |        | 534,000 |   |
| Cumulative exchangeable preferred stock  dividend                            |   | 19,161,000                                |        | 21,293,000 |   |
| Cancellation of warrants                                                     |   | —                                    |        | 12,150,000 |   |

 

See accompanying notes.

 

4

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GRANITE BROADCASTING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation and Accounting Policies 

 

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

 

Stock-Based Compensation

 

The Company has adopted the disclosure-only provisions of Statement of FinancialAccounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS123”).  Accordingly, no compensationexpense has been recognized for the stock option plans.  For purposes of SFAS 123 pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period; therefore, the impact on pro forma net lossfor the three and nine months ended September 30, 2003 may not berepresentative of the impact in future years.

 

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

 
|                                            |   | **Three  Months Ended September 30,** |        | **Nine  Months Ended September 30,** |   |
|-------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|--------|
|                                            |   | **2003**                                   |        | **2002**                                  |   | **2003** |   | **2002** |   |
|                                            |   |                                       |        |                                      |   |   |   |   |   |
| Net loss, as reported                           |   | $                                          | (14,427,913 | )                                         | $      | (2,651,690 | ) | $ | (30,265,473 | ) | $ | (76,368,627 | ) |
| Add:   pro forma compensation expense      |   | (349,587                                   | )           | (568,976                                  | )      | (1,039,161 | ) | (1,596,687 | ) |
| Less: option compensation expense, as  reported |   | 12,000                                     |        | —                                    |   | 36,000 |   | — |   |
| Pro forma net loss                              |   | $                                          | (14,765,500 | )                                         | $      | (3,220,666 | ) | $ | (31,268,634 | ) | $ | (77,965,314 | ) |
|                                            |   |                                       |        |                                      |   |   |   |   |   |
| Basic net loss per share, as reported           |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.68 | ) |
| Pro forma compensation expense                  |   | (0.02                                      | )           | (0.03                                     | )      | (0.05 | ) | (0.09 | ) |
| Pro forma basic net loss per share              |   | $                                          | (0.78       | )                                         | $      | (0.42 | ) | $ | (2.33 | ) | $ | (3.77 | ) |
|                                            |   |                                       |        |                                      |   |   |   |   |   |
| Diluted net loss per share, as reported         |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.63 | ) |
| Pro forma compensation expense                  |   | (0.02                                      | )           | (0.03                                     | )      | (0.05 | ) | (0.08 | ) |
| Pro forma diluted net loss per share            |   | $                                          | (0.78       | )                                         | $      | (0.42 | ) | $ | (2.33 | ) | $ | (3.71 | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black-Scholes options pricing model. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility.  The Company’s employee stock options havecharacteristics significantly different from those of traded options andchanges in the subjective input assumptions can materially affect the fairvalue estimate.

 

5

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Note 2 – Intangible Assets

 

The Company adopted Statement of Financial AccountingStandards No. 142, Goodwill and Other Intangible Assets (“Statement 142”), onJanuary 1, 2002.  Upon adoption ofStatement 142, the Company recorded a one-time non-cash charge to reduce thecarrying value of goodwill and other indefinite lived intangible assets by$95,000,000 and $114,000,000 respectively during 2002.  Such charge was non-operational in natureand is reflected as a cumulative effect of a change in accounting principle inthe statement of operations for the nine months ended September 30, 2002.

 

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

 
|                                            |   | **September 30,  2003** |        | **December 31,  2002**   |   |
|-------------------------------------------------|--------|------------------------------|-------------|-------------------------------|--------|
|                                            |   | **Gross  Carrying Value**    |        | **Accumulated  Amortization** |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   |
| Intangible assets subject to amortization:      |   |                         |        |                          |   |   |   |   |   |
| WB affiliation agreements                       |   | $                            | 31,685,120  |                          | $      | (19,004,180 | ) | $ | 32,256,034 |   | $ | (16,394,626 | ) |
| Covenant not to compete                         |   | 30,000,000                   |        | (30,000,000                   | )      | 30,000,000 |   | (26,750,000 | ) |
|                                            |   |                         |        |                          |   |   |   |   |   |
|                                            |   | $                            | 61,685,120  |                          | $      | (49,004,180 | ) | $ | 62,256,034 |   | $ | (43,144,626 | ) |
|                                            |   |                         |        |                          |   |   |   |   |   |
| Intangible assets not subject to  amortization: |   |                         |        |                          |   |   |   |   |   |
| Goodwill                                        |   | $                            | 111,252,372 |                          | $      | (28,201,070 | ) | $ | 111,252,372 |   | $ | (28,201,070 | ) |
| Broadcast licenses                              |   | 159,647,594                  |        | (32,315,765                   | )      | 159,647,594 |   | (32,315,765 | ) |
| Network affiliation agreements                  |   | 95,366,707                   |        | (20,882,800                   | )      | 95,366,707 |   | (20,882,800 | ) |
|                                            |   |                         |        |                          |   |   |   |   |   |
|                                            |   | $                            | 366,266,673 |                          | $      | (81,399,635 | ) | $ | 366,266,673 |   | $ | (81,399,635 | ) |

 

The Company recorded amortization expense of $5,859,554 and $16,615,563during the nine months ended September 30, 2003 and 2002,respectively.  Based on the currentamount of intangible assets subject to amortization, the estimated amortizationexpense for each of the succeeding 5 years are as follows: remaining amount for2003: $869,000; 2004: $3,310,000; 2005: $3,031,000; 2006: $3,031,000 and 2007:$3,031,000.  As acquisitions anddispositions occur in the future these amounts may vary.

 

Note 3 –Related Party

 

On February 25, 2003, theCompensation Committee recommended and the Board of Directors approved a stockincentive award to certain officers to be paid only upon the refinancing, witha maturity of at least two years, of the Company’s current senior debt dueApril 15, 2004.  The incentive awardwould be used to repay in full the officer’s outstanding loans from theCompany.

 

Note 4 –Recent Accounting Pronouncements

 

On April 30, 2002, the FASBissued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections (“Statement145”). Statement 145 updates, clarifies and simplifies existing accountingpronouncements.  Statement 145 rescindsStatement 4, which required all gains and losses from extinguishments of debtto be aggregated and, if material, classified as an extraordinary item, net ofrelated income tax effect. Statement 145 is effective for fiscal yearsbeginning after June 15, 2002.  Allprior extraordinary items relating to the extinguishments of debt have beenretroactively adjusted and reclassified to income from continuingoperations.  The impact of adoptingStatement 145 reduced income from continuing operations by $15,097,000 duringthe nine month periods ended September 30, 2002.

 

In June 2002, the FASB issuedStatement of Financial Accounting Standards No. 146, Accounting for CostsAssociated with Exit or Disposal Activities (“Statement 146”).  Statement 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (“EITF”) issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring).”  The provisions of Statement 146 areeffective for exit or disposal activities that are initiated after December 31,2002, with early application encouraged. The adoption of Statement 146 did not have a significant impact on theCompany’s financial position, results of operations, or cash flows.

 

6

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In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities (“Interpretation 46”).  Interpretation 46 addresses when a companyshould include in its financial statements the assets, liabilities andactivities of another entity. Interpretation 46 is effective for interim periods beginning afterJune 15, 2003.  The application ofInterpretation 46 did not have an impact on the Company’s financial position,results of operations, or cash flows.

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150, Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity (“Statement 150”).  Statement 150establishes standards for classifying and measuring as liabilities certainfinancial instruments that have characteristics of both liabilities andequity.  The provisions of Statement 150are effective beginning with the first interim period after June 15,2003.  The Company adopted Statement 150during the three months ended September 30, 2003.  The Company’s 12 3/4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”) has been reclassified onthe Company’s consolidated balance sheet as a long-term liability and the accrualof dividends for the three months ended September 30, 2003 has beenrecorded as a charge to expense on the consolidated statement ofoperations.  The impact of adoptingStatement 150 is expected to reduce income before income taxes by $12,774,000for the year ended December 31, 2003. Previously, dividends on the Preferred Stock were treated as a reductionof shareholders’ equity.

 

Note 5 –  Per Share Calculations

The per-share calculations shown on theincome statement for the three and nine month periods ended September 30,2003 and 2002 are computed in accordance with Statement of Financial AccountingStandards No. 128, Earnings Per Share. The following table sets forth the computation of basic and dilutedearnings per share:

 

7

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GRANITE BROADCASTING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 
|                                                                        |   | **Three  Months Ended September 30,** |        | **Nine  Months Ended September 30,** |   |
|-----------------------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|--------|
|                                                                        |   | **2003**                                   |        | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                          | (14,427,913 | )                                         | $      | (2,651,690 | ) | $ | (30,265,473 | ) | $ | 74,109,956 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                     |        | —                                    |   | — |   | 150,478,583 |   |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Net loss                                                                    |   | (14,427,913                                | )           | (2,651,690                                | )      | (30,265,473 | ) | (76,368,627 | ) |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| LESS:                                                                       |   |                                       |        |                                      |   |   |   |   |   |
| Cumulative exchangeable preferred stock  dividends                          |   | —                                     |        | 6,029,308                                 |   | 12,773,922 |   | 22,681,461 |   |
| Accretion on exchangeable preferred stock                                   |   | —                                     |        | 88,819                                    |   | 177,636 |   | 318,976 |   |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| ADD:                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Gain on repurchase of cumulative  exchangeable preferred stock              |   | —                                     |        | 1,384,266                                 |   | — |   | 30,299,037 |   |
| Net loss attributable to common  shareholders                               |   | $                                          | (14,427,913 | )                                         | $      | (7,385,551 | ) | $ | (43,217,031 | ) | $ | (69,070,027 | ) |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| (in shares)                                                                 |   |                                       |        |                                      |   |   |   |   |   |
| Basic weighted average common shares  outstanding                           |   | 19,011,870                                 |        | 18,757,441                                |   | 18,983,799 |   | 18,745,885 |   |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| ADD:                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Stock options                                                               |   | —                                     |        | —                                    |   | — |   | 271,605 |   |
| Diluted weighted average common shares  outstanding                         |   | 19,011,870                                 |        | 18,757,441                                |   | 18,983,799 |   | 19,017,490 |   |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Per basic common share:                                                     |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | 4.35 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                     |        | —                                    |   | — |   | (8.03 | ) |
| Basic net loss per share                                                    |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.68 | ) |
|                                                                        |   |                                       |        |                                      |   |   |   |   |   |
| Per diluted common share:                                                   |   |                                       |        |                                      |   |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | 4.28 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit  |   | —                                     |        | —                                    |   | — |   | (7.91 | ) |
| Diluted net loss per share                                                  |   | $                                          | (0.76       | )                                         | $      | (0.39 | ) | $ | (2.28 | ) | $ | (3.63 | ) |

 

8

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# *Item 2.  Management’s Discussion and Analysis ofFinancial Conditions and Results of Operations*

 

The following discussion should be read inconjunction with the consolidated financial statements and related notesappearing in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2002.  Certainsections of this Form 10-Q contain various forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, whichrepresent the Company’s expectations or beliefs concerning future events.  The forward-looking statements include,without limitation, the Company’s ability to meet its future liquidityneeds.  These forward-looking statementsreflect the plans and beliefs of management as of the date of this report.  The Company cautions that theseforward-looking statements are further qualified by important factors thatcould cause actual results to differ materially from those in theforward-looking statements.  Suchfactors include, without limitation, general economic conditions, competitionin the markets in which the Company’s stations are located, technologicalchange and innovation in the broadcasting industry and proposedlegislation.  Consequently, thesecautionary statements and the cautionary language set forth in the Company’smost recent Form 10-K report and other documents filed with the Securities andExchange Commission qualify all forward-looking statements made herein.

 

**Introduction**

 

The Company owns and operates eightnetwork-affiliated television stations in geographically diverse marketsreaching over 6% of the nation’s television households.  Three stations are affiliated with the NBCTelevision Network (NBC), two with the ABC Television Network (ABC), one withthe CBS Television Network (CBS), and two with the Warner Brothers TelevisionNetwork (WB).  The NBC affiliates areKSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois, andKBJR-TV, Duluth, Minnesota and Superior, Wisconsin.  The ABC affiliates are WKBW-TV, Buffalo, New York, and WPTA-TV,Fort Wayne, Indiana.  The CBS affiliateis WTVH-TV, Syracuse, New York.  The WBaffiliates are KBWB-TV, San Francisco-Oakland-San Jose, California, andWDWB-TV, Detroit, Michigan.

 

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

 

The Company’s revenues are derivedprincipally from local and national advertising and, to a lesser extent, fromnetwork compensation for the broadcast of programming and revenues from studiorental and commercial production activities. The primary operating expenses involved in owning and operatingtelevision stations are employee salaries, depreciation and amortization,programming, advertising and promotion.

 

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

 

The Company is in the process of completingupgrades to its television stations to enable them to broadcast with digitaltechnology.  As of September 30,2003, all of the Company’s television stations were capable of digitaltelevision broadcasts except for its Buffalo, Detroit and Syracuse stations.  The Federal Communications Commission (the“Commission”) denied the Buffalo station’s request for a third extension of thedeadline for completing its digital upgrade. The result of this denial is that the Buffalo station will be requiredto submit regular progress reports to the Commission until the anticipatedcompletion date of March 2004.  TheDetroit and Syracuse stations applied to the Commission for a second extensionof the deadline for completing its digital upgrades.  If granted, the deadline will be extended to May 2004.  The Company has no reason to believe the extensionswill not be granted and expects the digital upgrades to be completed by March2004.

 

**Resultsof Operations**

 

# *Threemonths ended September 30, 2003 and 2002*

 

Net revenue totaled $25,720,000for the three months ended September 30, 2003; a decrease of $364,000 or1% as compared to $26,084,000 for the three months ended September 30,2002.  The decrease was primarily due toa reduction in political revenue of $1,798,000 in a non-election year offset inpart by an increase in local revenue.

 

Station operating expenses totaled$22,013,000 for the three months ended September 30, 2003; an increase of$793,000 or 4% as compared to $21,220,000 for the three months endedSeptember 30, 2002.  The increasewas primarily due to increases in sales and technical expense.

 

9

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Amortization expense totaled$1,120,000 for the three months ended September 30, 2003; a decrease of$1,258,000 or 53% compared to $2,378,000 for the three months endedSeptember 30, 2002.  The decreasewas primarily due to a reduction in amortization of a covenant not tocompete.  Depreciation expense increased$244,000 or 18% during the three months ended September 30, 2003 comparedto the same period a year earlier primarily due to increased capitalexpenditures for the conversion to digital television.  Corporate expense increased $315,000 or 14%during the three months ended September 30, 2003 compared to the sameperiod a year earlier primarily due to increased compensation, officers’ anddirectors’ liability insurance and professional fees.  Non-cash compensation expense decreased $240,000 or 58% due to areduction in stock awards granted to certain executives.

 

Interest expense increased$1,048,000 or 16% during the three months ended September 30, 2003 ascompared to the same period a year earlier primarily due to higher averagebalances on the Tranche B term loan under the Company’s amended and restatedsenior credit agreement dated April 30, 2002 (the “Credit Agreement”).  Interest income decreased $145,000 or 51%during the three months ended September 30, 2003 compared to the sameperiod a year earlier primarily due to lower cash balances and lower interestrates.  Non-cash interest expense increased$322,000 or 33% during the three months ended September 30, 2003 comparedto the same period a year earlier primarily due to increased amortization ofdeferred financing fees associated with the Credit Agreement.  The Company recorded as an expense theaccrual of dividends on the 12 3/4% Cumulative Exchangeable Preferred Stock(the “Preferred Stock”) totaling $6,387,000 during the three months endedSeptember 30, 2003 as required by Statement of Financial AccountingStandards No. 150 (“Statement 150”). Previously, dividends on the Preferred Stock were treated as a reductionof shareholders’ equity.

 

During the three months endedSeptember 30, 2003, the Company recorded a benefit for income taxes of$2,774,000, compared to $6,558,000 for the three months endedSeptember 30, 2002.  The decrease wasprimarily due to a decrease in the effective tax rate resulting from theadoption of Statement 150.

 

*Nine months ended September 30, 2003 and2002*

 

Net revenue totaled $78,844,000for the nine months ended September 30, 2003; a decrease of $23,335,000 or23% as compared to $102,179,000 for the nine months ended September 30,2002.  Included in the nine months endedSeptember 30, 2002 is $25,295,000 of net revenue related to KNTV, whichthe Company sold on April 30, 2002. Net revenue at the remaining stations increased $1,960,000 or 3% due toincreases in local and national revenue offset by a $3,271,000 reduction inpolitical revenue in a non-election year.

 

Station operating expensestotaled $67,147,000 for the nine months ended September 30, 2003; a decreaseof $9,013,000 or 12% as compared to $76,160,000 for the nine months endedSeptember 30, 2002.  Included inthe nine months ended September 30, 2002 is $12,694,000 of operatingexpenses related to KNTV.  Stationoperating expenses at the remaining stations increased $3,681,000 or 6%primarily due to increases in sales and programming expense.

 

Amortization expense totaled$5,860,000 for the nine months ended September 30, 2003; a decrease of$10,756,000 or 65% compared to $16,616,000 for the nine months endedSeptember 30, 2002.  Included inthe nine months ended September 30, 2002 is $9,033,000 of amortizationexpense related to KNTV.  Amortizationexpense at the remaining stations decreased $1,723,000 or 23% due to areduction in amortization of a covenant not to compete.  Depreciation expense increased $71,000 or 2%during the nine months ended September 30, 2003 compared to the sameperiod a year earlier.  Included in thenine months ended September 30, 2002 is $525,000 of depreciation expenserelated to KNTV.  Depreciation expenseat the remaining stations increased $596,000 or 15% due to increased capitalexpenditures for the conversion to digital television.  Corporate expense increased $1,191,000 or17% during the nine months ended September 30, 2003 compared to the sameperiod a year earlier primarily due to increased compensation, officers’ anddirectors’ liability insurance and professional fees.  Non-cash compensation expense decreased $345,000 or 32% due to areduction in stock awards granted to certain executives.

 

Interest expense decreased$4,105,000 or 15% during the nine months ended September 30, 2003 ascompared to the same period a year earlier primarily due to lower average debtbalances and lower interest rates on the Company’s Credit Agreement.  Interest income decreased $68,000 or 11%during the nine months ended September 30, 2003 compared to the sameperiod a year earlier primarily due to lower cash balances, and lower interestrates.  Non-cash interest expensedecreased $8,357,000 or 70% during the nine months ended September 30,2003 compared to the same period a year earlier.  Included in non-cash interest expense for the nine months endedSeptember 30, 2002 is $7,537,000 related to the imputation of interest onKNTV’s NBC affiliation agreement.  Theremaining decrease in non-cash interest expense is related to decreasedamortization of deferred financing fees associated with the Company’s CreditAgreement.  The Company recorded as anexpense the accrual of dividends on the Preferred Stock totaling $6,387,000during the nine months ended September 30, 2003 as required by Statement150.  Previously, dividends on thePreferred Stock were treated as a reduction of shareholders’ equity.

 

10

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The Company recorded a gain onthe sale of KNTV of $192,406,000 during the nine-month period endedSeptember 30, 2002.

 

The Company recorded a loss onthe early extinguishment of debt of $15,097,000 during the nine months endedSeptember 30, 2002 due to the write-off of unamortized deferred financingfees associated with the extinguished debt.

 

During the nine months endedSeptember 30, 2003, the Company recorded a benefit for income taxes of$10,273,000 compared to a provision for income taxes of $60,967,000 during thenine months ended September 30, 2002. The provision for taxes in 2002 resulted from the gain on the sale ofKNTV.

 

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

 

## ***Liquidity andCapital Resources***

 

The Company’s 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 theCompany with respect to all of the loan facilities are secured by substantiallyall of the assets of the Company and its subsidiaries.  As of September 30, 2003, $35,000,000of the Tranche A loan facility and the entire Tranche B loan facility wasoutstanding.  On October 30, 2003,the Company borrowed the remaining $25,000,000 of the Tranche A term loan.  Proceeds from Tranche A and Tranche B termloans can be used for working capital and general corporate purposes.  The Tranche A loans bear interest at thegreater of 6.50% or LIBOR plus 4.50% and the Tranche B loans bear interest atthe greater of 11% or LIBOR plus 9%. All interest is payable monthly in arrears.  The Credit Agreement matures on April 15, 2004, at whichtime the Company must repay the principal amount of all outstanding loans andall other obligations then due and owing under the Credit Agreement.  The Company expects to refinance its seniordebt on or before April 15, 2004. There can be no assurance that the Company will be successful in refinancingits senior debt. The Company is currently considering selling certain assetsand, if necessary, will explore selling equity.  The Credit Agreement requires the Company, among other matters,to maintain compliance with certain financial tests, including but not limitedto, minimum net revenue, broadcast cash flow, EBITDA, working capital and cashbalances.  The Company is in compliancewith all covenants under the Credit Agreement.

 

Under theterms of the Certificate of Designations for the Company’s 12 3/4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”), the Company was requiredto make the semi-annual dividends on such shares in cash beginningOctober 1, 2002.  However, the cashpayment of dividends is restricted by the terms of the indentures governing theCompany’s senior subordinated bonds and is prohibited under the terms of theCredit Agreement. Consequently the Company did not pay the semi-annual dividenddue to the holders of the Preferred Stock on October 1, 2002, April 1,2003 and October 1, 2003.  Sincethree or more semi-annual dividend payments (whether or not consecutive) havenot been paid, the holders of the Preferred Stock have the right to elect thelesser of two directors or that number of directors constituting 25% of themembers of the Board of Directors.  Theright of the holders of the Preferred Stock to elect members of the Board ofDirectors as set forth above will continue until such time as all accumulateddividends that are required to be paid in cash and that are in arrears on thePreferred Stock are paid in full in cash. The Company does not anticipate paying cash dividends on its PreferredStock in the foreseeable future.

 

Net cash used in operating activities was$18,918,000 during the nine months ended September 30, 2003, compared to$52,049,000 during the nine months ended September 30, 2002.  The change from 2002 to 2003 was primarilythe result of a decrease in the payment of interest expense and income taxes,offset in part by an increase in net assets and a decrease in operating cashflow.

 

Net cash used in investing activities was$10,281,000 during the nine months ended September 30, 2003, compared tonet cash provided by investing activities of $256,897,000 during the ninemonths ended September 30, 2002. The change from 2002 to 2003 was due to the sale of KNTV onApril 30, 2002 offset by increased capital expenditures as the Companycontinues to complete its conversion to digital television.

 

Net cash used in financingactivities was $645,000 during the nine months ended September 30, 2003compared to $152,080,000 during the nine months ended September 30,2002.  The change from 2002 to 2003 wasprimarily due to the repayment of long-term debt and the repurchase ofredeemable Preferred Stock in 2002 and a reduction in the payment of deferredfinancing fees.

 

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As of October 31, 2003,the Company had approximately $54,025,000 of cash on hand.  The Company expects to generate taxablelosses during 2003 that will be carried back to recover approximately$14,000,000 of income taxes paid during the calendar year 2002.  The Company expects to receive this refundduring the second quarter of 2004.  TheCompany expects to spend a total of approximately $15,000,000 in 2003 oncapital expenditures of which $10,200,000 was spent during the nine monthsended September 30, 2003.  TheCompany believes that borrowings under the current Credit Agreement togetherwith internally generated funds from operations, and cash on hand will besufficient to satisfy the Company’s cash requirements until April 15,2004, when the Company’s senior credit agreement matures.  As mentioned above, the Company expects torefinance its senior debt on or before April 15, 2004. There can be noassurance that the Company will be successful in refinancing its seniordebt.  The Company is currentlyconsidering selling certain assets and, if necessary, will explore sellingequity.

 

# *Item3.Quantitative and Qualitative Disclosures about Market Risk*

 

The Company’s earnings may beaffected by changes in short-term interest rates as a result of its CreditAgreement.  Under the Credit Agreement,the Company pays interest at the greater of LIBOR plus 4.50% or 6.50%,currently 6.50% for its Tranche A facility and the Tranche B loans bearinterest at the greater of LIBOR plus 9% or 11%, currently 11%.  As of October 31, 2003, the one-monthLIBOR rate was 1.12%.  The Company has not entered into anyagreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding atOctober 31, 2003 a 2% increase in the LIBOR rate would increase interestexpense on an annual basis by approximately $1,568,000.  This analysis does not consider the effectsof the reduced level of overall economic activity that could exist in suchenvironment.

 

*Item 4. Controls and Procedures*

 

As of September 30, 2003, an evaluationwas performed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures.  Based on thatevaluation, the Company’s management, including the CEO and CFO, concluded thatthe Company’s disclosure control and procedures were effective as ofSeptember 30, 2003.  There havebeen no significant changes in the Company’s internal controls or in otherfactors that could significantly affect internal controls subsequent toSeptember 30, 2003.

 

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**PART II. OTHER INFORMATION**

 
| *ITEM 6.* | *Exhibits and Reports on  Form 8-K* |
|-----------|-------------------------------------|
|      |                                |   |   |
|      | a.                                  | Exhibits |
|      |                                |   |   |   |
|      |                                |   | 31.1   Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|      |                                |   |   |   |
|      |                                |   |   |   |
|      |                                |   | 31.2   Certification of  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |
|      |                                |   |   |   |
|      |                                |   |   |   |
|      |                                |   | 32      Certifications  of Chief Executive Officer and Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|      |                                |   |   |   |
|      | b.                                  | Reports on  Form 8-K |
|      |                                |   |
|      |                                | On  August 6, 2003, we filed a Current Report on Form 8-K furnishing our  press release dated August 6, 2003, which announced our Financial,  results for the quarter ended June 30, 2003. |
|           |                                     |  |  |  |  |  |

 

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SIGNATURES

 

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

 

 
|   | GRANITE  BROADCASTING CORPORATION                          |
|--------|------------------------------------------------------------|
|   | Registrant                                                 |
|   |                                                       |
|   |                                                       |
| Date:  | November 12,  2003                                    | /s/ | W. DON  CORNWELL |   |
|   | (W. Don Cornwell)                                          |   |
|   | Chief Executive Officer                                    |   |
|   |                                                       |
|   |                                                       |
| Date:  | November 12,  2003                                    | /s/ | LAWRENCE I.  WILLS |   |
|   | (Lawrence I. Wills)                                        |   |
|   | Senior Vice  President – Chief Administrative Officer |   |
|   | (Principal Accounting Officer)                             |   |
|        |                                                            |  |  |  |  |

 

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