**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2004**

 

**OR**

 

**o****                                ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition periodfrom                         to                         **

 

**CommissionFile Number  0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**             | ** ** | **13-3458782**                       |
|--------------------------|------------|--------------------------------------|
| (State of Incorporation) |       | (I.R.S. Employer Identification No.) |

 

**767 ThirdAvenue, 34th FloorNew York, New York 10017(212) 826-2530**

(Address, including zip code,and telephone number,including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes   ý   No   o

 

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

 

(APPLICABLE ONLY TO CORPORATEISSUERS:)

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

Class A VotingCommon Stock, par value $.01 per share - 178,500 shares outstanding at July 31,2004; Common Stock (Nonvoting), par value $.01 per share – 19,202,624 sharesoutstanding at July 31, 2004.

 

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**DOCUMENTS INCORPORATED BY REFERENCE: None**

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
|       |     |                  | **Page**                                                                                                      |
|------------|----------|-----------------------|---------------------------------------------------------------------------------------------------------------|
| PART I     |     | FINANCIAL INFORMATION | 3                                                                                                             |
|       |     |                  |                                                                                                          |   |
|       | Item 1.  |                  | Financial Statements                                                                                          | 3 |
|       |     |                  | Consolidated  Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                            | 3 |
|       |     |                  | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2004 and  2003 (unaudited) | 4 |
|       |     |                  | Consolidated  Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2004  (unaudited)     | 5 |
|       |     |                  | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003  (unaudited)           | 6 |
|       |     |                  | Notes  to Consolidated Financial Statements                                                                   | 7 |
|       |     |                  |                                                                                                          |   |
|       | Item 2.  |                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                   | 9 |
|       | Item 3.  |                  | Quantitative and Qualitative Disclosures  About Market Risk                                                   | 14 |
|       | Item 4.  |                  | Controls and Procedures                                                                                       | 14 |
|       |     |                  |                                                                                                          |   |
| PART II    |     | OTHER INFORMATION     | 15                                                                                                            |
|       |     |                  |                                                                                                          |   |
|       | Item 4.  |                  | Submission of Matters to a Vote of Security  Holders                                                          | 15 |
|       | Item  5. |                  | Other  Information                                                                                            | 15 |
|       | Item 6.  |                  | Exhibits and Reports on Form 8-K                                                                              | 15 |
|       |     |                  |                                                                                                          |   |
| SIGNATURES | 16       |

 

Granite BroadcastingCorporation is a Delaware corporation. Unless the context otherwise requires,“we”, “us”, “its” and “our” refer to Granite Broadcasting Corporation, togetherwith its direct and indirect subsidiaries. Our principal executive offices are located at 767 Third Avenue, 34thFloor, New York, NY 10017, and our telephone number at that address is (212)826-2530. Our web site is located at http://www.granitetv.com. The informationon our web site is not part of this report.

 

1

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**FORWARD-LOOKING STATEMENTS**

 

This report includes and incorporates forward-looking statements.  We have based these forward-lookingstatements on our current expectations and projections about futureevents.  These forward-looking statementsare subject to risks, uncertainties and assumptions about us, including, amongother things:

 

•                  inability to implement our strategy, or, havingimplemented it, failure to realize anticipated cost savings or revenueopportunities available through implementation of our strategy;

 

•                  inability to effect dispositions or acquisitions of televisionstations, which are an important part of our strategy;

 

•                  the effects of governmental regulation of broadcasting, includingadverse changes in, or interpretations of, the exceptions to the FederalCommunications Commission’s duopoly rule which could restrict, or eliminate,our ability to enter into duopoly-type operating arrangements and implement ouroperating strategy;

 

•                  pricing fluctuations in national and local advertising;

 

•                  volatility or increases in programming costs;

 

•                  restrictions on our operations due to our significant leverage andlimited sources of liquidity;

 

•                  the impact of changes in national and regional economies;

 

•                  delay in any economic recovery or the recovery not being as robust asmight otherwise have been anticipated;

 

•                  our ability to service our outstanding debt;

 

•                  successful integration of acquired television stations (includingachievement of synergies and cost reductions);

 

•                  competition in the markets in which our stations are located;

 

•                  loss of network affiliations or changes in the terms of networkaffiliation agreements upon renewal; and

 

•                  technologicalchange and innovation in the broadcasting industry.

 

Our networkaffiliation agreement with The Warner Brothers Network at WDWB-TV, serving theDetroit, Michigan market expired on May 31, 2004.  Renewal negotiations are underway and wecontinue to operate WDWB-TV under the terms of the expired agreement and haveno reason to believe the agreement will not be renewed or extended.

 

Other mattersset forth in this report, as well as risk factors set forth in our Form 10-Kfor the year ended December 31, 2003, filed with the Securities and ExchangeCommission may also cause actual results in the future to differ materiallyfrom those described in the forward-looking statements.  We undertake no obligation to update andrevise any forward-looking statements, whether as a result of new information,future events or otherwise.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this report might not occur.

 

2

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**PART I. FINANCIAL INFORMATION**

 

***Item 1.****         **Financial Statements*

**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **(Unaudited)**    | ** **  | ** **             | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                          |       |               |        |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                 |       |               |        |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                       |       | $                  | 73,468,178  |                   | $          | 90,213,995 |   |
| Marketable securities, at fair value                                                                                                                                                                                                                                                                                                                                            |       | 8,384,412          |        | —                 |       |
| Accounts receivable, less allowance for  doubtful accounts ($1,031,481 at June 30, 2004 and $1,319,238 at December 31,  2003)                                                                                                                                                                                                                                                   |       | 20,698,810         |        | 21,464,965             |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                            |       | 9,658,302          |        | 15,299,993             |       |
| Income tax receivable                                                                                                                                                                                                                                                                                                                                                           |       | —             |        | 16,326,799             |       |
| Other current assets                                                                                                                                                                                                                                                                                                                                                            |       | 6,262,696          |        | 5,795,794              |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                            |       | 118,472,398        |        | 149,101,546            |       |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                     |       | 47,635,293         |        | 48,449,586             |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                            |       | 4,555,800          |        | 8,446,229              |       |
| Other non current assets                                                                                                                                                                                                                                                                                                                                                        |       | 9,820,949          |        | 7,891,335              |       |
| Deferred financing fees, less accumulated  amortization ($1,013,216 at June 30, 2004 and $50,902 at December 31, 2003)                                                                                                                                                                                                                                                          |       | 12,582,214         |        | 13,373,623             |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                                   |       | 63,123,440         |        | 63,123,440             |       |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                                         |       | 127,331,829        |        | 127,331,829            |       |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                                       |       | 82,615,292         |        | 86,379,757             |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                    |       | $                  | 466,137,215 |                   | $          | 504,097,345 |   |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                      |       |               |        |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                |       | $                  | 1,754,713   |                   | $          | 2,903,728 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                                |       | 3,290,625          |        | 987,187                |       |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                       |       | 5,006,356          |        | 7,039,091              |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                                    |       | 23,532,653         |        | 27,314,160             |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                                       |       | 1,745,474          |        | 2,951,001              |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                       |       | 35,329,821         |        | 41,195,167             |       |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                  |       | 400,438,948        |        | 400,086,598            |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                                    |       | 16,060,886         |        | 24,616,575             |       |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                          |       | 26,491,844         |        | 31,277,708             |       |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                      |       | 198,658,225        |        | 198,480,586            |       |
| Accrued dividends on redeemable preferred  stock                                                                                                                                                                                                                                                                                                                                |       | 57,482,651         |        | 44,708,729             |       |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                                   |       | 13,821,761         |        | 13,163,788             |       |
|                                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                   |       |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                                                     |       |               |        |                   |       |
| Common stock: 41,000,000 shares authorized  consisting of 1,000,000 shares of Class A Common Stock, $.01 par value, and  40,000,000 shares of Common Stock   (Nonvoting), $.01 par value; 178,500 shares of Class A Common Stock  and 19,202,624 shares of Common Stock (Nonvoting) (18,834,179 shares at  December 31, 2003) issued and outstanding at June 30, 2004 |       | 193,810            |        | 190,126                |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                      |       | 405,881            |        | —                 |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                            |       | (20,005            | )           | —                 |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                             |       | (281,234,044       | )           | (248,118,609           | )          |
| Less: Unearned compensation                                                                                                                                                                                                                                                                                                                                                     |       | (616,888           | )           | (627,648               | )          |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                         |       | (875,675           | )           | (875,675               | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                |       | (282,146,921       | )           | (249,431,806           | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                |       | $                  | 466,137,215 |                   | $          | 504,097,345 |   |

 

See accompanying notes.

 

3

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                    | ** ** | **2004**                        | ** **  | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                      | ** **  | **(Restated)**                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Net revenues                                  |       | $                               | 29,163,107  |                          | $          | 28,467,458 |   | $ | 55,163,748 |   | $ | 53,124,651 |   |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Station operating expenses                    |       | 22,311,977                      |        | 23,028,963                    |       | 43,403,253 |   | 45,134,504 |   |
| Depreciation expense                          |       | 1,724,372                       |        | 1,553,446                     |       | 3,486,849 |   | 3,084,475 |   |
| Amortization of intangible assets             |       | 1,882,227                       |        | 3,114,690                     |       | 3,764,465 |   | 6,229,384 |   |
| Corporate expense                             |       | 3,477,403                       |        | 2,672,088                     |       | 7,022,392 |   | 5,492,505 |   |
| Non-cash  compensation expense(1)             |       | 132,178                         |        | 164,787                       |       | 435,002 |   | 550,524 |   |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Operating loss                                |       | (365,050                        | )           | (2,066,516                    | )          | (2,948,213 | ) | (7,366,741 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Other expenses (income):                      |       |                            |        |                          |       |   |   |   |   |
| Interest expense                              |       | 9,872,461                       |        | 7,688,428                     |       | 19,745,054 |   | 15,315,152 |   |
| Interest income                               |       | (284,012                        | )           | (176,832                      | )          | (516,539 | ) | (391,118 | ) |
| Non-cash interest expense                     |       | 1,133,856                       |        | 1,204,044                     |       | 2,280,297 |   | 2,275,161 |   |
| Non-cash preferred stock dividend             |       | 6,386,961                       |        | —                        |       | 12,773,922 |   | — |   |
| Other                                         |       | 422,214                         |        | 121,801                       |       | 562,152 |   | 260,249 |   |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Loss before income taxes                      |       | (17,896,530                     | )           | (10,903,957                   | )          | (37,793,099 | ) | (24,826,185 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Benefit for income taxes                      |       | (2,193,992                      | )           | (3,549,088                    | )          | (4,677,664 | ) | (8,020,333 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Net loss                                      |       | $                               | (15,702,538 | )                             | $          | (7,354,869 | ) | $ | (33,115,435 | ) | $ | (16,805,852 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Net loss attributable to common  shareholders |       | $                               | (15,702,538 | )                             | $          | (13,830,648 | ) | $ | (33,115,435 | ) | $ | (29,757,410 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Basic and diluted net loss per share          |       | $                               | (0.81       | )                             | $          | (0.73 | ) | $ | (1.71 | ) | $ | (1.57 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Weighted average common shares outstanding    |       | 19,381,124                      |        | 18,998,975                    |       | 19,350,292 |   | 18,969,759 |   |
|                                          |       |                            |        |                          |       |   |   |   |   |

 

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| (1)          Allocation of non-cash compensation expense  to other operating expenses: |   |   |    |   |   |    |   |   |    |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|
|                                                                                                                                |   |   |    |   |   |    |   |   |    |
| Corporate expense                                                                                                                   |   | $      | 107,872 |   | $      | 134,245 |   | $      | 382,160 |   | $ | 489,439 |   |
| Station operating expenses                                                                                                          |   | 24,306 |    | 30,542 |   | 52,842  |   | 61,085 |    |
| Non-cash compensation expense                                                                                                       |   | $      | 132,178 |   | $      | 164,787 |   | $      | 435,002 |   | $ | 550,524 |   |

 

See accompanying notes.

 

4

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**GRANITE BROADCASTINGCORPORATION**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ DEFICIT**

**(Unaudited)**

 
| ** **                             | ** ** | **Class A  Common  Stock** | ** ** | **Common  Stock  (Nonvoting)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Other  Comprehensive  Loss** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** ** | **Treasury  Stock** | ** **   | **Total  Stockholders’  Deficit** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|--------------|----------------------------------------|------------|
|                                   |       |                       |       |                           |       |                             |       |                           |       |                     |       |                       |       |                |         |                                   |       |
| Balance at December 31, 2003           |       | $                          | 1,785      |                           | $          | 188,341                          |       | $                              | —     |                     | $          | —                     |       | $                   | (248,118,609 | )                                      | $          | (627,648 | ) | $ | (875,675 | ) | $ | (249,431,806 | ) |
| Issuance of Common Stock (Nonvoting)   |       |                       |       | 3,684                          |       | (3,684                           | )          |                           |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense related to stock plans   |       |                       |       |                           |       | 198,825                          |       |                           |       |                     |       | 123,774                    |       |                |         | 322,599                                |       |
| Grant of stock award under stock plans |       |                       |       |                           |       | 210,740                          |       |                           |       |                     |       | (210,740                   | )          |                |         | —                                 |       |
| Discount on loans to officers          |       |                       |       |                           |       |                             |       |                           |       |                     |       | 97,726                     |       |                |         | 97,726                                 |       |
| Net loss                               |       |                       |       |                           |       |                             |       |                           |       | (33,115,435              | )          |                       |       |                |         | (33,115,435                            | )          |
| Unrealized loss on investment          |       |                       |       |                           |       |                             |       | (20,005                        | )          |                     |       |                       |       |                |         | (20,005                                | )          |
| Comprehensive loss                     |       |                       |       |                           |       |                             |       |                           |       |                     |       |                       |       |                |         | (33,135,440                            | )          |
|                                   |       |                       |       |                           |       |                             |       |                           |       |                     |       |                       |       |                |         |                                   |       |
| Balance at June 30, 2004               |       | $                          | 1,785      |                           | $          | 192,025                          |       | $                              | 405,881    |                     | $          | (20,005                    | )          | $                   | (281,234,044 | )                                      | $          | (616,888 | ) | $ | (875,675 | ) | $ | (282,146,921 | ) |

 

See accompanying notes.

 

5

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                   | ** ** | **2004**                      | ** **  | **2003** | ** ** |
| ** **                                                                   | ** ** | ** **                    | ** **  | **(Restated)** | ** ** |
| Cash flows from operating activities:                                        |       |                          |        |   |   |
| Net loss                                                                     |       | $                             | (33,115,435 | ) | $ | (16,805,852 | ) |
|                                                                         |       |                          |        |   |   |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                          |        |   |   |
| Amortization of intangible assets                                            |       | 3,764,465                     |        | 6,229,384 |   |
| Depreciation                                                                 |       | 3,486,849                     |        | 3,084,475 |   |
| Performance award expense                                                    |       | 1,048,542                     |        | — |   |
| Non-cash compensation expense                                                |       | 435,002                       |        | 550,524 |   |
| Non-cash interest expense                                                    |       | 2,280,297                     |        | 2,275,161 |   |
| Non-cash preferred stock dividend                                            |       | 12,773,922                    |        | — |   |
| Deferred tax benefit                                                         |       | (4,677,664                    | )           | — |   |
| Change in assets and liabilities:                                            |       |                          |        |   |   |
| Decrease in accounts receivable                                              |       | 766,155                       |        | 1,614,542 |   |
| Increase (decrease) in accrued liabilities                                   |       | 270,703                       |        | (717,279 | ) |
| Decrease in accounts payable                                                 |       | (1,149,015                    | )           | (633,394 | ) |
| WB affiliation payment                                                       |       | (1,688,389                    | )           | (1,057,532 | ) |
| Decrease (increase) in income tax  receivable                                |       | 16,326,799                    |        | (7,573,726 | ) |
| Decrease in film contract rights and other  assets                           |       | 6,033,580                     |        | 9,936,534 |   |
| Decrease in film contract rights payable  and other liabilities              |       | (12,177,309                   | )           | (12,262,329 | ) |
| Net cash used in operating activities                                        |       | (5,621,498                    | )           | (15,359,492 | ) |
|                                                                         |       |                          |        |   |   |
| Cash flows from investing activities:                                        |       |                          |        |   |   |
| Investments in marketable securities and  other investments                  |       | (8,353,112                    | )           | — |   |
| Capital expenditures                                                         |       | (2,600,302                    | )           | (8,025,464 | ) |
| Net cash used in investing activities                                        |       | (10,953,414                   | )           | (8,025,464 | ) |
|                                                                         |       |                          |        |   |   |
| Cash flows from financing activities:                                        |       |                          |        |   |   |
| Payment of deferred financing fees                                           |       | (170,905                      | )           | (647,146 | ) |
| Repurchase of common stock                                                   |       | —                        |        | (23,751 | ) |
| Exercise of stock options                                                    |       | —                        |        | 26,250 |   |
| Net cash used in financing activities                                        |       | (170,905                      | )           | (644,647 | ) |
|                                                                         |       |                          |        |   |   |
| Net decrease in cash and cash equivalents                                    |       | (16,745,817                   | )           | (24,029,603 | ) |
| Cash and cash equivalents, beginning of  period                              |       | 90,213,995                    |        | 54,319,597 |   |
| Cash and cash equivalents, end of period                                     |       | $                             | 73,468,178  |   | $ | 30,289,994 |   |
|                                                                         |       |                          |        |   |   |
| Supplemental information:                                                    |       |                          |        |   |   |
| Cash paid for interest                                                       |       | $                             | 17,440,313  |   | $ | 15,374,732 |   |
| Cash paid for income taxes                                                   |       | 21,100                        |        | 114,440 |   |
| Non-cash capital expenditures                                                |       | 72,254                        |        | — |   |
| Cumulative exchangeable preferred stock  dividend                            |       | —                        |        | 12,773,922 |   |
|                                                                         |       |                          |        |   |   |

 

See accompanying notes.

 

6

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**GRANITE BROADCASTING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Note 1 -Basis of Presentation and Accounting Policies**

 

The accompanying unaudited consolidatedfinancial statements include the accounts of Granite Broadcasting Corporationand its subsidiaries (the “Company”), and have been prepared in accordance withthe instructions to Form 10-Q and do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. Operating results for the three and six-month periods ended June 30,2004 are not necessarily indicative of the results that may be expected for theyear ended December 31, 2004.  Forfurther information, refer to the Company’s consolidated financial statementsand notes thereto for the year ended December 31, 2003, which were included inthe Company’s Annual Report on Form 10-K for the year ended December 31,2003.  All significant inter-companyaccounts and transactions have been eliminated. The Company has adjusted itsGoodwill and Deferred Tax Liability balances by approximately $14,926,000 toappropriately reflect the tax basis of certain assets acquired in prior years’acquisitions. These adjustments have been reflected in the June 30, 2004 andDecember 31, 2003 Balance Sheets disclosed herein. This adjustment had noeffect on the Company’s previously reported Statement of Operations or CashFlows. Data at, and for the year ended, December 31, 2003 are derived from theCompany’s audited consolidated financial statements.  In the opinion of management, all adjustmentsof a normal recurring nature, which are necessary for a fair presentation ofthe results for the interim periods, have been made.

 

*Restatement of Financial Statements*

 

Upon theadoption of Statement of Financial Accounting Standards No. 142, Goodwill andOther Intangible Assets (“Statement 142”), the Company considered the value ofits network affiliation agreements as indefinite lived assets that should notbe subject to amortization.  In light of stated positions by theSecurities and Exchange Commission regarding amortization of networkaffiliation agreements, the Company has changed its accounting policy as ofDecember 31, 2003 to amortize these assets retroactive to January 1, 2002 usinga 25-year useful life.  As a result, the financial results for the three andsix months ended June 30, 2003 have been restated.  The total impact ofthe adjustment was an increase in amortization expense for the three and sixmonths ended June 30, 2003 of $744,839 and $1,489,678, respectively, with acorresponding adjustment to loss before income taxes and net loss for the threeand six months ended June 30, 2003 of $484,145 and $968,290, respectively.  Basic and diluted net loss per shareincreased by $0.03 and $0.05 for the three and six months ended June 30, 2003,respectively.

 

*Cash Equivalents and Investments inMarketable Securities*

 

All highlyliquid investments purchased with an original maturity of ninety days or lessare considered cash equivalents. The marketable securities are classified asavailable-for-sale in accordance with the provisions of Statement of FinancialAccounting Standards No. 115, Accounting for Certain Investments in Debt andEquity Securities.  These securities arecarried at fair market value based on current market quotes. Unrealized gainsand losses are reported in stockholders’ equity as a separate component ofother comprehensive income / (loss) until realized.  Gains and losses on securities sold are basedon the specific identification method. The Company does not hold thesesecurities for speculative or trading purposes. For the six months ended June30, 2004, the Company’s unrealized holding losses totaled approximately$20,000.  For the three and six monthsended June 30, 2004, the Company recorded realized losses of approximately$60,000.

 

*Stock-Based Compensation*

 

The Company has adopted the disclosure provisions of SFASNo. 148, Accounting for Stock-Based Compensation — Transition and Disclosure torequire disclosure in the summary of accounting policies of the effects of anentity’s accounting policy with respect to stock-based compensation on reportednet income / (loss) and earnings per share in annual and interim financialstatements.

 

The Companyaccounts for stock option grants under the recognition and measurementprinciples of Accounting Principles Board (“APB”) No 25, Accounting for StockIssued to Employees and related interpretations. Under APB No. 25, because theexercise price of the Company’s stock options equals the market price (fairvalue) of the underlying stock on the date of grant, no compensation expense isrecorded.

 

The followingtable illustrates the effect on net loss and loss per share as if the Companyhad applied the fair value recognition provisions of SFAS No. 123, as amendedby SFAS No. 148, to stock-based compensation for the three and six months

 

7

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ended June 30, 2004 and 2003 which may not be representative of the impact infuture years.

 
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2004**                        | ** **  | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                 | ** ** | ** **                      | ** **  | **(Restated)**                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net loss attributable to common  shareholders, as reported |       | $                               | (15,702,538 | )                             | $          | (13,830,648 | ) | $ | (33,115,435 | ) | $ | (29,757,410 | ) |
| Add: pro forma compensation expense                        |       | (358,064                        | )           | (349,587                      | )          | (715,438 | ) | (689,575 | ) |
| Less: compensation expense, as reported                    |       | 12,000                          |        | 12,000                        |       | 24,000 |   | 24,000 |   |
| Pro forma net loss attributable to common  shareholders    |       | $                               | (16,048,602 | )                             | $          | (14,168,235 | ) | $ | (33,806,873 | ) | $ | (30,422,985 | ) |
|                                                       |       |                            |        |                          |       |   |   |   |   |
| Basic and diluted net loss per share, as  reported         |       | $                               | (0.81       | )                             | $          | (0.73 | ) | $ | (1.71 | ) | $ | (1.57 | ) |
| Pro forma compensation expense                             |       | (0.02                           | )           | (0.02                         | )          | (0.04 | ) | (0.04 | ) |
| Pro forma basic and diluted net loss per  share            |       | $                               | (0.83       | )                             | $          | (0.75 | ) | $ | (1.75 | ) | $ | (1.61 | ) |

 

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

 

**Note 2 – Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity**

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity (“Statement 150”).  Statement 150 establishes standards forclassifying and measuring as liabilities certain financial instruments thathave characteristics of both liabilities and equity.  The provisions of Statement 150 wereeffective 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% Cumulative ExchangeablePreferred Stock (the “Preferred Stock”) has been reclassified on the Company’sconsolidated balance sheet as a long-term liability and the accrual ofdividends of $6,387,000 and $12,774,000 for the three and six months ended June30, 2004, respectively has been recorded as a charge to expense on theconsolidated statement of operations. For the three and six months ended June 30, 2003, dividends on thePreferred Stock were treated as a reduction of stockholders’ equity.

 

**Note 3 – Acquisitions and Dispositions**

 

On April 23,2004, the Company announced that it has entered into a definitive agreement tosell the assets of its Fort Wayne, Indiana ABC affiliate, WPTA-TV, to MalaraBroadcasting for $45.9 million, subject to certain closing adjustments. TheWPTA-TV transaction is contingent upon Malara Broadcasting obtaining adequatefinancing and no assurance can be given that the transaction will beconsummated.  The Company will acquirethe stock of NVG-Fort Wayne, Inc, owner and operator of WISE-TV, the NBCaffiliate serving Fort Wayne, Indiana for $44.2 million, subject to certainclosing adjustments.  Following thesetransactions, the Company intends to enter into a strategic arrangement withMalara Broadcasting under which the Company will provide advertising sales,promotion and administrative services, and selected programming to certainMalara-owned stations. The first implementation of the arrangement will involvestations in Fort Wayne, Indiana and Duluth, Minnesota.  Malara Broadcasting has entered into adefinitive agreement to acquire the assets of KDLH-TV, the CBS affiliateserving Duluth, Minnesota from New Vision Group LLC for $10.8 million, subjectto certain closing adjustments. It is anticipated that the Company willguarantee financing for the foregoing Malara Broadcasting acquisitions. TheCompany anticipates that once these acquisitions and strategic arrangements areconsummated it will account for these transactions in accordance with certainprovisions of FASB Interpretation No. 46, Consolidation of Variable InterestEntities (“Interpretation 46”).  Interpretation 46 addresses when a company should include in itsfinancial statements the assets, liabilities and results of operations ofanother entity.

 

All of theabove transactions are contingent upon approval by the Federal CommunicationsCommission or (FCC) and satisfaction of other customary closing conditions. InMay 2004 petition to deny Malara Broadcasting’s FCC application to acquireKDLH-TV was filed with the FCC.  MalaraBroadcasting filed an opposition to the petition in June 2004, and thepetitioning party filed its reply to that opposition.   The Company is not aware of any petitionsfiled regarding either the WPTA-TV application or the WISE-TV application andthe time for public comment on all of the foregoing FCC applications has sinceexpired. The Company and Malara Broadcasting believe that the KDLH petition iswithout merit and anticipate that the FCC will approve all of the abovetransactions; however, the Company can provide no assurances in this regard.

 

8

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**Note 4 – Per Share Calculations**

 

The per-share calculations shown on theincome statement for the three and six months ended June 30, 2004 and 2003 arecomputed in accordance with Statement of Financial Accounting Standards No.128, Earnings Per Share.  The followingtable sets forth the computation of basic and diluted earnings per share:

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                         | ** ** | **2004**                        | ** **  | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | ** **                      | ** **  | **(Restated)**                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net loss                                           |       | $                               | (15,702,538 | )                             | $          | (7,354,869 | ) | $ | (33,115,435 | ) | $ | (16,805,852 | ) |
|                                               |       |                            |        |                          |       |   |   |   |   |
| LESS:                                              |       |                            |        |                          |       |   |   |   |   |
| Cumulative exchangeable preferred stock  dividends |       | —                          |        | 6,386,961                     |       | — |   | 12,773,922 |   |
| Accretion on exchangeable preferred stock          |       | —                          |        | 88,818                        |       | — |   | 177,636 |   |
|                                               |       |                            |        |                          |       |   |   |   |   |
| Net loss attributable to common  shareholders      |       | $                               | (15,702,538 | )                             | $          | (13,830,648 | ) | $ | (33,115,435 | ) | $ | (29,757,410 | ) |
|                                               |       |                            |        |                          |       |   |   |   |   |
| Weighted average common shares outstanding         |       | 19,381,124                      |        | 18,998,975                    |       | 19,350,292 |   | 18,969,759 |   |
|                                               |       |                            |        |                          |       |   |   |   |   |
| Per basic and diluted common share:                |       |                            |        |                          |       |   |   |   |   |
| Basic and diluted net loss per share               |       | $                               | (0.81       | )                             | $          | (0.73 | ) | $ | (1.71 | ) | $ | (1.57 | ) |

 

**Note 5 – Restructuring Charges**

 

In the second quarter of 2004, the Companyrecognized a $526,000 restructuring charge related to voluntary and involuntaryemployee terminations at our Buffalo, New York television station. This chargeincluded severance and earned vacation, payroll taxes and health insurancecosts.  In addition, we anticipate thatthere will be additional staff reductions at this station and estimate that therestructuring charge will approximate $100,000 in the third quarter of 2004.

 

At June 30, 2004, the restructuring chargewas included in “other accrued liabilities” on the consolidated Balance Sheetsand the expense was included in “station operating expenses” on theconsolidated Statement of Operations. These costs were recognized in accordancewith the provisions of Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with Exit or Disposal Activities.

 

The following is a reconciliation of theaggregate liability recorded for restructuring charges as of June 30, 2004:

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                            |       |                          |       |   |   |   |   |
| Beginning balance  |       | $                               | —     |                          | $          | — |   | $ | — |   | $ | — |   |
| Expense recognized |       | 526,000                         |       | —                        |       | 526,000 |   | — |   |
| Payments made      |       | —                          |       | —                        |       | — |   | — |   |
|               |       |                            |       |                          |       |   |   |   |   |
| Ending balance     |       | $                               | 526,000    |                          | $          | — |   | $ | 526,000 |   | $ | — |   |

 

The liabilityfor the restructuring charges will be paid in accordance with the provisions ofthe severance agreements and payments are expected to be completed within oneyear.

 

***Item 2******. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations***

 

The following information should be read in conjunction with theunaudited consolidated financial statements and notes thereto in this QuarterlyReport and the audited financial statements and Management’s Discussion andAnalysis of Financial Condition and Results of Operations contained in our Form10-K for the year ended December 31, 2003.

 

9

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*Executive Summary*

 

We own andoperate eight network affiliated television stations in geographically diversemarkets reaching over 6% of the nation’s television households.  Three stations are affiliated with NBC, twowith ABC and one with CBS, our Big Three Affiliates and two stations areaffiliated with the Warner Brothers Television Network, our WB Affiliates.  The NBC affiliates are KSEE-TV,Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois, and KBJR-TV,Duluth, Minnesota and Superior, Wisconsin. The ABC affiliates are WKBW-TV, Buffalo, New York and WPTA-TV, FortWayne, Indiana.  The CBS affiliate isWTVH-TV, Syracuse, New York.  The WBaffiliates are KBWB-TV, San Francisco, California and WDWB-TV, Detroit,Michigan.

 

Upon adoptionof Statement of Financial Accounting Standards No. 142 on January 1, 2002, weconsidered the value of the network affiliation agreements as indefinite-livedand were not amortizing the intangible assets. In light of stated positions bythe Securities and Exchange Commission regarding amortization of networkaffiliation agreements, we have changed our accounting policy as of December 31,2003 to amortize these assets retroactive to January 1, 2002 using a 25-yearuseful life.  As a result, we restatedour earnings for the three and six months ended June 30, 2003, and recordedadditional amortization expense of $745,000 and $1,490,000, respectively.

 

We believethat inflation has not had a material impact on our results of operations forthe three and six months ended June 30, 2004. However, there can be no assurance that future inflation would not havean adverse impact on our operating results and financial condition.

 

Our operatingrevenues are generally lower in the first calendar quarter and generally higherin the fourth calendar quarter than in the other two quarters, due in part toincreases in retail advertising in the fall months in preparation for theholiday season, and in election years due to increased political advertising.

 

Our revenuesare derived principally from local and national advertising, politicaladvertising in an election year and, to a lesser extent, from networkcompensation for the broadcast of programming and revenues from studio rentaland commercial production activities. The primary operating expenses involved in owning and operatingtelevision stations are employee salaries, depreciation and amortization,programming, advertising and promotion. Amounts referred to in the following discussion have been rounded to thenearest thousand.

 

**RESULTSOF OPERATIONS**

** **

*Three Months Ended June 30, 2004 and 2003*

 

***Consolidated***

 

Net revenuefor our eight-station group increased $696,000 or 2% to $29,163,000 for thethree months ended June 30, 2004, from $28,467,000 for the three months endedJune 30, 2003.  The increase wasprimarily due to increases in political advertising revenue and non-politicallocal revenue of $538,000 and $432,000, respectively. We generatedapproximately $690,000 of net political revenue, which representedapproximately 2% of total net revenues. The non-political local revenueincrease was primarily due to the growth in the automotive, instructionalschools and financial services categories. Non-political national revenuedeclined 4.5% or $663,000 due primarily to declines in the automotive,telecommunications and movie categories at our WB affiliates offset, in part,by increases in non-political national revenue at our Big Three affiliates.

 

Station operatingexpenses decreased $717,000 or 3% to $22,312,000 for the three months endedJune 30, 2004 from $23,029,000 for the three months ended June 30, 2003.  Lower film amortization expense resultingfrom write-downs in 2003 and 2002 of certain film contract rights at our WBaffiliates, was offset, in part, by higher healthcare costs, compensationincreases, the restructuring charge at WKBW and increases in power and rentresulting from the launch of digital broadcasting.  Film contract rights are lower due to theexpiration of certain programs and the write down of certain film contractrights to net realizable value in 2003.

 

***Big Three Affiliates***

 

Net revenue at our BigThree affiliates increased $828,000 or 4% to $20,220,000 from $19,392,000primarily due to increases in political advertising and non-political nationalrevenues of $514,000 and $471,000, respectively. The non-political nationalrevenue increase was primarily due to the growth in the paid programming,telecommunication and food store categories. These increases were partiallyoffset by decreases of $54,000 or 0.4% in non-political local revenue. The BigThree affiliates contributed 69% to net revenue during the quarter.

 

Station operatingexpenses at our Big Three affiliates increased $759,000 or 6% to $13,903,000from $13,144,000 due primarily to higher healthcare costs, compensationincreases, higher sales expense, the restructuring charge at WKBW and increased

 

10

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power costs resultingfrom the onset of digital broadcasting.

 

***WB Affiliates***

 

Net revenue at our WBaffiliates decreased $132,000 or 2% to $8,943,000 from $9,075,000 due primarilyto decreases in non-political national revenues of 19%, offset by healthynon-political local growth of 9%.  Thenon-political national revenue decreases were primarily due to declines in theautomotive, telecommunications and movie categories.  The WB affiliates do not generate meaningfulpolitical revenue, as they do not broadcast local news.  The WB affiliates contributed 31% to netrevenue during the quarter.

 

Stationoperating expenses at our WB affiliates decreased $1,476,000 or 15% to$8,409,000 from $9,885,000 primarily due to write-downs in 2003 and 2002 ofcertain film contract rights to net realizable value, as well as the expirationof certain programs.

 

***Consolidated***

 

Amortizationexpense decreased $1,232,000 or 40% during the three months ended June 30, 2004compared to the same period a year earlier. The decrease was primarily due tothe completion of amortization of a covenant not to compete as of July2003.  Depreciation expense increased$171,000 or 11% during the three months ended June 30, 2004 compared to thesame period a year earlier.  The increasewas primarily due to increased capital expenditures in 2003 related to theconversion to digital broadcasting.

 

Corporateexpense totaled $3,477,000; an increase of $805,000 or 30% compared to$2,672,000 for the three months ended June 30, 2003. The increase reflects$524,000 of expense associated with a performance award granted to certainofficers of the Company during 2003 that will be used primarily to repaycertain officers outstanding loans to us on January 25, 2006.  The performance award expense for the yearended December 31, 2004 is expected to be $2,096,000.  The remaining increase of $281,000 is due toincreased professional fees and directors’ and officers’ liability insurance.  Non-cash compensation expense decreased$33,000 or 20% due to a reduction in stock awards granted to certainexecutives.

 

Interestexpense totaled $9,872,000; an increase of $2,184,000 or 28% compared to$7,688,000 for the three months ended June 30, 2003.  The increase was primarily due to higher debtbalances on our outstanding senior secured notes.  Interest income totaled $284,000; an increaseof $107,000, or 61% compared to the three months ended June 30, 2003 primarilydue to the increased average cash balance invested for the three months endedJune 30, 2004 as compared to the same period in 2003. Non-cash interest expensetotaled $1,134,000, a decrease of $70,000 or 6% primarily due to imputedinterest on our obligation to the WB network under the affiliation agreements,offset in part by reduced amortization of deferred financing fees.

 

We recorded as an expense the accrual of dividends on our 12 3/4%Cumulative Exchangeable Preferred Stock totaling $6,387,000 during the threemonths ended June 30, 2004 as required by Statement of Financial AccountingStandards No.150. For the quarter ended June 30, 2003, dividends on thePreferred Stock were treated as a reduction of stockholders’ equity.

 

During thethree months ended June 30, 2004, we recorded a deferred tax benefit of$2,194,000, compared to a current tax benefit of $3,549,000 for the threemonths ended June 30, 2003.  The changein the tax benefit is primarily due to the Company providing for a valuationallowance against net operating loss carry forwards, which may not be utilizedin future periods.

 

*Six Months Ended June 30, 2004 and 2003*

 

***Consolidated***

 

Net revenuefor our eight-station group increased $2,039,000 or 4% to $55,164,000 for thesix months ended June 30, 2004, from $53,125,000 for the six months ended June30, 2003.  The increase was due primarilyto increased political advertising revenue and non-political local revenue of$1,617,000 and $649,000, respectively. We generated approximately $1,768,000 of net political revenue, whichrepresented approximately 3% of total net revenues. The non-political localrevenue increase was primarily due to the growth in the instructional schoolsand financial services categories. Non-political national revenue declined 3.6%or $976,000 due primarily to declines in the paid programming and movie categoriesat our WB affiliates offset, in part, by increases in non-political nationalrevenue at our Big Three affiliates.

 

Stationoperating expenses decreased $1,732,000 or 4% to $43,403,000 for the six monthsended June 30, 2004 from $45,135,000 for the six months ended June 30, 2003.Lower film amortization expense resulting from write-downs in 2003 and 2002 ofcertain film contract rights at our WB affiliates and the reduction in theallowance for doubtful accounts, was offset, in part, by higher healthcarecosts, compensation increases, the restructuring charge at WKBW and increasesin power and rent resulting from the launch of digital broadcasting.  Film contract rights are lower due to theexpiration of certain programs and the write down of certain

 

11

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film contract rights to netrealizable value in 2003.

 

***Big Three Affiliates***

 

Net revenue at our BigThree affiliates increased $1,967,000 or 6% to $37,893,000 from $35,926,000primarily due to increases in political advertising and non-political nationalrevenues of $1,582,000 and $745,000, respectively.  The non-political national revenue increasewas primarily due to the growth in the paid programming and telecommunicationscategories. These increases were partially offset by decreases in non-politicallocal revenue of $345,000.  Thenon-political local revenue decrease was primarily due to the decline in theretail, food store and entertainment categories.  The Big Three affiliates contributed 69% to netrevenue for the six months ended June 30, 2004.

 

Station operatingexpenses at our Big Three affiliates increased $1,432,000 or 6% to $27,420,000from $25,988,000 due primarily to higher healthcare costs, compensationincreases, higher sales expense, the restructuring charge at WKBW and increasedpower costs resulting from the onset of digital broadcasting.

 

***WB Affiliates***

 

Net revenue at our WBaffiliates increased $72,000 or less than 1% to $17,271,000 from$17,199,000.  Non-political nationalrevenue decreased 15.5% due primarily to declines in the paid programming andmovie categories.  The WB affiliates donot generate meaningful political revenue, as they do not broadcast local news.  The WB affiliates contributed 31% to netrevenue for the six months ended June 30, 2004.

 

Stationoperating expenses at our WB affiliates decreased $3,164,000 or 17% to$15,983,000 from $19,147,000 primarily due to write-downs in 2003 and 2002 ofcertain film contract rights to net realizable value, the expiration of certainprograms and a reduction of the allowance for doubtful accounts.

 

***Consolidated***

 

Amortizationexpense decreased $2,465,000 or 40% during the six months ended June 30, 2004compared to the same period a year earlier. The decrease was primarily due to thecompletion of amortization expense of a covenant not to compete in July 2003.Depreciation expense increased $402,000 or 13% during the six months ended June30, 2004 compared to the same period a year earlier.  The increase was primarily due to increasedcapital expenditures in 2003 related to the conversion to digital broadcasting.

 

Corporateexpense totaled $7,022,000; an increase of $1,530,000 or 28% compared to$5,493,000 for the six months ended June 30, 2003.  The increase reflects $1,049,000 of expenseassociated with a performance award granted to certain officers of the Companyduring 2003 that will be used primarily to repay certain officers outstandingloans to us on January 25, 2006.  Theperformance award expense for the year ended December 31, 2004 is expected tobe $2,096,000.  The remaining increase of$481,000 is due to increased professional fees and directors’ and officers’liability insurance.  Non-cash compensationexpense decreased $116,000 or 21% due to a reduction in stock awards granted tocertain executives.

 

Interestexpense totaled $19,745,000; an increase of $4,430,000 or 29% compared to$15,315,000 for the six months ended June 30, 2003.  The increase was primarily due to higher debtbalances on our outstanding senior secured notes.  Interest income totaled $517,000; an increaseof $125,000, or 32% compared to the six months ended June 30, 2003 primarilydue to the increased average cash balance invested for the six months endedJune 30, 2004 as compared to the same period in 2003.

 

We recorded as an expense the accrual of dividends on our 12 3/4%Cumulative Exchangeable Preferred Stock totaling $12,774,000 during the sixmonths ended June 30, 2004 as required by Statement of Financial AccountingStandards No.150. For the six months ended June 30, 2003, dividends on thePreferred Stock were treated as a reduction of stockholders’ equity.

 

During the sixmonths ended June 30, 2004, we recorded a deferred tax benefit of $4,678,000,compared to a current tax benefit of $8,020,000 for the six months ended June30, 2003. The change in the tax benefit is primarily due to the Companyproviding for a valuation allowance against net operating loss carry forwards,which may not be utilized in future periods.

 

*Restructuring Charges*

 

During the second quarter of 2004, weconducted an extensive review of the operating and cost structure at ourBuffalo, New York station. As a result of this review, we have eliminatedcertain functional job positions through a combination of voluntary and involuntaryemployee terminations and reduced certain non-personnel related operatingexpenses. In connection with the elimination of the employment positions, werecognized a $526,000 restructuring charge as of June 30, 2004 related toseverance and earned

 

12

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vacation, payroll taxes and health insurancecosts. In addition, we anticipate that there will be additional staffreductions at this station and estimate that the restructuring charge willapproximate $100,000 in the third quarter of 2004.

 

At June 30, 2004, the restructuring chargewas included in “other accrued liabilities” on the consolidated Balance Sheetsand the expense was included in “station operating expenses” on theconsolidated Statement of Operations. These costs were recognized in accordancewith the provisions of Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with Exit or Disposal Activities.

 

The following is a reconciliation of theaggregate liability recorded for restructuring charges as of June 30, 2004:

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|               |       |                            |       |                          |       |   |   |   |   |
| Beginning balance  |       | $                               | —     |                          | $          | — |   | $ | — |   | $ | — |   |
| Expense recognized |       | 526,000                         |       | —                        |       | 526,000 |   | — |   |
| Payments made      |       | —                          |       | —                        |       | — |   | — |   |
|               |       |                            |       |                          |       |   |   |   |   |
| Ending balance     |       | $                               | 526,000    |                          | $          | — |   | $ | 526,000 |   | $ | — |   |

 

The liabilityfor the restructuring charges will be paid in accordance with the provisions ofthe severance agreements and payments are expected to be completed within oneyear.

 

*Liquidity and Capital Resources*

 

On December22, 2003, we completed a $405,000,000 offering of our 9 3/4% Senior SecuredNotes (the “Notes”) due December 1, 2010, at a discount, resulting in proceedsto us of $400,067,100.  Interest on the Notesis payable on December 1 and June 1 of each year, beginning on June 1,2004.  The Notes are secured bysubstantially all of our assets.  We usedthe net proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under our senior credit agreement, (ii)redeem at par, plus accrued interest, all of our 9 3/8% and 10 3/8% seniorsubordinated notes due May and December 2005, respectively, and (iii) torepurchase at par, plus accrued interest, all of our 8 7/8% senior subordinatednotes due May 2008.  The remainingproceeds are being used for general working capital purposes.

 

We have established an investment policy for investing cash that is notimmediately required for working capital purposes.  Our investment objectives are to preservecapital, maximize our return on investment and to ensure we have appropriateliquidity for our cash needs. The investments are considered to beavailable-for-sale as defined under Statement of FinancialAccounting Standards No. 115, Accounting for Certain Investments in Debt andEquity Securities. As of June 30, 2004, we had approximately $73,468,000 ofcash and cash equivalents and $8,384,000 of marketable securities. Themarketable securities, which include direct obligations of the U.S. Government,domestic commercial paper and domestic certificates of deposits, havematurities of one year or less and have active markets to ensure portfolioliquidity.  During the second quarter of2004, the Company received its $16,000,000 tax refund as anticipated. Webelieve that cash and cash equivalents together with the marketable securitiesand internally generated funds from operations will be sufficient to satisfyour cash requirements for our existing operations for the next twelve months.

 

Under theterms of the Certificate of Designations for our 12 3/4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”), we were required to makethe semi-annual dividends on such shares in cash beginning October 1, 2002.  The cash payment of dividends had beenrestricted by the terms of the senior credit agreement and the indenturegoverning our senior subordinated notes and is prohibited under the indenturesgoverning the Notes.  Consequently wehave not paid the semi-annual dividend due to the holders since October 1,2002.  Since three or more semi-annualdividend payments have not been paid, the holders of the Preferred Stock havethe right to elect the lesser of two directors or that number of directorsconstituting 25% of the members of the Board of Directors.  The right of the holders of the PreferredStock to elect members of the Board of Directors as set forth above willcontinue until such time as all accumulated dividends that are required to bepaid in cash and that are in arrears on the Preferred Stock are paid in full incash.  We are restricted from paying cashdividends under the Indenture governing the Notes and do not anticipate payingcash dividends on our Preferred Stock in the foreseeable future.

 

As part of anoverall effort to reduce station operating expenses, we have made substantialprogress replacing unprofitable programming with competitive, profitableprogramming.

 

Film paymentsat our WB affiliates for the three and six months ended June 30, 2004 totaled$4.8 million and $9.7 million, respectively, as compared to the three and sixmonths ended June 30, 2003 totaling $5.2 million and $10.2 million,respectively. Film

 

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payments for the year endedDecember 31, 2004 will approximate $18.9 million.  Based on completed negotiations and currentmarket conditions for the purchase of programming, we expect annual filmpayments at the WB affiliates to decline by approximately 50% by 2007.

 

Film paymentsat our Big Three affiliates for the three and six months ended June 30, 2004and June 30, 2003 totaled $1.3 million and $2.6 million, respectively. Filmpayments for the year ended December 31, 2004 will approximate $5.4million.  Based on completed negotiationsand current market conditions for the purchase of programming, we expect annualfilm payments at the Big Three affiliates to decline by approximately 20% by2007.

 

Net cash usedin operating activities was $5,621,000 during the six months ended June 30,2004 compared to $15,359,000 during the six months ended June 30, 2003.  The change from 2003 to 2004 was primarilydue to the receipt of a $16,000,000 income tax refund, offset in part byincreased payments of interest expense of $2,065,000 and changes in net assets.

 

Net cash used in investing activities was $10,953,000during the six months ended June 30, 2004 compared to $8,025,000 during the sixmonths ended June 30, 2003.  The changefrom 2003 to 2004 was primarily due to purchase of marketable securities,offset by a reduction in capital expenditures due to the completion of ourconversion to digital technology.

 

Net cash usedin financing activities was $171,000 during the six months ended June 30, 2004compared to $645,000 during the six months ended June 30, 2003.  The change from 2003 to 2004 primarilyresulted from a decrease in the payment of deferred financing fees.

 

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

 

The interest rate on our outstanding Senior Secured Notes is fixed at9.75%.  Consequently, our earnings willnot be affected by changes in short-term interest rates.

 

***Item 4******.******         ******Controls and Procedures***

 

As of June 30, 2004, an evaluation was carried out under thesupervision and with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRule 13a-14(c) under the Securities Exchange Act of 1934). Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective as of June 30, 2004. No significant changes were made in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

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**PARTII.  OTHER INFORMATION**

 

***Item 4.******          Submission of Matters to a Vote ofSecurity Holders***

 

None

 

***Item5.******         ******Other Information***

 

On June 17,2004, the Company had an oral hearing before the Nasdaq Listing QualificationsPanel (the “Panel”) to discuss the continued listing of the Company’s CommonStock (Nonvoting) on the Nasdaq Small Cap Market.  On August 3, 2004, the Panel issued its decisionto delist the Company’s Common Stock (Nonvoting) effective with the opening ofbusiness on August 5, 2004.  TheCompany’s Common Stock (Nonvoting) began trading on the Over the CounterBulletin Board on August 5, 2004.

 

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

 

a. Exhibits

 

31.1                           Certificationof Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002 (15 U.S.C. §7241)

 

31.2                           Certificationof Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002 (15 U.S.C. §7241)

 

32                                    Certificationsof Chief Executive Officer and Chief Financial Officer Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)

 

b. Reports on Form 8-K

 

Current Report on Form 8-K filed April 27,2004, disclosing the release of our earnings for the first quarter ended March31, 2004.

 

Current Report on Form 8-K filed May 7, 2004,disclosing the Company received a letter from NASDAQ stating that its nonvotingcommon stock (“Common Stock”) did not comply with the $35 million marketcapitalization requirement for continued listing on the Nasdaq SmallCap Market(Marketplace Rule 43210(c)(2)(B)(ii)).

 

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**SIGNATURES**

 

 

Pursuant to the requirements of Section 13 or15 (d) of the Securities Exchange Act of 1934, the Registrant has caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |             |   | GRANITE  BROADCASTING CORPORATION                          |
|--------|------------------|--------|------------------------------------------------------------|
|   |             |   |                                                       | Registrant |
|   |             |   |                                                       |   |
|   |             |   |                                                       |   |
| Date:  | August 11,  2004 |   | /s/                                                        | W. DON CORNWELL |
|   |             |   |                                                       | (W. Don Cornwell) |
|   |             |   |                                                       | Chief Executive Officer |
|   |             |   |                                                       |   |
|   |             |   |                                                       |   |
| Date:  | August 11,  2004 |   | /s/                                                        | LAWRENCE I. WILLS |
|   |             |   |                                                       | (Lawrence I. Wills) |
|   |             |   | Senior Vice  President – Chief Administrative Officer |
|   |             |   |                                                       | (Principal Accounting Officer) |
|        |                  |        |                                                            |  |  |  |  |

 

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