**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

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

 

**For the quarterly period ended March31, 2003**

 

**OR**

 

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

 

**For the transition periodfrom                     to                     **

 

**Commission File Number  0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrantas specified in its charter)

 
| **DELAWARE**                                                     |   | **13-3458782**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **767 Third Avenue  34th Floor  New York, New York  10017** |
| (Address of principal  executive offices) (Zip code)             |
|                                                             |
| **(212) 826-2530**                                               |
| (Registrant’s telephone  number, including area code)       |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý    No  o

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.  Class A Voting Common Stock, par value $.01per share - 178,500 shares outstanding at April 30, 2003; Common Stock(Nonvoting), par value $.01 per share – 18,813,879 shares outstanding at April30, 2003.

 

 

----

 

**GRANITEBROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
| PART I                      | FINANCIAL INFORMATION                                                                                        |
|-----------------------------|--------------------------------------------------------------------------------------------------------------|
|                        |                                                                                                         |
| Item 1.                     | Financial Statements                                                                                         |
|                        |                                                                                                         |
|                        | Consolidated Balance Sheets  as of March 31, 2003 (unaudited) and December 31, 2002                          |
|                        | Consolidated  Statement of Operations for the Three Months Ended March 31, 2003 and 2002  (unaudited)        |
|                        | Consolidated  Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2003  (unaudited) |
|                        | Consolidated  Statement of Cash Flows for the Three Months Ended March 31, 2003 and 2002  (unaudited)        |
|                        | Notes to  Consolidated Financial Statements                                                                  |
|                        |                                                                                                         |
| Item  2.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  |
|                        |                                                                                                         |
| Item  3.                    | Quantitative  and Qualitative Disclosures About Market Risk                                                  |
|                        |                                                                                                         |
| Item 4.                     | Controls and  Procedures                                                                                |
|                        |                                                                                                         |
| PART II                     | OTHER INFORMATION                                                                                            |
|                        |                                                                                                         |
| Item  4.                    | Submission  of Matters to a Vote of Security Holders                                                         |
|                        |                                                                                                         |
| Item 6.                     | Exhibits and  Reports on Form 8-K                                                                            |
|                        |
| Signatures                  |
|                        |
| Section  302 Certifications |
|                             |                                                                                                              |  |

 

----

 

**PARTI.  FINANCIAL INFORMATION**

 

***Item 1.  Financial Statements***

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEET**

 

|                                                                                                                                                                                                                                                                                                                                                      |   | **March 31,  2003** |        | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                      |   | **(Unaudited)**     |        |                   |   |
| **Assets**                                                                                                                                                                                                                                                                                                                                                |   |                |        |                   |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                           |   |                |        |                   |   |
| Cash and cash equivalents (including $1,777,115 of  restricted cash at December 31, 2002)                                                                                                                                                                                                                                                                 |   | $                   | 47,437,158  |                   | $      | 54,319,597 |   |
| Accounts receivable, less allowance for doubtful  accounts ($757,385 at March 31, 2003 and $747,520 at December 31, 2002)                                                                                                                                                                                                                                 |   | 19,090,715          |        | 23,211,637             |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                      |   | 16,340,902          |        | 19,713,849             |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                      |   | 17,362,161          |        | 10,116,047             |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                      |   | 100,230,936         |        | 107,361,130            |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                               |   | 42,533,995          |        | 41,813,349             |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                      |   | 11,462,355          |        | 12,918,123             |   |
| Other non current assets                                                                                                                                                                                                                                                                                                                                  |   | 3,552,416           |        | 3,461,975              |   |
| Deferred financing fees, less accumulated  amortization ($8,613,139 at March 31, 2003 and $7,612,443 at December 31,  2002)                                                                                                                                                                                                                               |   | 5,135,416           |        | 5,630,704              |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                             |   | 83,051,302          |        | 83,051,302             |   |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                   |   | 127,331,829         |        | 127,331,829            |   |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                 |   | 89,475,461          |        | 90,345,315             |   |
| Other intangibles, net                                                                                                                                                                                                                                                                                                                                    |   | 1,750,000           |        | 3,250,000              |   |
| Total assets                                                                                                                                                                                                                                                                                                                                              |   | $                   | 464,523,710 |                   | $      | 475,163,727 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| **Liabilities  and Stockholders’ Deficit**                                                                                                                                                                                                                                                                                                           |   |                |        |                   |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                          |   | $                   | 2,180,000   |                   | $      | 2,807,730 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                          |   | 7,910,201           |        | 3,158,876              |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                 |   | 6,487,736           |        | 6,941,220              |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                              |   | 25,088,817          |        | 26,601,355             |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                 |   | 3,480,916           |        | 3,581,243              |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                 |   | 45,147,670          |        | 43,090,424             |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                            |   | 312,800,107         |        | 312,791,038            |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                              |   | 29,843,298          |        | 33,379,694             |   |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                    |   | 45,779,491          |        | 45,779,491             |   |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                             |   | 36,183,739          |        | 30,356,259             |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                |   | 198,214,133         |        | 198,125,314            |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |                |        |                   |   |
| 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 18,813,879 shares of Common Stock (Nonvoting) (18,581,510 shares at  December 31, 2002) issued and outstanding |   | 189,924             |        | 187,600                |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                       |   | (201,830,929        | )           | (186,842,835           | )      |
| Less:                                                                                                                                                                                                                                                                                                                                                     |   |                |        |                   |   |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                     |   | (928,048            | )           | (851,334               | )      |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                   |   | (875,675            | )           | (851,924               | )      |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                          |   | (203,444,728        | )           | (188,358,493           | )      |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                          |   | $                   | 464,523,710 |                   | $      | 475,163,727 |   |

 

See accompanying notes.

 

1

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                                          |   | **Three Months Ended March 31,** |        |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                                          |   | **2003**                         |        | **2002** |   |
| Net revenue                                                                                   |   | $                                | 24,657,193  |   | $ | 43,542,357 |   |
| Station operating expenses                                                                    |   | 22,105,541                       |        | 30,084,800 |   |
| Depreciation                                                                                  |   | 1,531,029                        |        | 1,734,028 |   |
| Amortization of intangible assets                                                             |   | 2,369,854                        |        | 9,478,426 |   |
| Corporate expense                                                                             |   | 2,820,417                        |        | 2,297,145 |   |
| Non-cash compensation expense(1)                                                              |   | 385,737                          |        | 329,164 |   |
|                                                                                          |   |                             |        |   |   |
| Operating loss                                                                                |   | (4,555,385                       | )           | (381,206 | ) |
|                                                                                          |   |                             |        |   |   |
| Other expenses (income):                                                                      |   |                             |        |   |   |
| Interest expense                                                                              |   | 7,626,724                        |        | 12,587,182 |   |
| Interest income                                                                               |   | (214,286                         | )           | (118,508 | ) |
| Non-cash interest expense                                                                     |   | 1,071,117                        |        | 7,864,682 |   |
| Other                                                                                         |   | 138,448                          |        | 148,960 |   |
| Loss before income taxes and cumulative effect of a  change in accounting principle           |   | (13,177,388                      | )           | (20,863,522 | ) |
|                                                                                          |   |                             |        |   |   |
| Benefit for income taxes                                                                      |   | (4,210,551                       | )           | (7,808,009 | ) |
| Loss from continuing operations before cumulative  effect of a change in accounting principle |   | (8,966,837                       | )           | (13,055,513 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                    |   | —                           |        | 150,478,583 |   |
| Net loss                                                                                      |   | $                                | (8,966,837  | ) | $ | (163,534,096 | ) |
|                                                                                          |   |                             |        |   |   |
| Net loss attributable to common shareholders                                                  |   | $                                | (15,442,617 | ) | $ | (172,177,982 | ) |
|                                                                                          |   |                             |        |   |   |
| Per basic and diluted common share:                                                           |   |                             |        |   |   |
| Loss from continuing operations before cumulative  effect of a change in accounting principle |   | $                                | (0.82       | ) | $ | (1.16 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                    |   | —                           |        | (8.03 | ) |
| Basic and diluted net loss per share                                                          |   | $                                | (0.82       | ) | $ | (9.19 | ) |
|                                                                                          |   |                             |        |   |   |
| Weighted average common shares outstanding                                                    |   | 18,940,543                       |        | 18,727,972 |   |

 

----

(1)                                                Allocationof non-cash compensation expense to other operating expenses:

 
|                          |   | **Three Months Ended March 31,** |    |
|-------------------------------|--------|----------------------------------|---------|
|                          |   | **2003**                         |    | **2002** |   |
| Corporate expense             |   | $                                | 355,194 |   | $ | 301,007 |   |
| Station operating expenses    |   | 30,543                           |    | 28,157 |   |
| Non-cash compensation expense |   | $                                | 385,737 |   | $ | 329,164 |   |

 

See accompanying notes.

 

2

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ DEFICIT**

**(Unaudited)**

 
|                                                                            |   | **Class A  Common  Stock** |   | **Common  Stock  (Nonvoting)** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Unearned  Compensation** |         | **Treasury  Stock** |   | **Total  Stockholders’  Deficit** |   |
|---------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------------|--------|----------------------------------|--------|--------------------------|--------|----------------------------|--------------|---------------------|--------|----------------------------------------|--------|
|                                                                            |   |                       |   |                           |   |                             |   |                     |   |                       |         |                |   |                                   |   |
| Balance at  December 31, 2002                                                   |   | $                          | 1,785  |                           | $      | 185,815                          |   | —                   |   | $                          | (186,842,835 | )                   | $      | (851,334                               | )      | $ | (851,924 | ) | $ | (188,358,493 | ) |
| Dividends on  redeemable preferred stock                                        |   |                       |   |                           |   | (365,704                         | )      | (6,021,257               | )      |                       |         |                |   | (6,386,961                             | )      |
| Accretion of  offering costs related to Cumulative Exchangeable Preferred Stock |   |                       |   |                           |   | (88,819                          | )      |                     |   |                       |         |                |   | (88,819                                | )      |
| Issuance of  Common Stock (Nonvoting)                                           |   |                       |   | 2,324                          |   | (2,324                           | )      |                     |   |                       |         |                |   | —                                 |   |
| Repurchase of  Common Stock                                                     |   |                       |   |                           |   |                             |   |                     |   |                       |         | (23,751             | )      | (23,751                                | )      |
| Grant of stock  award under stock plans                                         |   |                       |   |                           |   | 229,500                          |   |                     |   | (229,500                   | )            |                |   | —                                 |   |
| Stock expense  related to stock plans                                           |   |                       |   |                           |   | 227,347                          |   |                     |   | 103,923                    |         |                |   | 331,270                                |   |
| Discount on  loans to officers                                                  |   |                       |   |                           |   |                             |   |                     |   | 48,863                     |         |                |   | 48,863                                 |   |
| Net loss                                                                        |   |                       |   |                           |   |                             |   | (8,966,837               | )      |                       |         |                |   | (8,966,837                             | )      |
|                                                                            |   |                       |   |                           |   |                             |   |                     |   |                       |         |                |   |                                   |   |
| Balance at March  31, 2003                                                      |   | $                          | 1,785  |                           | $      | 188,139                          |   | —                   |   | $                          | (201,830,929 | )                   | $      | (928,048                               | )      | $ | (875,675 | ) | $ | (203,444,728 | ) |
|                                                                                 |        |                            |        |                                |        |                                  |        |                          |        |                            |              |                     |        |                                        |        |  |  |  |  |  |  |  |

 

See accompanying notes.

 

3

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                         |   | **Three Months Ended March 31,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                         |   | **2003**                         |       | **2002** |   |
|                                                                         |   |                             |       |   |   |
| Cash flows from operating  activities:                                       |   |                             |       |   |   |
| Net loss                                                                     |   | $                                | (8,966,837 | ) | $ | (163,534,096 | ) |
|                                                                         |   |                             |       |   |   |
| Adjustments to reconcile net loss to net cash used  in operating activities: |   |                             |       |   |   |
| Amortization of intangible assets                                            |   | 2,369,854                        |       | 9,478,426 |   |
| Depreciation                                                                 |   | 1,531,029                        |       | 1,734,028 |   |
| Non-cash compensation expense                                                |   | 385,737                          |       | 329,164 |   |
| Non-cash interest expense                                                    |   | 1,071,117                        |       | 7,864,682 |   |
| Deferred tax benefit                                                         |   | —                           |       | (66,221,455 | ) |
| Cumulative effect of a change in accounting  principle                       |   | —                           |       | 208,829,529 |   |
| Change in assets and liabilities:                                            |   |                             |       |   |   |
| Decrease (increase) in accounts receivable                                   |   | 4,120,922                        |       | (8,952,816 | ) |
| Increase in accrued liabilities                                              |   | 4,297,841                        |       | 6,350,120 |   |
| (Decrease) increase   in accounts payable                               |   | (627,730                         | )          | 1,910,580 |   |
| WB affiliation payment                                                       |   | (630,857                         | )          | (204,182 | ) |
| (Increase) decrease in film contract rights and  other assets                |   | (2,574,796                       | )          | 2,114,829 |   |
| Decrease in film contract rights payable and other  liabilities              |   | (5,077,885                       | )          | (3,512,273 | ) |
| Net cash used in operating activities                                        |   | (4,101,605                       | )          | (3,813,464 | ) |
|                                                                         |   |                             |       |   |   |
| Cash flows from investing activities:                                        |   |                             |       |   |   |
| Capital expenditures                                                         |   | (2,251,675                       | )          | (1,487,438 | ) |
| Net cash used in investing activities                                        |   | (2,251,675                       | )          | (1,487,438 | ) |
|                                                                         |   |                             |       |   |   |
| Cash flows from financing activities:                                        |   |                             |       |   |   |
| Payment of deferred financing fees                                           |   | (505,408                         | )          | (251,552 | ) |
| Repurchase of common stock                                                   |   | (23,751                          | )          | — |   |
| Net cash used in financing activities                                        |   | (529,159                         | )          | (251,552 | ) |
|                                                                         |   |                             |       |   |   |
| Net decrease in cash and cash equivalents                                    |   | (6,882,439                       | )          | (5,552,454 | ) |
| Cash and cash equivalents, beginning of period                               |   | 54,319,597                       |       | 29,426,856 |   |
| Cash and cash equivalents, end of period                                     |   | $                                | 47,437,158 |   | $ | 23,874,402 |   |
|                                                                         |   |                             |       |   |   |
| Supplemental information:                                                    |   |                             |       |   |   |
| Restricted cash                                                              |   | $                                | —     |   | $ | 6,378,931 |   |
| Cash paid for interest                                                       |   | 2,874,514                        |       | 6,611,250 |   |
| Cash paid for income taxes                                                   |   | 52,000                           |       | 73,905 |   |
| Non-cash capital expenditures                                                |   | —                           |       | 302,345 |   |
| Cumulative exchangeable preferred stock dividend                             |   | 6,386,961                        |       | 8,518,849 |   |

 

See accompanying notes.

 

4

----

 

**GRANITE BROADCASTING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Note 1 - Basis of presentation

 

The accompanying unaudited consolidated financial statements includethe accounts of Granite Broadcasting Corporation and its subsidiaries (the“Company”), and have been prepared in accordance with the instructions to Form10-Q and do not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  Operating resultsfor the three-month period ended March 31, 2003 are not necessarily indicativeof the results that may be expected for the year ended December 31, 2003.  For further information, refer to theCompany’s consolidated financial statements and notes thereto for the yearended December 31, 2002 which were included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2002.  All significant inter-company accounts and transactions have beeneliminated.  Data at, and for the yearended December 31, 2002 are derived from the Company’s audited consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments of a normal recurring nature, which are necessaryfor a fair presentation of the results for the interim periods, have been made.

 

Note 2 – Intangible Assets

 

The Company adopted Statement of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets (“Statement 142”) on January 1,2002.  Upon adoption of Statement 142,the Company recorded a one-time non-cash charge to reduce the carrying value ofgoodwill and other indefinite lived intangible assets by $95,000,000 and$114,000,000, respectively during 2002. Such charge is non-operational in nature and is reflected as acumulative effect of a change in accounting principle in the statement ofoperations for the three months ended March 31, 2002.

 

As of March 31, 2003 andDecember 31, 2002, the Company’s intangible assets and related accumulatedamortization consisted of the following:

 

|                                            |   | **March 31,  2003**       |        | **December  31, 2002**        |   |
|-------------------------------------------------|--------|---------------------------|-------------|-------------------------------|--------|
|                                            |   | **Gross  Carrying Value** |        | **Accumulated  Amortization** |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   |
| Intangible  assets subject to amortization:     |   |                      |        |                          |   |   |   |   |   |
| WB  network affiliation agreements              |   | $                         | 32,256,034  |                          | $      | (17,264,480 | ) | $ | 32,256,034 |   | $ | (16,394,626 | ) |
| Covenant  not to compete                        |   | 30,000,000                |        | (28,250,000                   | )      | 30,000,000 |   | (26,750,000 | ) |
|                                            |   | $                         | 62,256,034  |                          | $      | (45,514,480 | ) | $ | 62,256,034 |   | $ | (43,144,626 | ) |
|                                            |   |                      |        |                          |   |   |   |   |   |
| Intangible  assets not subject to amortization: |   |                      |        |                          |   |   |   |   |   |
| Goodwill                                        |   | $                         | 111,252,372 |                          | $      | (28,201,070 | ) | $ | 111,252,372 |   | $ | (28,201,070 | ) |
| Broadcast  licenses                             |   | 159,647,594               |        | (32,315,765                   | )      | 159,647,594 |   | (32,315,765 | ) |
| Network  affiliation agreements                 |   | 95,366,707                |        | (20,882,800                   | )      | 95,366,707 |   | (20,882,800 | ) |
|                                            |   | $                         | 366,266,673 |                          | $      | (81,399,635 | ) | $ | 366,266,673 |   | $ | (81,399,635 | ) |

 

The Company recordedamortization expense of $2,370,000 and $9,478,000 during the three months endedMarch 31, 2003 and 2002, respectively. Based on the current amount of intangible assets subject to amortization,the estimated amortization expense for each of the succeeding 5 years are asfollows: 2003: $6,706,000; 2004: $3,310,000; 2005: $3,031,000; 2006: $3,031,000and 2007: $3,031,000.  As acquisitionsand dispositions occur in the future and as purchase price allocations arefinalized, these amounts may vary.

 

Note 3 – Stock Options

 

The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation” (“SFAS 123”).  Accordingly,no compensation expense has been recognized for the stock option plans.  For purposes of SFAS 123 pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period; therefore, the impact on pro forma net lossfor the three months ended March 31, 2003 may not be representative of theimpact in future years.  The Company’spro forma information for the three months ended March 31, follows:

 

5

----

 

|                                              |   | **2003** |       | **2002** |   |
|---------------------------------------------------|--------|----------|------------|----------|--------|
|                                              |   |     |       |     |   |
| Net loss, as reported                             |   | $        | (8,966,837 | )        | $      | (163,534,096 | ) |
| Pro forma compensation expense                    |   | (339,987 | )          | (575,244 | )      |
| Pro forma net loss                                |   | $        | (9,306,824 | )        | $      | (164,109,340 | ) |
|                                              |   |     |       |     |   |
| Basic and diluted net loss per share, as reported |   | $        | (0.82      | )        | $      | (9.19 | ) |
| Pro forma compensation expense                    |   | (0.02    | )          | (0.03    | )      |
| Pro forma basic and diluted net loss per share    |   | $        | (0.84      | )        | $      | (9.22 | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black Scholes option-pricing 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 employeestock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affectthe fair value estimate.  There were nostock options granted during the first quarter of 2003.

 

Note 4 – Related Party

 

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

 

Note 5 – RecentAccounting Pronouncements

 

On April 30, 2002, theFASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections (“Statement145”). Statement 145 updates, clarifies and simplifies existing accounting pronouncements.  Statement 145 rescinds Statement 4, whichrequired all gains and losses from extinguishments of debt to be aggregatedand, if material, classified as an extraordinary item, net of related incometax effect. Statement 145 is effective for fiscal years beginning after June15, 2002. The Company will adopt Statement 145 for the year ended December 31,2003.  All prior extraordinary itemsrelating to the extinguishments of debt will be retroactively adjusted andreclassified to income from continuing operations.  Income from continuing operations for 2002 will be reduced by$15,097,000.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146, Accounting for Costs Associated with Exit or DisposalActivities (“Statement 146”).  Statement146 addresses financial accounting and reporting for costs associated with exitor disposal activities and nullifies Emerging Issues Task Force (“EITF”) issueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).”  The provisions ofStatement 146 are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  The Company does not believe the adoption ofStatement 146 will have a significant impact on its financial position, resultsof operations, or cash flows.

 

Note 6 – Per ShareCalculations

 

The per-share calculations shown on the income statement for thethree-month periods ended March 31, 2003 and 2002 are computed in accordancewith Statement of Financial Accounting Standards No. 128, Earnings PerShare.  The following table sets forththe computation of basic and diluted earnings per share:

 

6

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|                                                                                          |   | **Three Months Ended March 31,** |        |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                                          |   | **2003**                         |        | **2002** | ** ** |
|                                                                                          |   |                             |        |   |   |
| Loss from continuing operations before cumulative  effect of a change in accounting principle |   | $                                | (8,966,837  | ) | $ | (13,055,513 | ) |
| Cumulative effect of a change in accounting principle,  net of tax benefit                    |   | —                           |        | 150,478,583 |   |
|                                                                                          |   |                             |        |   |   |
| Net loss                                                                                      |   | (8,966,837                       | )           | (163,534,090 | ) |
|                                                                                          |   |                             |        |   |   |
| Cumulative exchangeable preferred stock dividends                                             |   | 6,386,961                        |        | 8,518,849 |   |
| Accretion on exchangeable preferred                                                           |   | 88,819                           |        | 125,037 |   |
|                                                                                          |   |                             |        |   |   |
| Net loss attributable to common shareholders                                                  |   | $                                | (15,442,617 | ) | $ | (172,177,982 | ) |
|                                                                                          |   |                             |        |   |   |
| Weighted average common shares outstanding                                                    |   | 18,940,543                       |        | 18,727,972 |   |
|                                                                                          |   |                             |        |   |   |
| Per basic and diluted common share:                                                           |   |                             |        |   |   |
| Loss from continuing operations before cumulative  effect of a change in accounting principle |   | $                                | (0.82       | ) | $ | (1.16 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                    |   | —                           |        | (8.03 | ) |
| Basic and diluted net loss per share                                                          |   | $                                | (0.82       | ) | $ | (9.19 | ) |

 

7

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

 

The following discussion should be read in conjunction with theconsolidated financial statements and related notes appearing in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.  Certain sections of this Form 10-Q containvarious forward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, which represent the Company’s expectations orbeliefs concerning future events.  Theforward-looking statements include, without limitation, the Company’s abilityto meet its future liquidity needs. These forward-looking statements reflect the plans and beliefs ofmanagement as of the date of this report. The Company cautions that these forward-looking statements are furtherqualified by important factors that could cause actual results to differmaterially from those in the forward looking statements.  Such factors include, without limitation,general economic conditions, competition in the markets in which the Company’sstations are located, technological change and innovation in the broadcastingindustry and proposed legislation. Consequently, these cautionary statements and the cautionary language setforth in the Company’s most recent Form 10-K report and other documents filedwith the Securities and Exchange Commission qualify all forward-lookingstatements made herein.

 

**Introduction**

 

The Company owns and operates eight network-affiliated televisionstations in geographically diverse markets reaching over 6% of the nation’stelevision households.  Three stationsare affiliated with the NBC Television Network (NBC), two with the ABCTelevision Network (ABC), one with the CBS Television Network (CBS), and twowith the Warner Brothers Television Network (WB). The NBC affiliates areKSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois, andKBJR-TV, Duluth, Minnesota and Superior, Wisconsin. The ABC affiliates areWKBW-TV, Buffalo, New York, and WPTA-TV, Fort Wayne, Indiana.  The CBS affiliate is WTVH-TV, Syracuse, NewYork. The WB affiliates are KBWB-TV, San Francisco-Oakland-San Jose,California, and WDWB-TV, Detroit, Michigan.

 

The Company’s 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.

 

The Company’s revenuesare derived principally from local and national advertising and, to a lesserextent, from network compensation for the broadcast of programming and revenuesfrom studio rental and commercial production activities.  The primary operating expenses involved inowning and operating television stations are employee salaries, depreciationand amortization, programming, advertising and promotion.

 

Comparisons of theCompany’s consolidated financial statements between the three-months endedMarch 31, 2003 and 2002 have been affected by the Company’s sale of KNTV, theNBC affiliate in San Francisco, California, on April 30, 2002.  We believe that inflation has not had amaterial impact on our results of operations for the three-months ended March31, 2003 and 2002.  However, there canbe no assurance that future inflation would not have an adverse impact on ouroperating results and financial condition.

 

8

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**Resultsof Operations**

 

# *Three Months Ended March31, 2003 and 2002*

 

Net revenue totaled $24,657,000 for the three months ended March 31,2003; a decrease of $18,885,000 or 43% compared to $43,542,000 for the threemonths ended March 31, 2002.  Includedin the three months ended March 31, 2002 is $19,833,000 of net revenue relatedto KNTV, which was sold on April 30, 2002. Net revenue at the remaining stations increased $950,000 or 4%.

 

Station operating expenses totaled $22,106,000 for the three monthsended March 31, 2003; a decrease of $7,979,000 or 27% compared to $30,085,000for the three months ended March 31, 2002. Included in the three months endedMarch 31, 2002 is $9,614,000 of operating expenses related to KNTV.  The remaining stations’ operating expensesincreased $1,635,000 or 8% primarily due to increases in programming expense atthe WB affiliates.

 

Amortization expense totaled $2,370,000 for the three months endedMarch 31, 2003; a decrease $7,109,000 or 75% compared to $9,478,000 for thethree months ended March 31, 2002. Included in the three months ended March 31, 2002 is $7,078,000 ofamortization expense related to KNTV, which was sold on April 30, 2002.  Corporate expense increased $523,000 or 23%during the three months ended March 31, 2003 compared to the same period a yearearlier primarily due to increased compensation, professional fees andofficers’ and directors’ liability insurance.

 

# *Interest expense totaled $7,627,000; a decrease of$4,960,000 or 39% compared to the three months ended March 31, 2002 primarilydue to lower average debt balances and lower interest rates on the Company’scurrent senior credit facility. Interest income increased $96,000 or 81% during the three months endedMarch 31, 2003 compared to the same period a year earlier primarily due tohigher average cash balances.  Non-cashinterest expense totaled $1,071,000 for the three months ended March 31, 2003;a decrease of $6,794,000 or 86% compared to $7,865,000 the same period a yearearlier. Included in non-cash interest expense for the three months ended March31, 2002 is $5,653,000 related to the imputation of interest on KNTV’s NBCaffiliation agreement.  The remainingdecrease in non-cash interest expense is related to reduced amortization ofdeferred financing fees associated with the current senior credit facility.*

# * *

Upon adoption ofStatement 142 as of January 1, 2002, the Company recorded a one-time, non-cashcharge of $150,479,000, net of a tax benefit of $58,351,000, to reduce thecarrying value of its goodwill and other indefinite-lived intangible assets.Such charge is non-operational in nature and is reflected as a cumulativeeffect of an accounting change in the accompanying consolidated statement ofoperations.

 

During the three months ended March 31, 2003, the Company recorded abenefit for income taxes of $4,211,000, compared to $7,808,000 for the threemonths ended March 31, 2002. The benefit for income taxes for the three-monthsended March 31, 2003 is a correction from the amount reported in the Company'searnings release dated April 28, 2003.

 

## ***Liquidity and Capital Resources***

 

On April 30, 2002, the Company entered into an amended and restatedsenior credit agreement (the “Credit Agreement”).  The Credit Agreement consists of (i) a committed $60,000,000Tranche A term loan facility, (ii) a committed $80,000,000 Tranche B term loanfacility, and (iii) an uncommitted $10,000,000 Tranche C supplemental term loanfacility.  The obligations of theCompany with respect to all of the loan facilities are secured by substantiallyall of the assets of the Company and its subsidiaries. As of March 31, 2003,$35,000,000 of the Tranche A loan facility and the entire Tranche B loanfacility was outstanding.  Proceeds fromTranche A and Tranche B term loans can be used for working capital and generalcorporate purposes.  The Tranche A loansbear interest at the greater of 6.50% or LIBOR plus 4.50% and the Tranche Bloans bear interest at the greater of 11% or LIBOR plus 9%.  All interest is payable monthly inarrears.   The Credit Agreement matureson April 15, 2004, at which time the Company must repay the principal amount ofall outstanding loans and all other obligations then due and owing under theCredit Agreement.  The Credit Agreement requiresthe Company, among other matters, to maintain compliance with certain financialtests, including but not limited to, minimum net revenue, broadcast cash flow,EBITDA, working capital and cash balances. The Company is in compliance withall covenants under the Credit Agreement.

 

Under the terms of the Certificate of Designations for the Company’s 123/4% Cumulative Exchangeable Preferred Stock (the “Preferred Stock”), theCompany was required to make the semi-annual dividends on such shares in cashbeginning October 1, 2002.  The cashpayment of dividends is restricted by the terms of the indentures governing theCompany’s senior subordinated bonds and is prohibited under the terms of theCredit Agreement. Consequently the Company did not pay the semi-annual dividenddue to the holders of the Preferred Stock on October 1, 2002 and April 1,2003.  If three or more semi-annualdividend payments (whether or not consecutive) are not paid, the holders of thePreferred Stock will have the right to elect the lesser of two directors orthat number of directors constituting 25% of the members of the Board ofDirectors.  The right of the holders ofthe Preferred Stock to elect members of the Board of Directors as set forthabove would continue until such time as all accumulated dividends that arerequired to be paid in cash and that are in arrears on the Preferred Stock arepaid in full in cash. The Company does not anticipate paying cash dividends onits Preferred Stock in the foreseeable future.

 

9

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Net cash used in operating activities was $4,102,000 during the threemonths ended March 31, 2003 compared to $3,813,000 during the three monthsended March 31, 2002.  The change from2002 to 2003 was primarily the result of a decrease in operating income offsetin part by a decrease in interest payments and a decrease in net operatingassets.

 

Net cash used in investing activities was $2,252,000 during the threemonths ended March 31, 2003 compared to net cash used in investing activitiesof $1,487,000 during the three months ended March 31, 2002.  Cash used in investing activities consistedentirely of capital expenditures for the three months ended March 31, 2003 and2002.

 

Net cash used in financing activities was $529,000 during the threemonths ended March 31, 2003 compared to net cash used in financing activitiesof $252,000 during the three months ended March 31, 2002. The change from 2002to 2003 was primarily due to an increase in the payment for deferred financingfees.

 

As of April 30, 2003, the Company had approximately $45,000,000 of cashon hand and $25,000,000 in available borrowings under the CreditAgreement.  The Company expects to spendapproximately $15,000,000 in 2003 in capital expenditures of which $2,100,000was spent during the three months ended March 31, 2003. The Company believesthat borrowings under the current Credit Agreement together with internallygenerated funds from operations, and cash on hand will be sufficient to satisfythe Company’s cash requirements until April 15, 2004, when the Company’s seniordebt matures.  The Company expects torefinance its senior debt on or before its maturity with a new senior creditfacility.

 

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

 

The Company’s earnings may be affected by changes in short-terminterest rates as a result of its new senior Credit Agreement.  Under the Credit Agreement, Tranche A loansbear interest at the greater of LIBOR plus 4.50% or 6.50%, currently 6.50%, andthe Tranche B loans bear interest at the greater of LIBOR plus 9% or 11%,currently 11%.  As of April 30, 2003,the six-month LIBOR rate was 1.29%.  The Company has not entered into anyagreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding at March 31,2003, a 2% increase in the LIBOR rate would increase interest expense on anannual basis by approximately $1,484,000. This analysis does not consider the effects of the reduced level ofoverall economic activity that could exist in such environment.

 

***Item 4. Controlsand Procedures***

 

As of March 31, 2003, an evaluation was performed under the supervisionand with the participation of the Company’s management, including the ChiefExecutive and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company’smanagement, including the CEO and CFO, concluded that the Company’s disclosurecontrol and procedures were effective as of March 31, 2003.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to March 31, 2003.

 

10

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**PARTII.  OTHER INFORMATION**

 

***Item 4. Submissionof Matters to a Vote of Security Holders***

 

On February 25, 2003, the holders of all of the Company’s Voting CommonStock adopted resolutions by unanimous written consent in lieu of a specialmeeting amending the Company’s Management Stock Plan, effective January 1,2003, to provide for performance awards and the deferral of awards.

 

***Item 6. Exhibitsand Reports on Form 8-K***

 
| a. Exhibits |
|-------------|
|        |
| 10.15 (a)/  |   | Granite Broadcasting Corporation Management Stock  Plan, as amended through January 1, 2003 |
|        |   |   |
| 10.54(a)/   |   | First Amendment, dated as of March 5, 2003, to the  Amended and Restated Credit Agreement dated as of April 30, 2002  among Granite Broadcasting Corporation, the Lenders party thereto and Goldman  Sachs Credit Partners L.P. as Administrative Agent, as Collateral Agent, as  Sole Lead Arranger and as Sole Bookrunner, and for purposes of Section IV  thereof, the subsidiaries of Granite Broadcasting Corporation. |
|        |   |   |
| 99.1        |   | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|        |   |   |
| 99.2        |   | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

(a)/ Incorporated by reference to similarly numberedexhibits to the Company’s annual report on Form 10-K filed March 28, 2003

 

b. Reports on Form 8-K

 

None

 

11

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|   |        |   |                                                      | GRANITE BROADCASTING CORPORATION           |
|--------|-------------|--------|-----------------------------------------------------------|--------------------------------------------|
|   |        |   |                                                      | Registrant                                 |
|   |        |   |                                                      |                                       |   |
| Date:  | May 5, 2003 |   |                                                      | /s/  W. DON CORNWELL                  |   |
|   |        |   |                                                      | (W. Don Cornwell)  Chief Executive Officer |   |
|   |        |   |                                                      |
| Date:  | May 5, 2003 |   |                                                      | /s/ LAWRENCE I. WILLS                      |   |
|   |        |   |                                                      | (Lawrence I. Wills)                        |   |
|   |        |   | Senior Vice President – Chief Administrative Officer |
|   |        |   |                                                      | (Principal Accounting  Officer)            |   |

 

12

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**Certificationof****Chief Executive Officerof Granite Broadcasting Corporation**

 

I, W. Don Cornwell, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Granite Broadcasting Corporation (the“Company”);

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4.               The Company’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and have:

 

a) designed such disclosure controls and procedures toensure that material information relating to the Company, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b) evaluated the effectiveness of the Company’sdisclosure controls and procedures as of a date within 90 days prior  to the filing date of this quarterly report(the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The Company’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the Company’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the Company’sability to record, process, summarize and report financial data and haveidentified for the Company’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the Company’sinternal controls; and

 

6.               The Company’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 5, 2003 |
|-------------------------|
|                    |
|                    | /s/ W. DON CORNWELL |   |
|                    | W. Don Cornwell |
|                    | Chief Executive Officer |

 

13

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**CertificationofChief Financial Officerof Granite Broadcasting Corporation**

 

I, Ellen McClain, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Granite Broadcasting Corporation (the“Company”);

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this quarterly report;

 

4.               The Company’s othercertifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Company and have:

 

a) designed such disclosure controls and procedures toensure that material information relating to the Company, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b) evaluated the effectiveness of the Company’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The Company’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the Company’s auditors and the audit committee of the Company’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the Company’sability to record, process, summarize and report financial data and haveidentified for the Company’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the Company’sinternal controls; and

 

6.               The Company’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  May 5, 2003 |                    |
|-------------------------|-------------------------|
|                    |                    |
|                    | /s/ ELLEN MCCLAIN       |   |
|                    | Ellen McClain           |
|                    | Chief Financial Officer |

 

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