**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                           to                           **

 

**Commission File Number  0-19728**

 

**GRANITEBROADCASTING CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements 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   ýs

 

(APPLICABLE ONLYTO CORPORATE ISSUERS:)

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

Class A Voting Common Stock,par value $.01 per share - 178,500 shares outstanding at October 31, 2004;Common Stock (Nonvoting), par value $.01 per share – 19,203,674 sharesoutstanding at October 31, 2004.

 

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**DOCUMENTS INCORPORATED BYREFERENCE:  None**

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
| PART I     | FINANCIAL INFORMATION                                                                                               |   |
|------------|---------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                |   |
| Item 1.    | Financial Statements                                                                                                |   |
|       | Consolidated Balance Sheets  as of September 30, 2004 (unaudited) and December  31, 2003                            |   |
|       | Consolidated  Statements of Operations for the Three and Nine Months Ended September 30,  2004 and 2003 (unaudited) |   |
|       | Consolidated  Statement of Stockholders’ Deficit for the Nine Months Ended September 30,  2004 (unaudited)     |   |
|       | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2004 and  2003 (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 5.    | Other Information                                                                                                   |   |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                                                   |   |
|       |                                                                                                                |   |
| SIGNATURES |                                                                                                                |   |

 

Granite BroadcastingCorporation is a Delaware corporation. Unless the context otherwise requires, “we”,“us”, “its” and “our” refer to Granite Broadcasting Corporation, together withits 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 andincorporates forward-looking statements. We have based these forward-looking statements on our currentexpectations and projections about future events.  These forward-looking statements are subjectto risks, uncertainties and assumptions about us, including, among otherthings:

 

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

 

•      inability to effect dispositions oracquisitions of television stations, which are an important part of ourstrategy;

 

•      the effects of governmental regulation ofbroadcasting, including adverse changes in, or interpretations of, theexceptions to the Federal Communications Commission’s duopoly rule which couldrestrict, or eliminate, our ability to enter into duopoly-type operatingarrangements and implement our operating strategy;

 

•      pricing fluctuations in national andlocal advertising;

 

•      volatility or increases in programmingcosts;

 

•      restrictions on our operations due to oursignificant leverage and limited sources of liquidity;

 

•      the impact of changes in national and regionaleconomies;

 

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

 

•      our ability to service our outstandingdebt;

 

•      successful integration of acquiredtelevision stations (including achievement of synergies and cost reductions);

 

•      competition in the markets in which ourstations are located;

 

•      loss of network affiliations or changesin the terms of network affiliation agreements upon renewal; and

 

•      technologicalchange and innovation in the broadcasting industry.

 

Our network affiliation agreement with The WarnerBros. Network at WDWB-TV, serving the Detroit, Michigan market was renewed fora three-year period commencing June 1, 2004.

 

Other matters set forth in this report, as well asrisk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2003, filed with the Securities and Exchange Commission may alsocause actual results in the future to differ materially from those described inthe forward-looking statements.  Weundertake no obligation to update and revise any forward-looking statements,whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this report might notoccur.

 

2

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**PART I. FINANCIAL INFORMATION**

 

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

**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** **              | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|-------------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** **              | **(Unaudited)**         | ** **  | ** **             | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                         |                    |                    |        |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                           |                    |                    |        |                   |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                |                    |                    |        |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                                     |                    | $                       | 76,211,554  |                   | $          | 90,213,995 |   |
| Marketable  securities, at fair value                                                                                                                                                                                                                                                                                                                                          |                    | 6,686,760               |        | —                 |       |
| Accounts  receivable, less allowance for doubtful accounts ($1,013,295 at September 30,  2004 and $1,319,238 at December 31, 2003)                                                                                                                                                                                                                                             |                    | 18,550,000              |        | 21,464,965             |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                          |                    | 13,094,021              |        | 15,299,993             |       |
| Income tax  receivable                                                                                                                                                                                                                                                                                                                                                         |                    | —                  |        | 16,326,799             |       |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                          |                    | 5,590,404               |        | 5,795,794              |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                          |                    | 120,132,739             |        | 149,101,546            |       |
|                                                                                                                                                                                                                                                                                                                                                                           |                    |                    |        |                   |       |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                                   |                    | 47,153,819              |        | 48,449,586             |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                          |                    | 4,681,751               |        | 8,446,229              |       |
| Other non  current assets                                                                                                                                                                                                                                                                                                                                                      |                    | 8,732,797               |        | 7,891,335              |       |
| Deferred  financing fees, less accumulated amortization ($1,499,199 at September 30,  2004 and $50,902 at December 31, 2003)                                                                                                                                                                                                                                                   |                    | 12,151,538              |        | 13,373,623             |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                                  |                    | 63,123,440              |        | 63,123,440             |       |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                       |                    | 127,331,829             |        | 127,331,829            |       |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                     |                    | 80,733,060              |        | 86,379,757             |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                   |                    | $                       | 464,040,973 |                   | $          | 504,097,345 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |                    |                    |        |                   |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                    |                    |                    |        |                   |       |
|                                                                                                                                                                                                                                                                                                                                                                           |                    |                    |        |                   |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                          |                    |                    |        |                   |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                               |                    | $                       | 1,328,965   |                   | $          | 2,903,728 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                               |                    | 13,162,500              |        | 987,187                |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                                     |                    | 6,130,427               |        | 7,039,091              |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                                  |                    | 26,907,053              |        | 27,314,160             |       |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                                     |                    | 2,537,821               |        | 2,951,001              |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                     |                    | 50,066,766              |        | 41,195,167             |       |
|                                                                                                                                                                                                                                                                                                                                                                           |                    |                    |        |                   |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                 |                    | 400,615,123             |        | 400,086,598            |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                                  |                    | 18,333,299              |        | 24,616,575             |       |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                        |                    | 21,453,281              |        | 31,277,708             |       |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                    |                    | 198,747,043             |        | 198,480,586            |       |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                               |                    | 63,869,612              |        | 44,708,729             |       |
| Other non  current liabilities                                                                                                                                                                                                                                                                                                                                                 |                    | 13,005,648              |        | 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 September 30, 2004 |                    | 193,811                 |        | 190,126                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                    |                    | 324,962                 |        | —                 |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                          |                    | (26,134                 | )           | —                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                           |                    | (301,236,514            | )           | (248,118,609           | )          |
| Less:                                                                                                                                                                                                                                                                                                                                                                          | Unearned compensation   |                    | (430,249    | )                      | (627,648   | ) |
|                                                                                                                                                                                                                                                                                                                                                                           | Treasury stock, at cost |                    | (875,675    | )                      | (875,675   | ) |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                              |                    | (302,049,799            | )           | (249,431,806           | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                              |                    | $                       | 464,040,973 |                   | $          | 504,097,345 |   |

 

See accompanying notes.

 

3

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                             | ** **  | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | ** **                           | ** **  | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Net revenues                                                                              |       | $                                    | 27,045,885  |                                | $          | 25,719,558 |   | $ | 82,209,633 |   | $ | 78,844,209 |   |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Station  operating expenses                                                               |       | 25,126,628                           |        | 22,012,692                          |       | 68,529,881 |   | 67,147,196 |   |
| Depreciation  expense                                                                     |       | 1,710,093                            |        | 1,594,277                           |       | 5,196,942 |   | 4,678,752 |   |
| Amortization of  intangible assets                                                        |       | 2,126,841                            |        | 1,864,690                           |       | 5,891,306 |   | 8,094,074 |   |
| Corporate  expense                                                                        |       | 2,736,505                            |        | 2,646,186                           |       | 8,710,355 |   | 8,138,691 |   |
| Performance  award expense                                                                |       | 1,911,887                            |        | —                              |       | 2,960,429 |   | — |   |
| Corporate  separation agreement expense                                                   |       | 1,250,842                            |        | —                              |       | 1,250,842 |   | — |   |
| Non-cash  compensation expense(1)                                                         |       | 109,757                              |        | 170,454                             |       | 544,759 |   | 720,978 |   |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Operating loss                                                                            |       | (7,926,668                           | )           | (2,568,741                          | )          | (10,874,881 | ) | (9,935,482 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Other expenses  (income):                                                                 |       |                                 |        |                                |       |   |   |   |   |
| Interest expense                                                                          |       | 9,872,368                            |        | 7,718,935                           |       | 29,617,422 |   | 23,034,087 |   |
| Interest income                                                                           |       | (349,410                             | )           | (136,413                            | )          | (865,949 | ) | (527,531 | ) |
| Non-cash  interest expense                                                                |       | 1,075,127                            |        | 1,296,233                           |       | 3,355,424 |   | 3,571,394 |   |
| Non-cash preferred  stock dividend                                                        |       | 6,386,961                            |        | 6,386,961                           |       | 19,160,883 |   | 6,386,961 |   |
| Other                                                                                     |       | 50,019                               |        | 112,648                             |       | 612,171 |   | 372,897 |   |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Loss before  income taxes                                                                 |       | (24,961,733                          | )           | (17,947,105                         | )          | (62,754,832 | ) | (42,773,290 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Benefit for  income taxes                                                                 |       | (4,959,263                           | )           | (3,035,046                          | )          | (9,636,927 | ) | (11,055,379 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Net loss                                                                                  |       | $                                    | (20,002,470 | )                                   | $          | (14,912,059 | ) | $ | (53,117,905 | ) | $ | (31,717,911 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Net loss  attributable to common shareholders                                             |       | $                                    | (20,002,470 | )                                   | $          | (14,912,059 | ) | $ | (53,117,905 | ) | $ | (44,669,469 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Basic and  diluted net loss per share                                                     |       | $                                    | (1.03       | )                                   | $          | (0.78 | ) | $ | (2.74 | ) | $ | (2.35 | ) |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Weighted average  common shares outstanding                                               |       | 19,381,124                           |        | 19,011,870                          |       | 19,360,569 |   | 18,983,799 |   |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
|                                                                                           |
| (1)   Allocation  of non-cash compensation expense to other operating expenses: |
|                                                                                      |       |                                 |        |                                |       |   |   |   |   |
| Corporate  expense                                                                        |       | $                                    | 86,087      |                                | $          | 134,245 |   | $ | 468,247 |   | $ | 623,684 |   |
| Station  operating expenses                                                               |       | 23,670                               |        | 36,209                              |       | 76,512 |   | 97,294 |   |
| Non-cash  compensation expense                                                            |       | $                                    | 109,757     |                                | $          | 170,454 |   | $ | 544,759 |   | $ | 720,978 |   |

 

See accompanying notes.

 

4

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**GRANITE BROADCASTING CORPORATION**

**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)   |       |                       |       | 3,685                          |       | (3,685                           | )          |                           |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense  related to stock plans   |       |                       |       |                           |       | 205,957                          |       |                           |       |                     |       | 157,066                    |       |                |         | 363,023                                |       |
| Grant of stock  award under stock plans |       |                       |       |                           |       | 122,690                          |       |                           |       |                     |       | (122,690                   | )          |                |         | —                                 |       |
| Discount on loans  to officers          |       |                       |       |                           |       |                             |       |                           |       |                     |       | 163,023                    |       |                |         | 163,023                                |       |
| Net loss                                |       |                       |       |                           |       |                             |       |                           |       | (53,117,905              | )          |                       |       |                |         | (53,117,905                            | )          |
| Unrealized loss  on investment          |       |                       |       |                           |       |                             |       | (26,134                        | )          |                     |       |                       |       |                |         | (26,134                                | )          |
| Comprehensive  loss                     |       |                       |       |                           |       |                             |       |                           |       |                     |       |                       |       |                |         | (53,144,039                            | )          |
|                                    |       |                       |       |                           |       |                             |       |                           |       |                     |       |                       |       |                |         |                                   |       |
| Balance at  September 30, 2004          |       | $                          | 1,785      |                           | $          | 192,026                          |       | $                              | 324,962    |                     | $          | (26,134                    | )          | $                   | (301,236,514 | )                                      | $          | (430,249 | ) | $ | (875,675 | ) | $ | (302,049,799 | ) |

 

See accompanying notes.

 

5

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                   | ** ** | **2004**                            | ** **  | **2003** | ** ** |
| ** **                                                                   | ** ** | ** **                          | ** **  | **(Restated)** | ** ** |
| Cash flows from  operating activities:                                       |       |                                |        |   |   |
| Net loss                                                                     |       | $                                   | (53,117,905 | ) | $ | (31,717,911 | ) |
|                                                                         |       |                                |        |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                |        |   |   |
| Amortization of  intangible assets                                           |       | 5,891,306                           |        | 8,094,074 |   |
| Depreciation                                                                 |       | 5,196,942                           |        | 4,678,752 |   |
| Performance  award expense                                                   |       | 2,960,429                           |        | — |   |
| Non-cash  compensation expense                                               |       | 544,759                             |        | 720,978 |   |
| Non-cash  interest expense                                                   |       | 3,355,424                           |        | 3,571,394 |   |
| Non-cash  preferred stock dividend                                           |       | 19,160,883                          |        | 6,386,961 |   |
| Deferred tax  benefit                                                        |       | (9,636,927                          | )           | — |   |
| Change in assets  and liabilities:                                           |       |                                |        |   |   |
| Decrease in  accounts receivable                                             |       | 2,914,965                           |        | 3,878,535 |   |
| Increase in  accrued liabilities                                             |       | 11,266,649                          |        | 4,214,624 |   |
| Decrease in  accounts payable                                                |       | (1,574,763                          | )           | (1,361,944 | ) |
| WB affiliation  payment                                                      |       | (2,319,246                          | )           | (1,688,389 | ) |
| Decrease  (increase) in income tax receivable                                |       | 16,326,799                          |        | (13,319,775 | ) |
| Decrease in film  contract rights and other assets                           |       | 2,383,268                           |        | 2,160,658 |   |
| Decrease in film  contract rights payable and other liabilities              |       | (6,806,696                          | )           | (4,536,262 | ) |
| Net cash used in  operating activities                                       |       | (3,454,113                          | )           | (18,918,305 | ) |
|                                                                         |       |                                |        |   |   |
| Cash flows from  investing activities:                                       |       |                                |        |   |   |
| Investments in  marketable securities and other investments                  |       | (6,593,327                          | )           | — |   |
| Capital  expenditures                                                        |       | (3,728,789                          | )           | (10,281,237 | ) |
| Net cash used in  investing activities                                       |       | (10,322,116                         | )           | (10,281,237 | ) |
|                                                                         |       |                                |        |   |   |
| Cash flows from  financing activities:                                       |       |                                |        |   |   |
| Payment of  deferred financing fees                                          |       | (226,212                            | )           | (647,146 | ) |
| Repurchase of  common stock                                                  |       | —                              |        | (23,751 | ) |
| Exercise of  stock options                                                   |       | —                              |        | 26,250 |   |
| Net cash used in  financing activities                                       |       | (226,212                            | )           | (644,647 | ) |
|                                                                         |       |                                |        |   |   |
| Net decrease in cash  and cash equivalents                                   |       | (14,002,441                         | )           | (29,844,189 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 90,213,995                          |        | 54,319,597 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                   | 76,211,554  |   | $ | 24,475,408 |   |
|                                                                         |       |                                |        |   |   |
| Supplemental  information:                                                   |       |                                |        |   |   |
| Cash paid for  interest                                                      |       | $                                   | 17,440,313  |   | $ | 18,280,009 |   |
| Cash paid for  income taxes                                                  |       | 163,320                             |        | 137,914 |   |
| Non-cash capital  expenditures                                               |       | 172,386                             |        | 79,153 |   |
| Cumulative  exchangeable preferred stock dividend                            |       | —                              |        | 12,773,922 |   |

 

See accompanying notes.

 

6

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**GRANITE BROADCASTING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

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

 

The accompanying unaudited consolidated financial statements include the accountsof Granite Broadcasting Corporation and its subsidiaries (the “Company”), andhave been prepared in accordance with the instructions to Form 10-Q and do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  Operating results for the three andnine-month periods ended September 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ended December 31, 2004.  For further information, refer to the Company’sconsolidated financial statements and notes thereto for the year ended December31, 2003, which were included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.  Allsignificant inter-company accounts and transactions have been eliminated. Inthe second quarter of 2004, the Company adjusted its Goodwill and Deferred TaxLiability balances by approximately $14,926,000 to appropriately reflect thetax basis of certain assets acquired in prior years’ acquisitions. Theseadjustments have been reflected in the September 30, 2004 and December 31, 2003Balance Sheets disclosed herein. This adjustment had no effect on the Company’spreviously reported Statement of Operations or Cash Flows. Data at, and for theyear ended, December 31, 2003 are derived from the Company’s auditedconsolidated financial statements.  Inthe opinion of management, all adjustments of a normal recurring nature, whichare necessary for a fair presentation of the results for the interim periods,have been made.

 

*Restatement of FinancialStatements*

 

Upon the adoption of Statement of Financial AccountingStandards No. 142, Goodwill and Other Intangible Assets (“Statement 142”), theCompany considered the value of its network affiliation agreements asindefinite lived assets that should not be subject to amortization.  Inlight of stated positions by the Securities and Exchange Commission regardingamortization of network affiliation agreements, the Company has changed itsaccounting policy as of December 31, 2003 to amortize these assets retroactiveto January 1, 2002 using a 25-year useful life.  As a result, thefinancial results for the three and nine months ended September 30, 2003 havebeen restated.  The total impact of the adjustment was an increase inamortization expense for the three and nine months ended September 30, 2003 of$744,839 and $2,234,517, respectively, with a corresponding adjustment to lossbefore income taxes and net loss for the three and nine months ended September30, 2003 of $484,145 and $1,452,435, respectively.  Basic and diluted net loss per shareincreased by $0.02 and $0.07 for the three and nine months ended September 30,2003, respectively.

 

*Cash Equivalents and Investmentsin Marketable Securities*

 

All highly liquid investments purchased with anoriginal maturity of ninety days or less areconsidered 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 based on the specificidentification method. The Company does not hold these securities forspeculative or trading purposes. For the nine months ended September 30, 2004,the Company’s unrealized holding losses totaled approximately $26,000.  For the three and nine months ended September30, 2004, the Company recorded realized gain of approximately $87,000 and$27,000, respectively.

 

*Stock-Based Compensation*

 

The Company has adopted the disclosure provisions ofSFAS No. 148, Accounting for Stock-Based Compensation — Transition andDisclosure**to require disclosure in the summary ofaccounting policies of the effects of an entity’s accounting policy with respectto stock-based compensation on reported net income / (loss) and earnings pershare in annual and interim financial statements.

 

The Company accounts for stock option grants under therecognition and measurement principles of Accounting Principles Board (“APB”)No 25, Accounting for Stock Issued to Employees**andrelated interpretations. Under APB No. 25, because the exercise price of theCompany’s stock options equals the market price (fair value) of the underlyingstock on the date of grant, no compensation expense is recorded.

 

The following table illustrates the effect on net lossand loss per share as if the Company had applied the fair value recognitionprovisions of SFAS No. 123, as amended by SFAS No. 148, to stock-basedcompensation for the three and nine months

 

7

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

 
| ** **                                                 | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                             | ** **  | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                 | ** ** | ** **                           | ** **  | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net loss  attributable to common shareholders, as reported |       | $                                    | (20,002,470 | )                                   | $          | (14,912,059 | ) | $ | (53,117,905 | ) | $ | (44,669,469 | ) |
| Add: pro forma  compensation expense                       |       | (332,730                             | )           | (349,587                            | )          | (1,048,168 | ) | (1,039,161 | ) |
| Less: compensation  expense, as reported                   |       | 11,167                               |        | 12,000                              |       | 35,167 |   | 36,000 |   |
| Pro forma net  loss attributable to common shareholders    |       | $                                    | (20,324,033 | )                                   | $          | (15,249,646 | ) | $ | (54,130,906 | ) | $ | (45,672,630 | ) |
|                                                       |       |                                 |        |                                |       |   |   |   |   |
| Basic and  diluted net loss per share, as reported         |       | $                                    | (1.03       | )                                   | $          | (0.78 | ) | $ | (2.74 | ) | $ | (2.35 | ) |
| Pro forma  compensation expense                            |       | (0.02                                | )           | (0.02                               | )          | (0.05 | ) | (0.05 | ) |
| Pro forma basic  and diluted net loss per share            |       | $                                    | (1.05       | )                                   | $          | (0.80 | ) | $ | (2.79 | ) | $ | (2.40 | ) |

 

The fair value foreach option grant was estimated at the date of grant using the Black-Scholes options pricing model.  The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility.  TheCompany’s employee stock options have characteristics significantly differentfrom those of traded options and changes in the subjective input assumptionscan materially affect the fair value estimate.

 

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

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150, Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity (“Statement 150”).  Statement 150establishes standards for classifying and measuring as liabilities certainfinancial instruments that have characteristics of both liabilities andequity.  The provisions of Statement 150were effective beginning with the first interim period after June 15,2003.  The Company adopted Statement 150during the three months ended September 30, 2003.  The Company’s 12 3/4% 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 for the three months ended September 30, 2004 and 2003,respectively and $19,161,000 for the nine months ended September 30, 2004 hasbeen recorded as a charge to expense on the consolidated statement ofoperations.  During the six months endedJune 30, 2003, dividends on the Preferred Stock were treated as a reduction ofstockholders’ equity.

 

**Note 3 – Acquisitions and Dispositions**

 

On April 23, 2004, the Company announced that it hasentered into a definitive agreement to sell 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 MalaraBroadcasting obtaining adequate financing and no assurance can be given thatthe transaction will be consummated.  TheCompany will acquire the stock of NVG-Fort Wayne, Inc, owner and operator ofWISE-TV, the NBC affiliate serving Fort Wayne, Indiana for $44.2 million,subject to certain closing adjustments. Following these transactions, the Company intends to enter into astrategic arrangement with Malara Broadcasting underwhich the Company will provide advertising sales, promotion and administrativeservices, and selected programming to certain Malara-ownedstations. The first implementation of the arrangement will involve stations inFort 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 MalaraBroadcasting acquisitions. The Company anticipates that once these acquisitionsand strategic arrangements are consummated it will account for thesetransactions in accordance with certain provisions of FASB Interpretation No.46, Consolidation of Variable Interest Entities (“Interpretation 46”).  Interpretation 46 addresses when a companyshould include in its financial statements the assets, liabilities and resultsof operations of another entity.

 

All of the above transactions are contingent uponapproval by the Federal Communications Commission or (FCC) and satisfaction ofother customary closing conditions. In May 2004 a petition to deny Malara Broadcasting’s FCC application to acquire KDLH-TVwas filed with the FCC.  Malara Broadcasting filed an opposition to the petition inJune 2004, and the petitioning party filed its reply to that opposition.  There were no opposition petitions filedregarding either the WPTA-TV application or the WISE-TV application and thetime for public comment on all of the foregoing FCC applications has expired.The Company and Malara Broadcasting believe that theKDLH petition is without merit and anticipate that the FCC will approve all ofthe above transactions; however, the Company can provide no assurances in thisregard.

 

8

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**Note 4 – Per Share Calculations**

 

The per-sharecalculations shown on the income statement for the three and nine months endedSeptember 30, 2004 and 2003 are computed in accordance with Statement ofFinancial Accounting Standards No. 128, Earnings PerShare.  The following table sets forththe computation of basic and diluted earnings per share:

 
| ** **                                         | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                         | ** ** | **2004**                             | ** **  | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                         | ** ** | ** **                           | ** **  | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net loss                                           |       | $                                    | (20,002,470 | )                                   | $          | (14,912,059 | ) | $ | (53,117,905 | ) | $ | (31,717,911 | ) |
|                                               |       |                                 |        |                                |       |   |   |   |   |
| LESS:                                              |       |                                 |        |                                |       |   |   |   |   |
| Cumulative  exchangeable preferred stock dividends |       | —                               |        | —                              |       | — |   | 12,773,922 |   |
| Accretion on  exchangeable preferred stock         |       | —                               |        | —                              |       | — |   | 177,636 |   |
|                                               |       |                                 |        |                                |       |   |   |   |   |
| Net loss  attributable to common shareholders      |       | $                                    | (20,002,470 | )                                   | $          | (14,912,059 | ) | $ | (53,117,905 | ) | $ | (44,669,469 | ) |
|                                               |       |                                 |        |                                |       |   |   |   |   |
| Weighted average  common shares outstanding        |       | 19,381,124                           |        | 19,011,870                          |       | 19,360,569 |   | 18,983,799 |   |
|                                               |       |                                 |        |                                |       |   |   |   |   |
| Per basic and  diluted common share:               |       |                                 |        |                                |       |   |   |   |   |
| Basic and  diluted net loss per share              |       | $                                    | (1.03       | )                                   | $          | (0.78 | ) | $ | (2.74 | ) | $ | (2.35 | ) |

 

For the three andnine months ended September 30, 2004 and 2003, conversion of the commonequivalent shares relating to outstanding stock options is not assumed, sincethe results would have been antidilutive.

 

**Note 5 –Related Parties**

 

On September 21, 2004, the Company and Stuart J. Beck,President and Secretary, mutually agreed upon Mr. Beck’s resignation from thecompany in connection with his appointment as Ambassador/PermanentRepresentative of the Republic of Palau to the United Nations.  Mr. Beck will remain on the Company’s Boardof Directors. Pursuant to his Separation Agreement, as approved by the Company’sBoard of Directors, the Company will pay Mr. Beck severance totaling $1,008,000in equal installments over the next eighteen months.  In addition, Mr.Beck will be eligible for a pro-rated bonus for 2004 as determined by the Boardof Directors based upon achievements of certain financial targets for 2004.

 

In February 2003, the Board of Directors approved anincentive award (the “Performance Award”) of $3,286,065 to Mr. Beck to be paid,subject to vesting terms, only upon the occurrence of the refinancing, with amaturity of at least two years, of the then outstanding senior debt of theCompany.  On December 22, 2003, the Company issued $405 million aggregateprincipal amount of 9 3/4% Senior Secured Notes, which satisfied theperformance objective of the Performance Award. Under the terms of the Performance Award, a portion of Mr. Beck’s awardwill be used to repay in full his outstanding loan from us of $221,200 dueJanuary 25, 2006, and the remaining amount will be paid, at the discretion ofthe Board of Directors, in the form of cash or shares of our Common Stock(Nonvoting).  Mr. Beck had irrevocablyelected to defer all payments otherwise due until January 25, 2006 andthereafter all payments but $221,200 until the first to occur of January 31,2011, a change of control of our company or the termination of hisemployment.  Mr. Beck’s award vestsevenly over three years from the refinancing date, and the amount of any CommonStock (Nonvoting) to be received will be valued on the date of payment.  If at any time Mr. Beck was no longeremployed by the Company, any unvested portion of the performance award was tobe forfeited at such time.

 

On September 21, 2004, the Company and Stuart J. Beckamended the Performance Award and deferral of such payments pursuant to theSeparation Agreement.  Under the amendedterms of the Performance Award, Mr. Beck’s Performance Award fully vested as ofhis separation date and payment of $221,200 was made on September 30, 2004 torepay his outstanding promissory note to the Company.  The remaining vested award of $3,065,000 ispayable in cash on December 22, 2006.

 

On September 21, 2004, pursuant to the SeparationAgreement the Company modified the terms of Mr. Beck’s outstanding stock optionawards.  Under the original provisions ofthe stock option awards, when an employee separates from the Company forreasons other than (i) death or disability or (ii)the occurrence of a Change of Control, any unvested options would be forfeitedand the employee would have thirty days from the date of separation to exerciseany vested portion of the stock option award. Under the modified terms pursuant to the Separation Agreement, Mr. Beckwill continue to vest and have exercise rights in his outstanding stock optionawards as of September 21, 2004 until the earlier of (A) the later of January2, 2007 and 30 days after the last day of Mr. Beck’s continuous service on theCompany’s Board of Directors and (B) the fixed date on which each stock optionaward was initially set to expire.

 

Pursuant to the Separation Agreement dated September21, 2004, Mr. Beck will exchange his 80,250 shares of the

 

9

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Company’s Class A Voting Common Stock, par value $0.01 per share, for 80,250shares of the Company’s Class B Non-Voting Common Stock, par value $0.01 pershare.

 

As of September30, 2004, the Company recorded one-time expenses for the separation benefitsand acceleration of the remaining portion of the Performance Award ofapproximately $1,135,000 and $1,450,000, respectively.

 

**Note 6 – Restructuring and Severance Charges**

 

During the thirdquarter of 2004, the Company recognized a $1,346,000 restructuring chargerelated to employee separations at both our corporate office and our Buffalo,New York television station.  Of thetotal $1,346,000, approximately $1,251,000 relates to the separation costs,which include severance, earned vacation, pro-ratedbonus, payroll taxes and health insurance costs associated with the separationof Stuart J. Beck and administrative support staff at our corporate office andwill be paid out over the next eighteen months. The remaining $95,000 restructuring charge is a result of our ongoingextensive review of the operating and cost structure at our Buffalo, New Yorktelevision stations, which commenced during the second quarter of 2004 andresulted in a restructuring charge of $526,000 at that time. These chargesincluded severance and earned vacation, payroll taxes and health insurancecosts.

 

At September 30,2004, the restructuring charges were included in “other accrued liabilities” onthe consolidated Balance Sheets and the related expense for the charge at theBuffalo, New York television station are included in “station operatingexpenses” and the related expense for the corporate charges are included in “corporateseparation agreement expenses” on the consolidated Statement ofOperations.  These costs were recognizedin accordance with the provisions of Statement of Financial AccountingStandards No. 146, Accounting for Costs Associated with Exit or DisposalActivities.

 

The following is areconciliation of the aggregate liability recorded for restructuring charges asof September 30, 2004:

 
| ** **         | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **June 30, 2004**                         | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2004** | ** ** |
|               |       |                                      |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                         | 525,803    |   | $ | 94,822 |   | $ | 229,058 |   | $ | 391,567 |   |
| Corporate          |       | —                                    |       | 1,250,842 |   | — |   | 1,250,842 |   |
|               |       |                                      |       |   |   |   |   |   |   |
| Total              |       | $                                         | 525,803    |   | $ | 1,345,664 |   | $ | 229,058 |   | $ | 1,642,409 |   |
|                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **December 31, 2003**                    | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2004** | ** ** |
|               |       |                                     |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                        | —     |   | $ | 620,625 |   | $ | 229,058 |   | $ | 391,567 |   |
| Corporate          |       | —                                   |       | 1,250,842 |   | — |   | 1,250,842 |   |
|               |       |                                     |       |   |   |   |   |   |   |
| Total              |       | $                                        | —     |   | $ | 1,871,467 |   | $ | 229,058 |   | $ | 1,642,409 |   |
|                    |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

The liability forthe restructuring charges will be paid in accordance with the provisions of theseverance agreements and payments are expected to be completed within eighteen months.

 

***Item2.******  Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

The following information should be read inconjunction with the unaudited consolidated financialstatements and notes thereto in this Quarterly Report and the audited financialstatements and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Form 10-K for the year ended December31, 2003.

 

*Executive Summary*

 

We own and operate eight network affiliated televisionstations in geographically diverse markets reaching over 6% of the nation’stelevision households.  Three stationsare affiliated with NBC, two with ABC and one with CBS, our Big ThreeAffiliates and two stations are affiliated with the Warner Brothers TelevisionNetwork, our WB Affiliates.  The NBCaffiliates are KSEE-TV, Fresno-Visalia, California, WEEK-TV,Peoria-Bloomington, Illinois, and KBJR-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, SanFrancisco, California and WDWB-TV, Detroit, Michigan.

 

10

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Upon adoption of Statement of Financial AccountingStandards No. 142 on January 1, 2002, we considered the value of the networkaffiliation agreements as indefinite-lived and were not amortizing theintangible assets. In light of stated positions by the Securities and ExchangeCommission regarding amortization of network affiliation agreements, we havechanged our accounting policy as of December 31, 2003 to amortize these assetsretroactive to January 1, 2002 using a 25-year useful life.  As a result, we restated our earnings for thethree and nine months ended September 30, 2003, and recorded additionalamortization expense of $745,000 and $2,235,000, respectively.

 

We believe that inflation has not had a materialimpact on our results of operations for the three and nine months endedSeptember 30, 2004.  However, there canbe no assurance that future inflation would not have an adverse impact on ouroperating results and financial condition.

 

Our operating revenues are generally lower in thefirst calendar quarter and generally higher in the fourth calendar quarter thanin the other two quarters, due in part to increases in retail advertising inthe fall months in preparation for the holiday season, and in election yearsdue to increased political advertising.

 

Our revenues are derived principally from local andnational advertising, political advertising in an election year and, to alesser extent, from network compensation for the broadcast of programming andrevenues from 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.  Amounts referred to in the followingdiscussion have been rounded to the nearest thousand.

 

**RESULTSOF OPERATIONS**

** **

*Three Months Ended September 30,2004 and 2003*

 

***Consolidated***

 

Set forth below are significant factors thatcontributed to our operating results for the three months ended September 30,2004 and 2003, respectively.

 
| ** **            | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003** | ** ** | **% Change** | ** ** |
|                  |       |                                 |       |   |   |   |   |
| Local/Regional        |       | $                                    | 15,689,000 |   | $ | 15,370,000 |   | 2 | % |
| National              |       | 12,823,000                           |       | 13,028,000 |   | (2 | )% |
| Network  Compensation |       | 741,000                              |       | 808,000 |   | (8 | )% |
| Political             |       | 1,642,000                            |       | 504,000 |   | 226 | % |
| Other                 |       | 998,000                              |       | 1,092,000 |   | (9 | )% |
| Gross Revenue         |       | 31,893,000                           |       | 30,802,000 |   | 4 | % |
| Agency  Commissions   |       | 4,847,000                            |       | 5,082,000 |   | (5 | )% |
| Net Revenue           |       | $                                    | 27,046,000 |   | $ | 25,720,000 |   | 5 | % |

 

Net Revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

 

Net revenue for our eight-station group increased$1,326,000 or 5% to $27,046,000 for the three months ended September 30, 2004,from $25,720,000 for the three months ended September 30, 2003.  The increase was primarily due to increasesin political advertising revenue and non-political local revenue of $1,138,000and $319,000, respectively. We generated approximately $1,395,000 of netpolitical revenue, after agency commissions of approximately $247,000, whichrepresented approximately 5% of total net revenues. The non-political localrevenue increase was primarily due to the growth in the instructional schools,financial services, furniture and movie categories.Non-political national revenue declined 2% or $205,000 due primarily todeclines in the movie, utilities, financial services and health care categories.

 

Station operatingexpenses increased $3,114,000 or 14% to $25,127,000 for the three months endedSeptember 30, 2004 from $22,013,000 for the three months ended September 30,2003. The increase was primarily due to higher film amortization expenseresulting from write-downs in 2004 of certain film contract rights at our WBaffiliates, increases in healthcare costs, the restructuring charge at Buffalo,New York and employee relocation expenses.

 

11

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***Big Three Affiliates***

 

Net revenue at our BigThree affiliates increased $1,929,000 or 11% to $19,437,000 from $17,508,000primarily due to increases in political advertising, non-political nationalrevenues and non-political local revenues of $1,116,000, $314,000 and $683,000,respectively.  The non-political nationalrevenue increase was primarily due to the growth in the automotive, paidprogramming and fast food restaurants categories. The non-political local revenueincrease was primarily due to the growth in the furniture, home stores andfinancial services categories. These increases were partially offset bydecreases of $68,000 or 8% in network compensation.  The Big Three affiliates contributed 72% tonet revenue during the quarter.

 

Station operatingexpenses at our Big Three affiliates increased $730,000 or 5% to $14,174,000from $13,444,000 due primarily to increased healthcare costs, sales promotionexpenses, the restructuring charge at Buffalo, NewYork and employee relocation expenses. We anticipate realizing savings in future periods as a result of reducedpersonnel in connection with our restructuring charge at Buffalo, New York.

 

***WB Affiliates***

 

Net revenue at our WBaffiliates decreased $603,000 or 7% to $7,608,000 from $8,211,000 due primarilyto decreases in non-political national revenues of 11% and non-political localrevenues of 7%.  The non-politicalnational revenue decreases were primarily due to declines in the automotive andmovie categories.  The non-politicallocal revenue decreases were primarily due to declines in the automotive, fastfood restaurants and insurance categories. The WB affiliates do not generatemeaningful political revenue, as they do not broadcast local news.  The WB affiliates contributed 28% to netrevenue during the quarter.

 

Station operating expenses at our WB affiliatesincreased $2,384,000 or 28% to $10,953,000 from $8,569,000 primarily due tohigher film amortization expense resulting from write-downs taken in 2004 ofcertain film contract rights as compared to the same period in 2003.

 

***Consolidated***

 

Amortization expense increased $262,000 or 14% duringthe three months ended September 30, 2004 compared to the same period a yearearlier. This was primarily due to the increase in amortization expense relatingto the extension of our WB Network affiliation agreement at our San Franciscostation in October 2003.  Depreciationexpense increased $116,000 or 7% during the three months ended September 30,2004 compared to the same period a year earlier.  The increase was primarily due as a result ofincreased capital expenditures related to the conversion to digitalbroadcasting.

 

Corporate expense totaled $2,736,000; an increase of$90,000 or 3% compared to $2,646,000 for the three months ended September 30,2003. The increase was primarily due to increased healthcare costs.  The performance award expense for the threemonths ended September 30, 2004 totaled $1,912,000.  This was primarily due to the separation of acompany executive for which the unvested portion of the executive’s performanceaward expense was accelerated during the third quarter of 2004 pursuant to aSeparation Agreement dated September 21, 2004. The corporate separation agreement expense for the three months endedSeptember 30, 2004 totaled $1,251,000. This is primarily due to the separationof a company executive and pursuant to the Separation Agreement dated September21, 2004, which awarded payment of severance, pro-rated bonus and certainbenefits over the next eighteen months. We anticipate realizing significant savings in future periods resultingfrom the separation of certain executives that will not be replaced in thefuture.  Non-cash compensation expensedecreased $61,000 or 36% primarily due to the forfeitures of stock awardsgranted certain personnel in prior years who are no longer employed by us as ofSeptember 30, 2004.

 

Interest expense totaled $9,872,000; an increase of$2,153,000 or 28% compared to $7,719,000 for the three months ended September30, 2003.  The increase was primarily dueto higher debt balances on our outstanding senior secured notes.  Interest income totaled $349,000; an increaseof $213,000, or 156% compared to the three months ended September 30, 2003primarily due to the increased average cash balance invested during the threemonths ended September 30, 2004 as compared to the same period in 2003.Non-cash interest expense totaled $1,075,000; a decrease of $221,000 or 17%compared to $1,296,000 for the three months ended September 30, 2003.  The decrease was primarily due to reducedamortization of deferred financing fees, offset in part by higher imputedinterest on our obligation to the WB network under the affiliation agreements.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $6,387,000 during the three months ended September 30, 2004 and 2003,respectively as required by Statement of Financial Accounting Standards No.150.

 

During the three months ended September 30, 2004, werecorded a deferred tax benefit of $4,959,000, compared to a current

 

12

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taxbenefit of $3,035,000 for the three months ended September 30, 2003.  The lower effective tax benefit rate isprimarily due our providing in 2004 for a valuation allowance against netoperating loss carry forwards, which may not be utilized in future periods.

 

*Nine Months Ended September 30,2004 and 2003*

 

***Consolidated***

 

Set forth below are significant factors thatcontributed to our operating results for the nine months ended September 30,2004 and 2003, respectively.

 
| ** **            | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2004**                            | ** ** | **2003** | ** ** | **% Change** | ** ** |
|                  |       |                                |       |   |   |   |   |
| Local/Regional        |       | $                                   | 48,520,000 |   | $ | 47,552,000 |   | 2 | % |
| National              |       | 39,350,000                          |       | 40,531,000 |   | (3 | )% |
| Network  Compensation |       | 2,329,000                           |       | 2,426,000 |   | (4 | )% |
| Political             |       | 3,722,000                           |       | 967,000 |   | 285 | % |
| Other                 |       | 3,028,000                           |       | 3,082,000 |   | (2 | )% |
| Gross Revenue         |       | 96,949,000                          |       | 94,558,000 |   | 3 | % |
| Agency  Commissions   |       | 14,739,000                          |       | 15,714,000 |   | (6 | )% |
| Net Revenue           |       | $                                   | 82,210,000 |   | $ | 78,844,000 |   | 4 | % |

 

Net Revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

 

Net revenue for our eight-station group increased$3,366,000 or 4% to $82,210,000 for the nine months ended September 30, 2004,from $78,844,000 for the nine months ended September 30, 2003.  The increase was due primarily to increasedpolitical advertising revenue and non-political local revenue of $2,755,000 and$968,000, respectively.  We generatedapproximately $3,163,000 of net political revenue, after agency commissions ofapproximately $559,000, which represented approximately 4% of total netrevenues. The non-political local revenue increase was primarily due to thegrowth in the instructional schools, financial services and home storecategories. Non-political national revenue declined 3% or $1,181,000 due primarilyto declines in the automotive and movie categories at our WB affiliates offset,in part, by increases in non-political national revenue at our Big Threeaffiliates.

 

Station operating expenses increased $1,383,000 or 2%to $68,530,000 for the nine months ended September 30, 2004 from $67,147,000for the nine months ended September 30, 2003. The increase was primarily due toincreases in healthcare costs, compensation expenses, the restructuring chargeat Buffalo, New York, sales promotion expenses and employee relocationexpenses.

 

***Big Three Affiliates***

 

Net revenue at our BigThree affiliates increased $3,896,000 or 7% to $57,330,000 from $53,434,000primarily due to increases in political advertising, non-political nationalrevenues and non-political local revenues of $2,697,000, $1,059,000 and$338,000, respectively.  Thenon-political national revenue increase was primarily due to the growth in thepaid programming and fast food restaurants categories. The non-political localrevenue increase was primarily due to the growth in the home stores andfinancial services categories. These increases were partially offset bydecreases in network compensation of $97,000. The Big Three affiliates contributed 70% to net revenue for the ninemonths ended September 30, 2004.

 

Station operatingexpenses at our Big Three affiliates increased $2,163,000 or 5% to $41,594,000from $39,431,000 due primarily to increased healthcare costs, compensationexpenses, sales promotion expense, the restructuringcharge at Buffalo, New York and employee relocation expenses.  We anticipate realizing savings in futureperiods as a result of reduced personnel in connection with our restructuringcharge at Buffalo, New York.

 

***WB Affiliates***

 

Net revenue at our WBaffiliates decreased $530,000 or 2% to $24,880,000 from $25,410,000.  Non-political national revenue decreased 14%due primarily to declines in the automotive, paid programming and moviecategories. These decreases were partially offset by increases in non-politicallocal revenues of 4% due primarily to increases in the instructional school andhealth care categories. The WB affiliates do not generate meaningful politicalrevenue, as they do not broadcast local news. The WB affiliates

 

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contributed 30% to net revenue for the nine monthsended September 30, 2004.

 

Station operating expenses at our WB affiliatesdecreased $780,000 or 3% to $26,936,000 from $27,716,000 primarily due todecreases in general and administrative expense, a decrease in the write-downstaken in 2004 as compared to 2003 of certain film contract rights and lowerfilm amortization expense resulting from those write-downs taken in 2003.

 

***Consolidated***

 

Amortization expense decreased $2,203,000 or 27%during the nine months ended September 30, 2004 compared to the same period ayear earlier.  The decrease was primarilydue to the completion of amortization expense of a covenant not to compete inJuly 2003. Depreciation expense increased $518,000 or 11% during the ninemonths ended September 30, 2004 compared to the same period a yearearlier.  The increase was primarily dueas a result of increased capital expenditures in 2003 related to the conversionto digital broadcasting.

 

Corporate expense totaled $8,710,000; an increase of$571,000 or 7% compared to $8,139,000 for the nine months ended September 30,2003.  The increase was primarily due toincreased professional fees relating to Sarbanes-Oxley Section 404 compliance,healthcare costs and directors’ and officers’ liability insurance. Theperformance award expense for the nine months ended September 30, 2004 totaled$2,960,000.  This was primarily due tothe separation of a company executive for which the unvested portion of theexecutive’s performance award expense was accelerated during the third quarterof 2004 pursuant to a Separation Agreement dated September 21, 2004. Thecorporate separation agreement expense for the nine months ended September 30,2004 totaled $1,251,000.  This isprimarily due to the separation of a company executive and pursuant to theSeparation Agreement dated September 21, 2004, which awarded payment ofseverance, pro-rated bonus and certain benefits over the next eighteenmonths.  We anticipate realizingsignificant savings in future periods resulting from the separation of certainexecutives that will not be replaced in the future.  Non-cash compensation expense decreased$176,000 or 24% primarily due to the forfeitures of stock awards grantedcertain personnel in prior years who are no longer employed by us as ofSeptember 30, 2004.

 

Interest expense totaled $29,617,000; an increase of$6,583,000 or 29% compared to $23,034,000 for the nine months ended September30, 2003.  The increase was primarily dueto higher debt balances on our outstanding senior secured notes.  Interest income totaled $866,000; an increaseof $338,000, or 64% compared to the nine months ended September 30, 2003primarily due to the increased average cash balance invested during the ninemonths ended September 30, 2004 as compared to the same period in 2003.  Non-cash interest expense totaled $3,355,000;a decrease of $216,000 or 6% compared to $3,571,000 for the nine months endedSeptember 30, 2003.  The decrease wasprimarily due to reduced amortization of deferred financing fees, offset inpart by higher imputed interest on our obligation to the WB network under theaffiliation agreements.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $19,161,000 for the nine months ended September 30, 2004 and totaling$6,387,000 for the three months ended September 30, 2003 as required byStatement of Financial Accounting Standards No.150.  For the six months ended June 30, 2003,dividends on the Preferred Stock were treated as a reduction of stockholders’equity.

 

During the nine months ended September 30, 2004, werecorded a deferred tax benefit of $9,637,000, compared to a current taxbenefit of $11,055,000 for the nine months ended September 30, 2003. The lowereffective tax benefit rate is primarily due to our providing in 2004 for avaluation allowance against net operating loss carry forwards, which may not beutilized in future periods.

 

*Restructuring and SeveranceCharges*

 

During the thirdquarter of 2004, we recognized a $1,251,000 restructuring charge related toseverance, pro-rated bonus, payroll taxes and health insurance costs at ourcorporate office in connection with the separation of executive personnel andadministrative support staff and will be paid out over the next eighteenmonths.  These costs were primarily dueas a result of a mutually agreed upon separation of our President andco-founder on September 21, 2004.

 

During the secondquarter of 2004, we conducted an extensive review of the operating and coststructure at our Buffalo, New York station. As a result of this review, we haveeliminated certain functional job positions through a combination of voluntaryand involuntary employee terminations and reduced certain non-personnel relatedoperating expenses. In connection with the elimination of the employmentpositions, we recognized a $526,000 restructuring charge as of June 30, 2004related to severance and earned vacation, payroll taxes and health insurancecosts.  In addition, during the thirdquarter of 2004, we recorded an additional $95,000 of restructuring charges asa result of our continued review of our Buffalo, New York station related tothe severance and earned vacation, payroll taxes and health insurance costs asof September 30, 2004.

 

At September 30,2004, the restructuring charges were included in “other accrued liabilities” onthe consolidated Balance

 

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Sheets and therelated expense for the charges at the Buffalo, New York television station areincluded in “station operating expenses” and the related expense for thecorporate charges are included in “corporate separation agreement expenses” onthe consolidated Statement of Operations. These costs were recognized inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 146, Accounting for Costs Associated with Exit or Disposal Activities.

 

The following is areconciliation of the aggregate liability recorded for restructuring charges asof September 30, 2004:

 
| ** **         | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|--------------------|------------|-------------------------------------------|------------|
| ** **         | ** ** | **June 30, 2004**                         | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2004** | ** ** |
|               |       |                                      |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                         | 525,803    |   | $ | 94,822 |   | $ | 229,058 |   | $ | 391,567 |   |
| Corporate          |       | —                                    |       | 1,250,842 |   | — |   | 1,250,842 |   |
|               |       |                                      |       |   |   |   |   |   |   |
| Total              |       | $                                         | 525,803    |   | $ | 1,345,664 |   | $ | 229,058 |   | $ | 1,642,409 |   |

 
| ** **         | ** ** | **Nine Months Ended September 30, 2004** | ** ** |
|--------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **December 31, 2003**                    | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2004** | ** ** |
|               |       |                                     |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                        | —     |   | $ | 620,625 |   | $ | 229,058 |   | $ | 391,567 |   |
| Corporate          |       | —                                   |       | 1,250,842 |   | — |   | 1,250,842 |   |
|               |       |                                     |       |   |   |   |   |   |   |
| Total              |       | $                                        | —     |   | $ | 1,871,467 |   | $ | 229,058 |   | $ | 1,642,409 |   |

 

The liability forthe restructuring charges will be paid in accordance with the provisions of theseverance agreements and payments are expected to be completed within eighteenmonths.

 

*Liquidity and Capital Resources*

 

On December 22, 2003, we completed a $405,000,000offering of our 9 3/4% Senior Secured Notes (the “Notes”) due December 1, 2010,at a discount, resulting in proceeds to us of $400,067,100.  Interest on the Notes is payable on December1 and June 1 of each year, beginning on June 1, 2004.  The Notes are secured by substantially all ofour assets.  We used the net proceedsfrom the offering in part to (i) repay alloutstanding borrowings, plus accrued interest, under our senior creditagreement, (ii) redeem at par, plus accrued interest, all of our 9 3/8% and 103/8% senior subordinated notes due May and December 2005, respectively, and(iii) to repurchase at par, plus accrued interest, all of our 8 7/8% seniorsubordinated notes due May 2008.  Theremaining proceeds are being used for general working capital purposes.

 

We haveestablished an investment policy for investing cash that is not immediatelyrequired for working capital purposes. Our investment objectives are to preserve capital, maximize our returnon investment and to ensure we have appropriate liquidity for our cash needs.The investments are considered to be available-for-sale as defined underStatement of Financial Accounting Standards No. 115, Accounting for CertainInvestments in Debt and Equity Securities. As of September 30, 2004, we hadapproximately $76,212,000 of cash and cash equivalents and $6,687,000 ofmarketable securities. The marketable securities, which include directobligations of the U.S. Government, domestic commercial paper and domesticcertificates of deposits, have maturities of one year or less and have activemarkets to ensure portfolio liquidity. During the second quarter of 2004, we received the $16,000,000 taxrefund as anticipated. We believe that cash and cash equivalents together withthe marketable securities and internally generated funds from operations willbe sufficient to satisfy our cash requirements for our existing operations forthe next twelve months.  However, becausewe are highly leveraged, our ability to repay our existing debt and preferredstock will depend upon the success of our business strategy, prevailingeconomic conditions, regulatory risks, our ability to integrate acquired assetssuccessfully into our operations, competitive activities by other parties,technological developments, level of programming costs and other risk factorsdescribed in our Annual Report on Form 10-K for the year ended December 31,2003. The Indenture governing the Notes contain certain covenants that, amongother things, limits our ability to incur debt, pay cash dividends on orrepurchase capital stock, enter into agreements which create liens against ourassets, restrict the ability of a subsidiary to pay money or transfer assets tous, enter into certain transactions with affiliates and to merge, consolidateor sell substantially all of the our assets. Failure to make debt payments or comply with covenants of any of ourdebt indentures and agreements could result in an event of default that, if notcured or waived, could have a material adverse effect on us.

 

Under the terms of the Certificate of Designations forour 12 3/4% Cumulative Exchangeable Preferred Stock (the “Preferred Stock”), wewere required to make the semi-annual dividends on such shares in cashbeginning October 1, 2002.  The cashpayment of dividends had been restricted by the terms of the senior creditagreement and the indenture governing our senior subordinated notes

 

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andis prohibited under the indentures governing the Notes.  Consequently we have not paid the semi-annualdividend due to the holders since October 1, 2002.  Since three or more semi-annual dividendpayments have not been paid, the holders of the Preferred Stock have the rightto elect the lesser of two directors or that number of directors constituting25% of the members of the Board of Directors. The right of the holders of the Preferred Stock to elect members of theBoard of Directors as set forth above will continue until such time as allaccumulated dividends that are required to be paid in cash and that are inarrears on the Preferred Stock are paid in full in cash.  We are restricted from paying cash dividendsunder the Indenture governing the Notes and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.

 

As part of an overall effort to reduce stationoperating expenses, we have made substantial progress replacing unprofitableprogramming with competitive, profitable programming.

 

Film payments at our WB affiliates for the three andnine months ended September 30, 2004 totaled $4.6 million and $14.3 million,respectively, as compared to the three and nine months ended September 30, 2003totaling $4.9 million and $15.1 million, respectively. Film payments for theyear ended December 31, 2004 will approximate $18.8 million as compare to $20.1million at December 31, 2003.  Based oncompleted negotiations and current market conditions for the purchase ofprogramming, we expect annual film payments at the WB affiliates to decline byapproximately 50% by 2007 from our 2003 levels.

 

Film payments at our Big Threeaffiliates for the three and nine months ended September 30, 2004 and September30, 2003 totaled $1.3 million and $3.9 million, respectively. Film payments forthe year ended December 31, 2004 will approximate $5.3 million as compare to$5.2 million at December 31, 2003.  Basedon completed negotiations and current market conditions for the purchase ofprogramming, we expect annual film payments at the Big Three affiliates todecline by approximately 20% by 2007 from our 2003 levels.

 

Net cash used in operating activities was $3,454,000during the nine months ended September 30, 2004 compared to $18,918,000 duringthe nine months ended September 30, 2003. The change from 2003 to 2004 was primarily due to the receipt of a$16,000,000 income tax refund, offset in part by increased payments of interestexpense and changes in net assets.

 

Net cash used in investing activities was $10,322,000during the nine months ended September 30, 2004 compared to $10,281,000 duringthe nine months ended September 30, 2003. The change from 2003 to 2004 was primarily due to the purchase of marketablesecurities, offset by a reduction in capital expenditures due to the completionof our conversion to digital technology.

 

Net cash used in financing activities was $226,000during the nine months ended September 30, 2004 compared to $645,000 during thenine months ended September 30, 2003. The change from 2003 to 2004 primarily resulted from a decrease in thepayment of deferred financing fees.

 

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

 

The interest rate on our outstanding Senior SecuredNotes is fixed at 9.75%.  Consequently,our earnings will not be affected by changes in short-term interest rates.

 

***Item4.******  Controls and Procedures***

 

As of September 30, 2004, an evaluation was carriedout under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-14(c) under the Securities Exchange Actof 1934). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were effective as of September 30, 2004.  There was no change in our internal controlover financial reporting (as defined in Rules 13a-15(f) under the Exchange Act)that occurred during the period covered by this Quarterly Report on Form 10-Qthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II.****  OTHER INFORMATION**

 

***Item4.******  Submissionof Matters to a Vote of Security Holders***

 

None

 

 

***Item 5.****** Other Information***

 

None

 

***Item6.******  Exhibitsand Reports on Form 8-K***

 

a. Exhibits

 

10.1          SeparationAgreement dated September 21, 2004 between Granite Broadcasting Corporation andStuart J. Beck.

 

10.2          Renewalof Network Affiliation Agreement with the Warner Bros. Network for WDWB-TV,Detroit, Michigan.

 

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 onForm 8-K

 

Current Report onForm 8-K filed August 6, 2004, disclosing the release of our earnings for thesecond quarter ended June 30, 2004.

 

Current Report onForm 8-K filed September 7, 2004, announcing the promotion of Lawrence I. Willsto Chief Financial Officer and the resignation of Ellen McClain, Senior VicePresident-Chief Financial Officer.

 

Current Report on Form8-K filed September 21, 2004, announcing Stuart J. Beck, who is a founder andmember of our Board of Directors and has served as our President since 1991,has been appointed Ambassador/Permanent Representative of the Republic of Palauto the United Nations, resigned from the Company as an employee and officer,and shall continue to serve as a member of our Board.

 

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**SIGNATURES**

 

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

 

 
|                                           | GRANITE BROADCASTING CORPORATION                                                                                                                                            |
|------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                           | Registrant                                                                                                                                                                  |
|                                           |                                                                                                                                                                        |
|                                           |                                                                                                                                                                        |
| Date:    November 10, 2004 | /s/                         W.  DON CORNWELL   |   |
|                                           | (W. Don  Cornwell)                                                                                                                                                          |
|                                           | Chief Executive  Officer                                                                                                                                                    |
|                                           |                                                                                                                                                                        |
|                                           |                                                                                                                                                                        |
| Date:    November 10, 2004 | /s/                         LAWRENCE  I. WILLS |   |
|                                           | (Lawrence I.  Wills)                                                                                                                                                        |
|                                           | Senior Vice President – Chief Financial Officer                                                                                                                        |
|                                           | (Principal  Financial Officer)                                                                                                                                              |

 

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