----

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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION****WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

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

**For the quarterly period ended June 30, 2001**

**OR**

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

**For the transition period from ____________ to _____________**

 

**Commission File Number 0-19728**

**GRANITE BROADCASTINGCORPORATION**(exact name of registrant as specified inits charter)

| **DELAWARE**                                                    | **13-3458782**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | (I.R.S.  Employer Identification No.) |
|                                                            |                                  |
| 767 Third Avenue  34th Floor, New York, New York           |

Telephonenumber:   (212) 826-2530

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

(APPLICABLEONLY TO CORPORATE ISSUERS:)

 

             Indicate the number of sharesoutstanding of each of the issuer's classes of common stock, as of the latestpracticable date.

             Class A Voting Common Stock, parvalue $.01 per share - 178,500 shares outstanding at August 10, 2001; CommonStock (Nonvoting), par value $.01 per share – 18,443,377 shares outstanding atAugust 10, 2001.

----

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 PART I. FINANCIAL INFORMATIONGRANITE BROADCASTING CORPORATIONCONSOLIDATED BALANCE SHEET

 

|                                            | June 30,                                                                                |        | December 31, |        |
|-------------------------------------------------|-----------------------------------------------------------------------------------------|-------------|--------------|-------------|
| ASSETS                                          | 2001                                                                                    |        | 2000         |        |
|                                                 |                                                                                         |        |              |        |
|                                            | (Unaudited)                                                                             |        |         |        |
|                                            |                                                                                    |        |         |        |
| Current  assets:                                |                                                                                    |        |         |        |
|                                            | Cash  and cash equivalents (including $14,935,304 of restricted cash at June 30,  2001) | $           | 62,230,716   |        | $ | 9,209,249 |   |
|                                            | Accounts  receivable, net                                                               | 25,587,433  |         | 28,773,620  |   |
|                                            | Film  contract rights                                                                   | 9,507,131   |         | 17,835,745  |   |
|                                            | Other  current assets                                                                   | 9,148,033   |         | 29,719,328  |   |
|                                            |                                                                                    |             |         |             |   |
|                                            | Total  current assets                                                                   | 106,473,313 |         | 85,537,942  |   |
|                                            |                                                                                    |        |         |        |   |
| Non-current  assets:                            |                                                                                    |        |         |        |
|                                            | Property  and equipment, net                                                            | 43,046,392  |         | 42,682,736  |   |
|                                            | Film  contract rights and other non-current assets                                      | 48,206,146  |         | 23,856,896  |   |
|                                            | Deferred  financing fees, net                                                           | 17,460,380  |         | 5,027,846   |   |
|                                            | Intangible  assets, net                                                                 | 562,173,847 |         | 574,986,006 |   |
|                                            |                                                                                         |        |              |        |
|                                            | $                                                                                       | 777,360,078 |         | $           | 732,091,426 |   |
|                                            |                                                                                         |        |              |        |
|                                            |                                                                                    |        |         |        |
|                                            |                                                                                    |        |         |        |
|                                            |                                                                                    |        |         |        |
| LIABILITIES AND  STOCKHOLDERS' (DEFICIT) EQUITY |                                                                                    |
|                                                 |                                                                                    |
|                                                 |                                                                                         |             |              |             |  |  |  |  |

 

| Current liabilities:                                            |                                                                                                                                                                                                                                                                                                                                                                         |        |        |        |
|-----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|-------------|-------------|
|                                                            | Accounts payable                                                                                                                                                                                                                                                                                                                                                             | $           | 1,567,828   |        | $ | 3,744,779 |   |
|                                                            | Accrued interest                                                                                                                                                                                                                                                                                                                                                             | 4,323,528   |        | 2,903,984   |   |
|                                                            | Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                                   | 3,993,925   |        | 3,050,888   |   |
|                                                            | Film contract rights                                                                                                                                                                                                                                                                                                                                                         | 18,799,601  |        | 25,504,608  |   |
|                                                            | Other current  liabilities                                                                                                                                                                                                                                                                                                                                                   | 6,805,032   |        | 5,085,295   |   |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                         |             |        |             |   |
|                                                            | Total current  liabilities                                                                                                                                                                                                                                                                                                                                                   | 35,489,914  |        | 40,289,554  |   |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                         |        |        |        |   |
| Non-current  liabilities:                                       |                                                                                                                                                                                                                                                                                                                                                                         |        |        |        |
|                                                            | Long-term debt                                                                                                                                                                                                                                                                                                                                                               | 400,872,116 |        | 311,390,914 |   |
|                                                            | Film contract rights                                                                                                                                                                                                                                                                                                                                                         | 12,529,765  |        | 16,582,412  |   |
|                                                            | Deferred tax liability                                                                                                                                                                                                                                                                                                                                                       | 79,237,082  |        | 96,624,452  |   |
|                                                            | Other non-current  liabilities                                                                                                                                                                                                                                                                                                                                               | 26,355,586  |        | 19,843,495  |   |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                         |        |        |        |   |
| Cumulative  exchangeable preferred stock, net of offering costs | 255,324,930                                                                                                                                                                                                                                                                                                                                                                  |        | 239,544,783 |        |
| Stockholders' (deficit)  equity:                                |                                                                                                                                                                                                                                                                                                                                                                         |        |        |        |
|                                                            | Common Stock:  41,000,000 shares authorized consisting of  1,000,000 shares of Class A Voting Common Stock, $.01 par value, and  40,000,000 shares of Common Stock (Nonvoting), $.01 par value; 178,500 shares  of Class A Voting Common Stock and 18,443,027  shares of Common Stock (Nonvoting) (18,030,811 shares at  December 31, 2000) issued and outstanding | 186,215     |        | 182,093     |   |
| Additional paid in  capital                                     | -                                                                                                                                                                                                                                                                                                                                                                            |        | 2,295,136   |        |
| (Accumulated deficit)  retained earnings                        | (30,413,159                                                                                                                                                                                                                                                                                                                                                                  | )           | 7,614,114   |        |
| Less:                                                           | Unearned compensation                                                                                                                                                                                                                                                                                                                                                        | (1,925,371  | )           | (1,091,653  | ) |
|                                                            | Treasury stock                                                                                                                                                                                                                                                                                                                                                               | (297,000    | )           | (297,000    | ) |
|                                                            | Notes receivable from  officer                                                                                                                                                                                                                                                                                                                                               | -           |        | (886,875    | ) |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                              |        |             |        |
|                                                            | Total stockholders'  (deficit) equity                                                                                                                                                                                                                                                                                                                                        | (32,449,315 | )           | 7,815,815   |   |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                              |        |             |        |
| Total liabilities and  stockholders’ (deficit) equity      | $                                                                                                                                                                                                                                                                                                                                                                            | 777,360,078 |        | $           | 732,091,426 |   |
|                                                            |                                                                                                                                                                                                                                                                                                                                                                              |        |             |        |   |
|                                                                 |                                                                                                                                                                                                                                                                                                                                                                              |             |             |             |  |  |  |  |  |  |

Seeaccompanying notes.

GRANITE BROADCASTING CORPORATIONCONSOLIDATED STATEMENT OF OPERATIONS

|                                                         | Three Months Ended  June 30,                      |        | Six Months Ended June  30, |       |
|--------------------------------------------------------------|---------------------------------------------------|-------------|----------------------------|------------|
|                                                         |                                                   |             |                            |       |  |  |  |   |
|                                                         | 2001                                              |        | 2000                       |       | 2001 |   | 2000 |   |
|                                                         |                                                   |        |                            |       |  |   |  |   |
|                                                         | (Unaudited)                                       |        | (Unaudited)                |       |
|                                                         |                                              |        |                       |       |   |   |   |   |
| Net  revenues                                                | $                                                 | 30,506,207  |                       | $          | 37,575,779 |   | $ | 57,354,511 |   | $ | 70,915,059 |   |
| Station  operating expenses                                  | 25,381,503                                        |        | 24,354,250                 |       | 53,338,794 |   | 49,753,117 |   |
| Depreciation  expense                                        | 1,510,050                                         |        | 1,429,319                  |       | 3,013,444 |   | 2,807,281 |   |
| Amortization  expense                                        | 6,540,107                                         |        | 6,890,027                  |       | 12,828,602 |   | 13,772,447 |   |
| Corporate  expense (excluding non-cash compensation expense) | 2,498,838                                         |        | 2,408,547                  |       | 5,037,686 |   | 5,483,116 |   |
| Non-cash  compensation expense                               | 331,809                                           |        | 215,550                    |       | 799,185 |   | 431,100 |   |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Operating  (loss) income                                     | (5,756,100                                        | )           | 2,278,086                  |       | (17,663,200 | ) | (1,332,002 | ) |
|                                                         |                                              |        |                       |       |   |   |   |   |
| Other  (income) expense:                                     |                                              |        |                       |       |   |   |   |   |
|                                                         | Interest  expense                                 | 12,738,463  |                       | 7,297,576  |   | 21,900,445 |   | 14,754,095 |   |
|                                                         | Interest  income                                  | (649,870    | )                          | (181,285   | ) | (660,349 | ) | (326,517 | ) |
|                                                         | Non-cash  interest expense                        | 2,201,354   |                       | 759,324    |   | 3,069,943 |   | 1,498,799 |   |
|                                                         | Gain  from insurance settlement                   | -           |                       | (1,247,105 | ) | - |   | (1,247,105 | ) |
|                                                         | Other                                             | 289,174     |                       | 493,623    |   | 536,487 |   | 827,984 |   |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Loss  before benefit for income taxes and extraordinary item | (20,335,221                                       | )           | (4,844,047                 | )          | (42,509,726 | ) | (16,839,258 | ) |
| Benefit  for income taxes                                    | (8,148,549                                        | )           | (492,054                   | )          | (16,488,701 | ) | (3,675,974 | ) |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Loss  before extraordinary item                              | (12,186,672                                       | )           | (4,351,993                 | )          | (26,021,025 | ) | (13,163,284 | ) |
| Extraordinary  gain (loss), net of tax                       | -                                                 |        | 1,926,736                  |       | (1,207,081 | ) | 3,710,204 |   |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Net  loss                                                    | $                                                 | (12,186,672 | )                          | $          | (2,425,257 | ) | $ | (27,228,106 | ) | $ | (9,453,080 | ) |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Net  loss attributable to common shareholders                | $                                                 | (20,313,417 | )                          | $          | (9,627,500 | ) | $ | (43,008,253 | ) | $ | (23,433,439 | ) |
|                                                         |                                                   |        |                            |       |  |   |  |   |
| Per  common share:                                           |                                              |        |                       |       |   |   |   |   |
|                                                         | Basic  and diluted loss before extraordinary item | $           | (1.09                      | )          | $ | (0.62 | ) | $ | (2.25 | ) | $ | (1.48 | ) |
|                                                         | Basic  and diluted extraordinary gain (loss)      | -           |                       | 0.10       |   | (0.07 | ) | 0.20 |   |
|                                                         |                                                   |        |                            |       |  |   |  |   |
|                                                         | Basic  and diluted net loss                       | $           | (1.09                      | )          | $ | (0.52 | ) | $ | (2.32 | ) | $ | (1.28 | ) |
|                                                         |                                              |             |                       |            |   |  |   |  |   |
| Weighted  average common shares outstanding                  | 18,620,905                                        |        | 18,438,062                 |       | 18,512,398 |   | 18,369,962 |   |
|                                                         |                                              |        |                       |       |   |   |   |   |
|                                                              |                                                   |             |                            |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

(Unaudited)

 

|                                                                            | Class  A Voting Common Stock |          | Common  Stock (Nonvoting) |          | Additional  Paid-in Capital |          | Retained  Earnings (Accumulated Deficit) |                 | Unearned  Compensation |                 | Note  Receivable  from  Officer |                 | TreasuryStock |                 | Total  Stockholders'Equity (Deficit) |          |
|---------------------------------------------------------------------------------|------------------------------|---------------|---------------------------|---------------|-----------------------------|---------------|------------------------------------------|----------------------|------------------------|----------------------|--------------------------------------|----------------------|---------------|----------------------|--------------------------------------|---------------|
|                                                                            |                         |          |                      |          |                        |          |                                     |
|                                                                            |                         |          |                      |          |                        |          |                                     |
|                                                                            |                         |          |                      |          |                        |          |                                     |                 |                   |                 |                                 |                 |          |                 |                                 |          |
|                                                                            |                         |          |                      |          |                        |          |                                     |                 |                   |                 |                                 |                 |          |                 |                                 |          |
| Balance  at December 31, 2000                                                   | $                            | 1,785         |                      | $             | 180,308                     |          | $                                        | 2,295,136            |                   | $                    | 7,614,114                            |                 | $             | (1,091,653           | )                                    | $             | (886,875 | ) | $ | (297,000 | ) | $ | 7,815,815 |   |
| Dividends on Cumulative Exchangable Preferred  Stock                            |                         |          |                      |          | (4,730,904                  |          | (10,799,167                              |                 |                   |                 |                                 |                 |          |                 | (15,530,071                          |          |
|                                                                            |                         | )             | )                         |          |                        |          | )                                        |
| Accretion of offering costs related to  Cumulative Exchangeable Preferred Stock |                         |     |                      |     | (250,076                    | )             |                                     |       |                   |       |                                 |       |          |       | (250,076                             | )             |
| Grant of stock award under stock plans                                          | -                            |          |                      |          | 495,687                     |          |                                     |                 | (495,687               |                 |                                 |                 |          |                 |                                 |          |
|                                                                            |                         |          |                      | )             |                        |          |                                     |
| Issuance of Common Stock (Nonvoting)                                            |                         |     | 4,122                     |          | (4,122                      | )             |                                     |            |                   |            |                                 |            |          |            |                                 |     |
|                                                                            |                         |          |                      |          |                        |          |                                     |                 |                   |                 |                                 |                 |          |                 |                                 |          |
| Stock expense related to stock plans                                            |                         |          |                      |          | 129,520                     |          |                                     |                 | 565,891                |                 |                                 |                 |          |                 | 695,411                              |          |
|                                                                            |                         |          |                      |          |                        |          |                                     |
| Issuance of warrants related to new Senior  Credit Facility                     |                         |     |                      |     | 2,064,759                   |     |                                     |            |                   |            |                                 |            |          |            | 2,064,759                            |     |
| Discount  on loans to officers                                                  |                         |          |                      |          |                        |          |                                     |                 | (903,922               | )                    |                                 |                 |          |                 | (903,922                             | )             |
| Repayment of Note Receivable from Officer                                       |                         |     |                      |     |                        |     |                                     |            |                   |            | 886,875                              |            |          |            | 886,875                              |          |
| Net  loss                                                                       |                         |          |                      |          |                        |          | (27,228,106                              | )                    |                   |                 |                                 |                 |          |                 | (27,228,106                          | )             |
|                                                                            |                              |          |                           |          |                             |          |                                          |                 |                        |                 |                                      |                 |               |                 |                                      |          |
|                                                                            |                         |          |                      |          |                        |          |                                     |                 |                   |                 |                                 |                 |          |                 |                                 |          |
| Balance  at June 30, 2001                                                       | $                            | 1,785         |                      | $             | 184,430                     |          | $                                        | -                    |                   | $                    | (30,413,159                          | )                    | $             | (1,925,371           | )                                    | $             | - |   | $ | (297,000 | ) | $ | (32,449,315 | ) |
|                                                                            |                              |          |                           |          |                             |          |                                          |                 |                        |                 |                                      |                 |               |                 |                                      |          |

 

Seeaccompanying notes.

GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENT OF CASH FLOWS

** **

|                                                  | Six  Months ended June 30,                                                                              |         |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------|--------------|
|                                                  |                                                                                                         |         |
|                                                  | 2001                                                                                                    |         | 2000 |   |
|                                                  |                                                                                                         |         |  |   |
|                                                  | (Unaudited)                                                                                             |         |
| Cash flows from  operating activities:                |                                                                                                    |         |   |   |
|                                                  | Net loss                                                                                                | $            | (27,228,106 | ) | $ | (9,453,080 | ) |
|                                                  | Adjustments  to reconcile net loss to net cash provided by   (used in) operating activities:  |         |
|                                                  |
|                                                  | Amortization of  intangible assets                                                                      | 12,828,602   |   | 13,772,447 |   |
|                                                  | Depreciation                                                                                            | 3,013,444    |   | 2,807,281 |   |
|                                                  | Non-cash compensation  expense                                                                          | 799,185      |   | 431,100 |   |
|                                                  | Non-cash interest  expense                                                                              | 3,069,943    |   | 1,498,799 |   |
|                                                  | Deferred tax expense  (benefit)                                                                         | (17,387,370  | ) | 28,722 |   |
|                                                  | Gain from insurance  proceeds                                                                           | -            |   | (1,247,105 | ) |
|                                                  | Extraordinary loss  (gain)                                                                              | 2,011,801    |   | (6,183,674 | ) |
|                                                  | Change in assets and  liabilities:                                                                      |         |   |   |   |
|                                                  | Decrease in accounts  receivable, net                                                                   | 3,186,187    |   | 742,699 |   |
|                                                  | Increase (decrease) in  accounts payable and accrued liabilities                                        | 279,579      |   | (1,881,455 | ) |
|                                                  | Decrease in film  contract rights and other non-current assets                                          | 9,634,737    |   | 10,615,831 |   |
|                                                  | Decrease in film  contract rights and other liabilities                                                 | (7,776,203   | ) | (9,506,617 | ) |
|                                                  | Increase (decrease) in  other non-current liabilities                                                   | 549,591      |   | (181,291 | ) |
|                                                  | Decrease in income tax  receivable                                                                      | 19,431,046   |   | - |   |
|                                                  | Increase in other  assets                                                                               | (497,027     | ) | (2,194,212 | ) |
|                                                  |                                                                                                         |         |  |   |
|                                                  |                                                                                                    |         |   |   |
|                                                  | Net cash provided by  (used in) operating activities                                                    | 1,915,409    |   | (750,555 | ) |
|                                                  |                                                                                                    |         |   |   |
| Cash flows from  investing activities:                |                                                                                                    |         |   |   |
|                                                  | NBC network  affiliation prepayment                                                                     | (27,778,694  | ) | - |   |
|                                                  | WB Network affiliation  payment                                                                         | (1,261,714   | ) | (1,512,225 | ) |
|                                                  | Insurance proceeds  received                                                                            | -            |   | 1,327,572 |   |
|                                                  | Capital expenditures                                                                                    | (1,394,783   | ) | (6,072,783 | ) |
|                                                  | Other investing  activities                                                                             | -            |   | (258,041 | ) |
|                                                  |                                                                                                         |         |  |   |
|                                                  | Net cash used in  investing activities                                                                  | (30,435,191  | ) | (6,515,477 | ) |
|                                                  |                                                                                                    |         |   |   |   |
| Cash flows from  financing activities:                |                                                                                                    |         |   |   |
|                                                  | Proceeds from  long-term debt                                                                           | 205,000,000  |   | 95,000,000 |   |
|                                                  | Repayment of bank debt                                                                                  | (113,672,428 | ) | (10,327,572 | ) |
|                                                  | Retirement of senior  subordinated notes                                                                | -            |   | (81,019,763 | ) |
|                                                  | Payment of deferred  financing fees                                                                     | (9,786,323   | ) | (249,998 | ) |
|                                                  | Other financing  activities, net                                                                        | -            |   | (3,081 | ) |
|                                                  |                                                                                                         |         |  |   |
|                                                  |                                                                                                    |         |   |   |
|                                                  | Net cash provided by  financing activities                                                              | 81,541,  249 |   | 3,399,586 |   |
|                                                  |                                                                                                         |         |  |   |
| Net increase  (decrease) in cash and cash equivalents | 53,021,467                                                                                              |         | (3,866,446 | ) |
| Cash and cash  equivalents, beginning of period       | 9,209,249                                                                                               |         | 5,453,542 |   |
|                                                  |                                                                                                         |         |  |   |
| Cash and cash  equivalents, end of period             | $                                                                                                       | 62,230,716   |   | $ | 1,587,096 |   |
|                                                  |                                                                                                         |         |  |   |
| Supplemental  information:                            |                                                                                                    |         |   |   |
|                                                  | Cash paid for interest                                                                                  | $            | 18,602,000 |   | $ | 15,457,000 |   |
|                                                  | Income taxes paid                                                                                       | 162,000      |   | 134,000 |   |
|                                                  | Non-cash capital  expenditures                                                                          | 251,000      |   | 105,000 |   |
|                                                  | Non-cash dividend                                                                                       | 15,531,000   |   | 13,730,000 |   |
|                                                  | Fair value of warrants                                                                                  | 2,065,000    |   | 12,150,000 |   |
|                                                       |                                                                                                         |              |  |  |  |  |  |  |

Seeaccompanying notes.

GRANITEBROADCASTING CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)

Note 1 -  Basis of presentation 

The accompanying unaudited consolidatedfinancial statements include the accounts of Granite Broadcasting Corporationand its subsidiaries (the "Company"), and have been prepared inaccordance with the instructions to Form 10-Q and do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Operating results for the three-month and six-month periods ended June30, 2001 are not necessarily indicative of the results that may be expected forthe year ended December 31, 2001.  Forfurther information, refer to the Company's consolidated financial statementsand notes thereto for the year ended December 31, 2000 which were included inthe Company's Annual Report on Form 10-K for the year ended December 31,2000.  All significant inter-companyaccounts and transactions have been eliminated.  Data at and for the year ended December 31, 2000 are derived fromthe Company's audited consolidated financial statements.  In the opinion of management, alladjustments of a normal recurring nature, which are necessary for a fairpresentation of the results for the interim periods have been made.

Note 2 -  Long-term debt

On March 6, 2001, the Company enteredinto an amended and restated $205,000,000 Senior Credit Agreement (the “CreditAgreement”).  The Credit Agreementconsists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche B termloan.  The proceeds from the Credit Agreementwere used (i) to repay $114,410,000 of borrowings, of which $738,000represented interest, under the Company’s existing senior revolving creditfacility, (ii) to prepay the first installment under the KNTV NBC affiliationagreement (See Note 3 below), (iii) to pay certain fees and expenses associatedwith the Credit Agreement and (iv) for general working capital purposes.  The Tranche A and Tranche B term loans bearinterest annually at the greater of LIBOR plus 5.50% or 12% payablemonthly.  In addition, the Tranche Bterm loan accrues simple deferred interest at an annual rate of 6% which ispayable when the Credit Agreement matures on December 31, 2003. The CreditAgreement requires the Company to maintain compliance with certain financialtests, including but not limited to, minimum net revenue, broadcast cash flow,EBITDA and, beginning December 31, 2001, a maximum ratio of senior debt toEBITDA.  Other provisions placelimitations on payments for capital expenditures and prohibit the incurrence ofadditional debt, the purchase of the Company’s common stock, the repurchase ofsubordinated debt and the declaration and payment of cash dividends. While theCompany was in compliance with its debt covenants as of June 30, 2001, it doesnot anticipate being in compliance with certain of such financial tests atSeptember 30, 2001.   The Company iscurrently negotiating an amendment to the Credit Agreement to be in compliancewith such financial tests at September 30, 2001 and beyond.

The Company also granted to the Tranche Blenders a warrant to purchase 753,491 shares of Common Stock (Nonvoting), parvalue $.01 per share, at an exercise price of $1.75 per share.  The warrant is fully vested and remainsexercisable until March 6, 2006.  Thefair value of the warrants, $2,065,000, has been recorded as a discount to theamount outstanding under the Credit Agreement and will be amortized as non-cashinterest expense over the life of the Credit Agreement.

Note 3 - NBC Affiliation

On May 31, 2000, the Company entered intoa series of definitive agreements with NBC for KNTV to become the NBC affiliatefor the San Francisco-Oakland-San Jose, California television market for aten-year period commencing January 1, 2002 (the “San Francisco Affiliation”).  In consideration for the San FranciscoAffiliation, the Company was to pay $362,000,000 in nine annual installments,with the initial payment in the amount of $61,000,000 due on January 1,2002.  On March 6, 2001, the San FranciscoAffiliation was amended to reduce the January 1, 2002 installment to$30,500,000 and defer the remaining $30,500,000 of the original initial paymentuntil January 1, 2005.  The Companyprepaid the January 1, 2002 installment on March 6, 2001 by paying $27,779,000,which represents the present value of that installment discounted at 12%.  The Company will pay, excluding theprepayment, $342,480,000 in eight annual installments. NBC has the right toterminate the San Francisco Affiliation if it acquires an attributable interest(determined under Federal Communications Commission rules and regulations) inanother station in the San Francisco-Oakland-San Jose market, other thanKKPX-TV, upon a payment to the Company of at least $14,500,000.

Note 4 - Related PartyTransactions

Between 1995 and 1998, the Company loanedan officer a total of $2,911,000 in four separate transactions.  On January 1, 2001, the Company loaned thisofficer an additional $375,000. On February 15, 2001, the Companyagreed to consolidate the five loans into one promissory note in the amount of$3,286,000.  The new promissory notematures on January 25, 2006 or, if earlier, 30 days after the officer’stermination of employment. The new promissory note does not bear interest, butinterest at an annual rate of 6.75% will be imputed as additional compensationto the officer.  Accordingly, the newpromissory note has been recorded at its present value amount, resulting in adiscount of $915,000.  The discount hasbeen recorded as unearned compensation and will be amortized as non-cashcompensation over the life of the loan. The new promissory note allows for the loan to be forgiven in one-thirdincrements if the Company’s Common Stock (Nonvoting) trades for ten consecutivetrading days at $15.00, $20.00, and $25.00, respectively, or if the per shareconsideration received by the Company’s common stockholders in a Change ofControl (as defined in the Indentures governing the Company’s seniorsubordinated notes) equals at least $15.00, $20.00 or $25.00, respectively.  In addition, on February 15, 2001 theCompany forgave $232,000 of interest accrued during the year–endedDecember 31, 2000.  TheCompany took a charge against earnings for this amount in the first quarter of2001.

In 1995, the Company loaned anotherofficer a total of $221,000. On February 15, 2001, the Company agreedto cancel this note and issue a new promissory note in the same amount. The newpromissory note matures on January 25, 2006 or, if earlier, 30 days after theofficer’s termination of employment. The new promissory note does not bearinterest, but interest at an annual rate of 6.75% will be imputed as additionalcompensation to the officer. Accordingly, the new promissory note has beenrecorded at its present value amount, resulting in a discount of $62,000.  The discount has been recorded as unearnedcompensation and will be amortized as non-cash compensation over the life ofthe loan.  The new promissory noteallows for the loan to be forgiven in one-third increments if the Company’sCommon Stock (Nonvoting) trades for ten consecutive trading days at $15.00,$20.00, and $25.00, respectively, or if the per share consideration received bythe Company’s common stockholders in a Change of Control (as defined in theIndentures governing the Company’s senior subordinated notes) equals at least$15.00, $20.00 or $25.00, respectively. In addition, on February 15, 2001 the Company forgave $20,000 ofinterest accrued during the year–ended December 31, 2000. TheCompany took a charge against earnings for this amount in the first quarter of2001.

Note 5 - RecentAccounting Pronouncements 

In June 2001, the Financial AccountingStandards Board issued Statements of Financial Accounting Standards No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets,effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangibleassets deemed to have indefinite lives will no longer be amortized but will besubject to annual impairment tests in accordance with the Statements.  Other intangible assets will continue to beamortized over their useful lives.  TheCompany will apply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of 2002.  Application of the non-amortization provisionsof the Statement is expected to result in an increase in net income ofapproximately $13,000,000 or $.70 per share. During 2002, the Company will perform the first of the requiredimpairment tests of goodwill and indefinite lived intangible assets as ofJanuary 1, 2002 and has not yet determined what the effect of these tests willbe on the earnings and financial position of the Company.

MANAGEMENT'SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain sections of this Form 10-Qcontain various forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, which represent the Company’s expectationsor beliefs concerning future events. The forward-looking statements include, without limitation, theCompany’s ability to meet its future liquidity needs.  The Company cautions that these forward-looking statements arefurther qualified by important factors that could cause actual results to differmaterially from those in the forward looking statements.  Such factors include, without limitation,general economic conditions, competition in the markets in which the Company’sstations are located, technological change and innovation in the broadcastingindustry and proposed legislation.  Consequently,these cautionary statements and the cautionary language set forth in theCompany’s most recent Form 10-K report and other documents filed with theSecurities and Exchange Commission qualify all forward-looking statements madeherein.

Introduction

The Company is a group broadcaster thatoperates eight network-affiliated television stations and one independentstation.  The Company's revenues arederived principally from local and national advertising and, to a lesserextent, from network compensation for the broadcast of programming and revenuesfrom studio rental and commercial production activities.  The primary operating expenses involved inowning and operating television stations are employee salaries, depreciationand amortization, programming and advertising and promotion expenses.  Numbers referred to in the followingdiscussion have been rounded to the nearest thousand.  The Company’s operating revenue are generally lower in the firstcalendar quarter and generally higher in the fourth calendar quarter than inthe other two quarters, due in part to increases in retail advertising in thefall months in preparation for the holiday season, and in election years due toincreased political advertising.  Operatingresults for the three and six month periods ended June 30, 2001 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2001.

Comparisons of the Company’s consolidatedfinancial statements between the three and six month periods ended June 30, 2001and the same periods last year have been affected by the termination of the ABCaffiliation agreement at KNTV on July 1, 2000, significant increases in newsexpense at KNTV as it prepares to become the NBC affiliate for the SanFrancisco-Oakland-San Jose, California television market on January 1, 2002 andinvestments in syndicated programs at the Company’s WB affiliates.  The Company anticipates that comparisons ofthe Company’s consolidated financial statements between the years endedDecember 31, 2001 and 2000 will be impacted by increases in news and promotionexpenses at KNTV and continued investment in programming at the WB affiliates.

The following table sets forth certainoperating data for the three and six months ended June 30, 2001 and 2000:

|                           | Three  Months Ended June 30, |             | Six  Months Ended June 30, |   |
|--------------------------------|------------------------------|------------------|----------------------------|--------|
|                           |                              |             |                            |   |
|                           | 2001                         |             | 2000                       |   | 2001 |   | 2000 |   |
|                           |                              |             |                            |   |  |   |  |   |
| Operating (loss)  income       | $                            |  (5,756,000 | )                          | $      | 2,278,000 |   | $ | (17,663,000 | ) | $ | (1,332,000 | ) |
| Add:                           |                         |             |                       |   |   |   |   |   |
| Depreciation and  amortization | 8,050,000                    |             | 8,319,000                  |   | 15,842,000 |   | 16,579,000 |   |
| Corporate expense              | 2,499,000                    |             | 2,409,000                  |   | 5,038,000 |   | 5,483,000 |   |
| Non-cash compensation          | 332,000                      |             | 216,000                    |   | 799,000 |   | 431,000 |   |
| Program amortization           | 5,573,000                    |             | 5,340,000                  |   | 13,634,000 |   | 10,983,000 |   |
| Program payments               | (6,043,000                   | )                | (5,651,000                 | )      | (12,311,000 | ) | (9,624,000 | ) |
|                           |                              |             |                            |   |  |   |  |   |
| Broadcast cash flow            | $                            | 4,655,000        |                       | $      |  12,911,000 |   | $ | 5,339,000 |   | $ | 22,520,000 |   |
|                           |                              |             |                            |   |  |   |  |   |

 

"Broadcastcash flow" means operating income plus depreciation, amortization,corporate expense, non-cash compensation and program amortization, less programpayments.  The Company has includedbroadcast cash flow data because such data are commonly used as a measure ofperformance for broadcast companies and are also used by investors to measure acompany's ability to service debt. Broadcast cash flow is not, and should not be used as, an indicator oralternative to operating income, net income or cash flow as reflected in theconsolidated financial statements, is not a measure of financial performanceunder generally accepted accounting principles and should not be considered inisolation or as a substitute for measures of performance prepared in accordancewith generally accepted accounting principles.

 

*Threemonths ended June 30, 2001 and 2000*

Net revenue totaled $30,506,000 for thethree months ended June 30, 2001; a decrease of $7,070,000 or 19 percent ascompared to $37,576,000 for the three months ended June 30, 2001.  The decrease was primarily due to a weakadvertising climate, a decrease in political advertising in a non-election yearand lower revenue at KNTV as it operates on an interim basis as an independenttelevision station.

Station operating expenses totaled$25,382,000 for the three months ended June 30, 2001; an increase of $1,028,000or 4 percent as compared to $24,354,000 for the three months ended June 30,2000. The increase was primarily due to an increase in news expense at KNTV andincreases in programming expense at the Company’s WB affiliates.

Amortization expense decreased $350,000or 5 percent primarily due to the elimination of amortization of the ABCaffiliation at KNTV and a reduction in the book value of the WB networkaffiliation agreements. Corporate expense increased $90,000 or 4 percentprimarily due to increased professional fees. Non-cash compensation expense increased $116,000  primarily due to the grant of stock awardsto certain executives.

Interest expense increased $5,441,000primarily due to higher levels of outstanding debt and a higher interest rateon the Company's new Credit Agreement (as defined below).  Included in interest expense for the threemonths ended June 30, 2001 is approximately $1,425,000 of deferred interest onthe Credit Agreement payable on December 31, 2003.  Interest income increased $469,000 primarily due to increasedcash available for investment.

*Six months ended June 30, 2001 and 2000*

Net revenue totaled $57,355,000 for thesix months ended June 30, 2001; a decrease of $13,560,000 or 19 percent ascompared to $70,915,000 for the six months ended June 30, 2000.  The decrease was primarily due to a weakadvertising climate, a decrease in political advertising in a non-election yearand lower revenue at KNTV as it operates on an interim basis as an independenttelevision station.

Station operating expenses totaled$53,339,000 for the six months ended June 30, 2001; an increase of $3,586,000or 7 percent as compared to $49,753,000 for the six months ended June 30, 2000.The increase was primarily due to an increase in news expense at KNTV,increases in programming expense at the Company’s WB affiliates and theaccelerated amortization of certain syndicated programs.

Amortization expense decreased $944,000or 7 percent primarily due to the elimination of amortization of the ABCaffiliation at KNTV and a reduction in the book value of the WB networkaffiliation agreements. Corporate expense decreased $445,000 or 8 percentprimarily due to decreased professional fees. Non-cash compensation expense increased $368,000 primarily due to theearlier recognition of certain stock based compensation awards, and the grantof stock awards to certain executives.

Interest expense increased $7,146,000 or48 percent primarily due to higher levels of outstanding debt and a higherinterest rate on the Company's new Credit Agreement (as defined below).  Included in interest expense for the sixmonths ended June 30, 2001 is approximately $1,821,000 of deferred interest onthe Credit Agreement payable on December 31, 2003.  Interest income increased $334,000 primarily due to increasedcash available for investment offset in part by the forgiveness of interest onloans to certain executives.

 

*Liquidityand Capital Resources*

On March 6, 2001, the Company enteredinto an amended and restated $205,000,000 Senior Credit Agreement (the “CreditAgreement”).  The Credit Agreementconsists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche B termloan.  The proceeds from the CreditAgreement were used (i) to repay $114,410,000 of borrowings, of which $738,000represented interest, under the Company’s existing senior revolving creditfacility, (ii) to prepay the first installment under the KNTV NBC affiliationagreement, (iii) to pay certain fees and expenses associated with the CreditAgreement and (iv) for general working capital purposes.  The Tranche A and Tranche B term loans bearinterest annually at the greater of LIBOR plus 5.50% or 12%, which is payablemonthly.  In addition, the Tranche B termloan accrues simple deferred interest at an annual rate of 6% which is payablewhen the Credit Agreement matures on December 31, 2003.  The Credit Agreement requires the Company tomaintain compliance with certain financial tests, including but not limited to,minimum net revenue, broadcast cash flow, EBITDA and, beginning December 31,2001, a maximum ratio of senior debt to EBITDA. Other provisions placelimitations on payments for capital expenditures and prohibit the incurrence ofadditional debt, the purchase of the Company’s common stock, the repurchase ofsubordinated debt and the declaration and payment of cash dividends. While theCompany was in compliance with its debt covenants as of June 30, 2001, it doesnot anticipate being in compliance with certain of such financial tests atSeptember 30, 2001.  The Company iscurrently negotiating an amendment to the Credit Agreement to be in compliancewith such financial tests at September 30, 2001 and beyond.

The Company also granted to the Tranche Blenders a warrant to purchase 753,491 shares of Common Stock (Nonvoting), parvalue $.01 per share, at an exercise price of $1.75 per share.  The warrant is fully vested and remainsexercisable until March 6, 2006.  Thefair value of the warrants of $2,065,000 has been recorded as a discount to theamount outstanding under the Credit Agreement and will be amortized as non-cashinterest expense over the life of the Credit Agreement. As of August 10, 2001,the Company had approximately $57,731,000 of cash on hand, of which $13,096,000is reserved for interest payments on the Tranche B term loan.

On May 31, 2000, the Company entered intoa series of definitive agreements with NBC for KNTV to become the NBC affiliatefor the San Francisco-Oakland-San Jose, California television market for aten-year period commencing January 1, 2002 (the “San FranciscoAffiliation”).  In consideration for theSan Francisco Affiliation, the Company was to pay $362,000,000 in nine annualinstallments, with the initial payment in the amount of $61,000,000 due onJanuary 1, 2002.  On March 6, 2001, theSan Francisco Affiliation was amended to reduce the January 1, 2002 installmentto $30,500,000 and defer the remaining $30,500,000 of the original initialpayment until January 1, 2005. After giving effect to these changes, thepresent value of the new payment schedule is substantially unchanged from theoriginal terms.  The Company prepaid theJanuary 1, 2002 installment on March 6, 2001 by paying $27,779,000, whichrepresents the present value of that installment discounted at 12%. The nextpayment due to NBC is on January 1, 2003 in the amount of $37,160,000.  The Company will pay, excluding theprepayment, $342,480,000 in eight annual installments.  NBC has the right to terminate the SanFrancisco Affiliation if it acquires an attributable interest (determined underFederal Communications Commission rules and regulations) in another station inthe San Francisco-Oakland-San Jose market, other than KKPX-TV, upon a paymentto the Company of at least $14,500,000.

Net cash provided by operating activitieswas $1,915,000 during the six months ended June 30, 2001, compared to cashflows used in operating activities $751,000 during the six months ended June30, 2000.  The change from 2000 to 2001was primarily the result of an income tax refund received during the second quarter,offset in part by increased interest payments and a decrease in operating cashflow.

Net cash used in investing activities was$30,435,000 during the six months ended June 30, 2001, compared to $6,515,000during the six months ended June 30, 2000. The change from 2000 to 2001 wasprimarily due to the prepayment of the first installment under the SanFrancisco Affiliation, offset by lower capital expenditures.

Net cash provided by financing activitieswas $81,541,000 during the six months ended June 30, 2001 compared to$3,400,000 during the six months ended June 30, 2000. The change from 2000 to2001 was primarily due to a net increase in long-term debt, offset in part, byhigher deferred financing fees.

The Company expects to spendapproximately $9,000,000 in 2001 and $18,000,000 in 2002 in capitalexpenditures, of which a total of approximately $13,500,000 is associated withthe implementation of digital technology. The Company believes that internally generated funds from operations,and cash on hand will be sufficient to satisfy the Company's cash requirementsfor its existing operations for the next twelve months.

*Quantitative and Qualitative Disclosures about Market Risk*

The Company's earnings may be affected bychanges in short-term interest rates as a result of its new Senior CreditAgreement.  Under the Credit Agreement,the Company pays interest at the greater of LIBOR plus 5.50% or 12%, currently12%.  As of August 1, 2001, thesix-month LIBOR rate was 3.66875 %.  TheCompany has not entered into any agreements to hedge such risk.  A 2% increase in the LIBOR rate would haveno impact on interest expense on an annual basis.  This analysis does not consider the effects of the reduced levelof overall economic activity that could exist in such environment.

 

PARTII

OTHERINFORMATION

 

ITEM 6.            Exhibitsand Reports on Form 8-K

a. Exhibits

None

 

b. Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of Section13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has causedthis report to be signed by an officer and the principal accounting officer onits behalf by the undersigned thereunto duly authorized.

 

|   |             |   | GRANITE BROADCASTING  CORPORATION  Registrant                                              |
|--------|------------------|--------|--------------------------------------------------------------------------------------------|
|   |             |   |                                                                                       |
| Date   | August  14, 2001 |   | /s/  W. DON CORNWELL                                                                       |
|   |             |   |                                                                                            |
|   |             |   | (W. Don Cornwell)  Chief Executive Officer                                                 |
|   |             |   |
|   |             |   |                                                                                       |
|   |             |   |                                                                                       |
| Date   | August  14, 2001 |   | /s/  LAWRENCE I. WILLS                                                                     |
|   |             |   |                                                                                            |
|   |             |   | (Lawrence I. Wills)                                                                        |
|   |             |   | Senior Vice President  – Chief Administrative Officer  (Principal Accounting Officer) |