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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-19728
GRANITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3458782
(State of Incorporation) (I.R.S. Employer Identification No.)
767 THIRD AVENUE, 34TH FLOOR
NEW YORK, NEW YORK 10017
(212) 826-2530
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes [ ] No [X]
(APPLICABLE ONLY TO CORPORATE ISSUERS:)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Class A Voting Common Stock,
par value $.01 per share - 178,500 shares outstanding at April 30, 2004; Common
Stock (Nonvoting), par value $.01 per share - 19,202,624 shares outstanding at
April 30, 2004.
___________________________
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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GRANITE BROADCASTING CORPORATION
Form 10-Q
Table of Contents
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003......................................... 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003 (unaudited)..................... 4
Consolidated Statement of Stockholders' Deficit for the Three
Months Ended March 31, 2004 (unaudited)....................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 (unaudited)..................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 11
Item 4. Controls and Procedures......................................... 11
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Item 5. Other Information............................................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 12
SIGNATURES............................................................... 13
Granite Broadcasting Corporation is a Delaware corporation. Unless the
context otherwise requires, "we", "us" and "our" refer to Granite Broadcasting
Corporation, together with its direct and indirect subsidiaries. Our principal
executive offices are located at 767 Third Avenue, 34th Floor, 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 information on our web site is not
part of this report.
1
FORWARD-LOOKING STATEMENTS
This report includes and incorporates forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions about us, including, among other things:
o inability to implement our strategy, or, having implemented it,
failure to realize anticipated cost savings or revenue opportunities
available through implementation of our strategy;
o inability to effect dispositions or acquisitions of television
stations, which are an important part of our strategy;
o the effects of governmental regulation of broadcasting, including
adverse changes in, or interpretations of, the exceptions to the
Federal Communications Commission's duopoly rule which could
restrict, or eliminate, our ability to enter into duopoly-type
operating arrangements and implement our operating strategy;
o pricing fluctuations in national and local advertising;
o volatility or increases in programming costs;
o restrictions on our operations due to our significant leverage and
limited sources of liquidity;
o the impact of changes in national and regional economies;
o delay in any economic recovery or the recovery not being as robust
as might otherwise have been anticipated;
o our ability to service our outstanding debt;
o successful integration of acquired television stations (including
achievement of synergies and cost reductions);
o competition in the markets in which our stations are located;
o loss of network affiliations or changes in the terms of network
affiliation agreements upon renewal; and
o technological change and innovation in the broadcasting industry.
Our network affiliation agreement with The Warner Brothers Network at
WDWB-TV expires on May 31, 2004. We have no reason to believe that the agreement
will not be renewed or extended when it expires.
Other matters set forth in this report, as well as risk factors set forth
in our Form 10-K for the year ended December 31, 2003, filed with the Securities
and Exchange Commission may also cause actual results in the future to differ
materially from those described in the forward-looking statements. We undertake
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 and assumptions, the forward-looking events discussed in this
report might not occur.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 79,769,748 $ 90,213,995
Marketable securities, at fair value 8,742,271 --
Accounts receivable, less allowance for doubtful
accounts ($888,854 at March 31, 2004 and
$1,319,238 at December 31, 2003) 18,288,841 21,464,965
Film contract rights 12,725,215 15,299,993
Income tax receivable 16,326,799 16,326,799
Other current assets 7,233,836 5,795,794
------------- -------------
Total current assets 143,086,710 149,101,546
Property and equipment, net 47,991,023 48,449,586
Film contract rights 6,197,835 8,446,229
Other non current assets 7,586,567 7,891,335
Deferred financing fees, less accumulated
amortization ($532,571 at March 31, 2004 and
$50,902 at December 31, 2003) 12,934,670 13,373,623
Goodwill, net 78,049,529 78,049,529
Broadcast licenses, net 127,331,829 127,331,829
Network affiliations, net 84,497,521 86,379,757
------------- -------------
Total assets $ 507,675,684 $ 519,023,434
============= =============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 3,264,471 $ 2,903,728
Accrued interest 10,859,063 987,187
Other accrued liabilities 4,607,652 7,039,091
Film contract rights payable 25,493,629 27,314,160
Other current liabilities 2,708,617 2,951,001
------------- -------------
Total current liabilities 46,933,432 41,195,167
Long-term debt 400,262,773 400,086,598
Film contract rights payable 20,191,828 24,616,575
Deferred tax liability 43,666,025 46,203,797
Redeemable preferred stock 198,569,406 198,480,586
Accrued dividends on redeemable preferred stock 51,095,690 44,708,729
Other non current liabilities 13,498,681 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
March 31, 2004 193,810 190,126
Additional paid-in capital 378,106 --
Accumulated other comprehensive income 5,274 --
Accumulated deficit (265,531,506) (248,118,609)
Less:
Unearned compensation (712,160) (627,648)
Treasury stock, at cost (875,675) (875,675)
------------- -------------
Total stockholders' deficit (266,542,151) (249,431,806)
------------- -------------
Total liabilities and stockholders' deficit $ 507,675,684 $ 519,023,434
============= =============
See accompanying notes.
3
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
(Restated)
Net revenues $ 26,000,641 $ 24,657,193
Station operating expenses 21,091,276 22,105,541
Depreciation 1,762,477 1,531,029
Amortization of intangible assets 1,882,238 3,114,694
Corporate expense 3,544,989 2,820,417
Non-cash compensation expense (1) 302,824 385,737
------------- -------------
Operating loss (2,583,163) (5,300,225)
Other expenses (income):
Interest expense 9,872,593 7,626,724
Interest income (232,527) (214,286)
Non-cash interest expense 1,146,441 1,071,117
Non-cash preferred stock dividend 6,386,961 --
Other 139,938 138,448
------------- -------------
Loss before income taxes (19,896,569) (13,922,228)
Benefit for income taxes (2,483,672) (4,471,245)
------------- -------------
Net loss $ (17,412,897) $ (9,450,983)
============= =============
Net loss attributable to common shareholders $ (17,412,897) $ (15,926,763)
============= =============
------------- -------------
Basic and diluted net loss per share $ (0.90) $ (0.84)
============= =============
Weighted average common shares outstanding 19,319,460 18,940,543
============= =============
- ----------------------
(1) Allocation of non-cash compensation expense to other operating expenses:
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
Station operating expenses $ 28,536 $ 30,543
Corporate expense 274,288 355,194
------------- -------------
Non-cash compensation expense $ 302,824 $ 385,737
============= =============
See accompanying notes.
4
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Unaudited)
Class A Common Other Additional Total
Common Stock Comprehensive Paid-in Accumulated Unearned Treasury Stockholders'
Stock (Nonvoting) Income Capital Deficit Compensation Stock Deficit
------- ----------- ------------- ---------- ------------- ------------ ---------- -------------
Balance at December 31,
2003 $ 1,785 $ 188,341 $ -- $ -- $(248,118,609) $(627,648) $(875,675) $(249,431,806)
Issuance of Common
Stock (Nonvoting) 3,684 (3,684) --
Stock expense
related to stock plans 195,955 52,460 248,415
Grant of stock award
under stock plans 185,835 (185,835) --
Discount on loans to
officers 48,863 48,863
Net loss (17,412,897) (17,412,897)
Unrealized gain on
investment 5,274 5,274
-------------
Comprehensive loss (17,407,623)
------- ----------- ------- ---------- ------------- --------- ---------- -------------
Balance at March 31,
2004 $ 1,785 $ 192,025 $ 5,274 $ 378,106 $(265,531,506) $(712,160) $(875,675) $(266,542,151)
======= =========== ======= ========== ============= ========= ========== =============
See accompanying notes.
5
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
(Restated)
Cash flows from operating activities:
Net loss $ (17,412,897) $ (9,450,983)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets 1,882,238 3,114,694
Depreciation 1,762,477 1,531,029
Performance award expense 524,271 --
Non-cash compensation expense 302,824 385,737
Non-cash interest expense 1,146,441 1,071,117
Non-cash preferred stock dividend 6,386,961 --
Deferred tax benefit (2,483,672) --
Change in assets and liabilities:
Decrease in accounts receivable 3,176,124 4,120,922
Increase in accrued liabilities 7,440,437 4,297,841
Increase (decrease) in accounts payable 360,743 (627,730)
WB affiliation payment (1,057,532) (630,857)
Increase in income tax receivable -- (4,252,151)
Decrease in film contract rights and other assets 2,998,885 1,677,355
Decrease in film contract rights payable and other liabilities (5,409,536) (5,338,579)
------------- -------------
Net cash used in operating activities (382,236) (4,101,605)
------------- -------------
Cash flows from investing activities:
Investments in marketable securities and other (8,749,003) --
Capital expenditures (1,270,292) (2,251,675)
------------- -------------
Net cash used in investing activities (10,019,295) (2,251,675)
------------- -------------
Cash flows from financing activities:
Payment of deferred financing fees (42,716) (505,408)
Repurchase of common stock -- (23,751)
------------- -------------
Net cash used in financing activities (42,716) (529,159)
------------- -------------
Net decrease in cash and cash equivalents (10,444,247) (6,882,439)
Cash and cash equivalents, beginning of period 90,213,995 54,319,597
------------- -------------
Cash and cash equivalents, end of period $ 79,769,748 $ 47,437,158
============= =============
Supplemental information:
Cash paid for interest $ -- $ 2,874,514
Cash paid for income taxes 3,100 52,000
Non-cash capital expenditures 33,622 --
Cumulative exchangeable preferred stock dividend 6,386,961 6,386,961
See accompanying notes.
6
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements include
the accounts of Granite Broadcasting Corporation and its subsidiaries (the
"Company"), and have been prepared in accordance with the instructions to Form
10-Q and do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. Operating results for the three-month period ended March
31, 2004 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2004. For further information, refer to the
Company's consolidated financial statements and notes thereto for the year ended
December 31, 2003, which were included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. All significant inter-company
accounts and transactions have been eliminated. Data at, and for the year ended,
December 31, 2003 are derived from the Company's audited consolidated financial
statements. In the opinion of management, all adjustments of a normal recurring
nature, which are necessary for a fair presentation of the results for the
interim periods, have been made.
Restatement of Financial Statements
Upon the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("Statement 142"), the Company
considered the value of its network affiliation agreements as indefinite live
assets that should not be subject to amortization. In light of stated positions
by the Securities and Exchange Commission regarding amortization of network
affiliation agreements, the Company has changed its accounting policy as of
December 31, 2003 to amortize these assets retroactive to January 1, 2002 using
a 25-year useful life. As a result, the financial results for the quarter ended
March 31, 2003 have been restated. The total impact of the adjustment was an
increase in amortization expense of $744,839, with a corresponding adjustment to
loss before income taxes and net loss of $484,145. Basic and diluted net loss
per share increased by $0.02.
Cash Equivalents and Investments in Marketable Securities
All highly liquid investments purchased with an original maturity of
ninety days or less are considered cash equivalents. The marketable securities
are classified as available-for-sale in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. These securities are carried at fair
market value based on current market quotes. Unrealized gains and losses are
reported in stockholders' equity as a separate component of other comprehensive
income until realized. Gains and losses on securities sold are based on the
specific identification method. The Company does not hold these securities for
speculative or trading purposes.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("Statement 123"). Accordingly, no compensation expense has been recognized for
the stock option plans. For purposes of Statement 123 pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period; therefore, the impact on pro forma net loss for the three months
ended March 31, 2004 may not be representative of the impact in future years.
The Company's pro forma information for the three months ended March
31, 2004 and 2003 follows:
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
(Restated)
Net loss, as reported $ (17,412,897) $ (9,450,983)
Add: pro forma compensation expense 357,374 339,987
Less: compensation expense, as reported 12,000 12,000
------------- -------------
Pro forma net loss $ (17,758,271) $ (9,778,970)
============= =============
Basic and diluted net loss per share, as reported $ (0.90) $ (0.84)
Pro forma compensation expense (0.02) (0.02)
------------- -------------
Pro forma basic net loss per share $ (0.92) $ (0.86)
============= =============
7
The fair value for each option grant was estimated at the date of grant
using the Black-Scholes options pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The Company's
employee stock options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions can materially
affect the fair value estimate.
Note 2 - Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). Statement 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that have characteristics of both liabilities and equity.
The provisions of Statement 150 were effective beginning with the first interim
period after June 15, 2003. The Company adopted Statement 150 during the six
months ended December 31, 2003. The Company's 12 3/4% Cumulative Exchangeable
Preferred Stock (the "Preferred Stock") has been reclassified on the Company's
consolidated balance sheet as a long-term liability and the accrual of dividends
of $6,387,000 for the three months ended March 31, 2004 has been recorded as a
charge to expense on the consolidated statement of operations. For the quarter
ended March 31, 2003, dividends on the Preferred Stock were treated as a
reduction of stockholders' equity.
Note 3 - Recent Developments
On April 23, 2004, the Company announced that it has entered into a
definitive agreement to sell the assets of its Fort Wayne, Indiana ABC
affiliate, WPTA-TV, to Malara Broadcasting for $45.9 million, subject to certain
closing adjustments. The Company will acquire the stock of NVG-Fort Wayne, Inc,
owner and operator of WISE-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 a strategic arrangement with
Malara Broadcasting under which the Company will provide advertising sales,
promotion and administrative services, and selected programming to certain
Malara-owned stations. The first implementation of the arrangement will involve
stations in Fort Wayne, Indiana and Duluth, Minnesota. Malara Broadcasting has
entered into a definitive agreement to acquire the assets of KDLH-TV, the CBS
affiliate serving Duluth, Minnesota from New Vision Group LLC for $10.8 million,
subject to certain closing adjustments. It is anticipated that the Company will
guarantee financing for the Malara Broadcasting acquisitions.
All of the above transactions are contingent upon approval by the FCC
and satisfaction of other customary closing conditions and are expected to close
in the third quarter of 2004.
Note 4 - Per Share Calculations
The per-share calculations shown on the income statement for the
three-month period ended March 31, 2004 and 2003 are computed in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share. The
following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
(Restated)
Net loss $ (17,412,897) $ (9,450,983)
LESS:
Cumulative exchangeable preferred stock dividends -- 6,386,961
Accretion on exchangeable preferred stock -- 88,819
------------- -------------
Net loss attributable to common shareholders $ (17,412,897) $ (15,926,763)
============= =============
Weighted average common shares outstanding 19,319,460 18,940,543
Per basic and diluted common share:
Basic and diluted net loss per share $ (0.90) $ (0.84)
============= =============
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the unaudited
consolidated financial statements and notes thereto in this Quarterly Report and
the audited financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Form 10-K for the
year ended December 31, 2003.
Executive Summary
We own and operate eight network affiliated television stations in
geographically diverse markets reaching over 6% of the nation's television
households. Three stations are affiliated with NBC, two with ABC and one with
CBS, our Big Three Affiliates and two stations are affiliated with the Warner
Brothers Television Network, our WB Affiliates. The NBC affiliates are KSEE-TV,
Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois, and KBJR-TV,
Duluth, Minnesota and Superior, Wisconsin. The ABC affiliates are WKBW-TV,
Buffalo, New York and WPTA-TV, Fort Wayne, Indiana. The CBS affiliate is
WTVH-TV, Syracuse, New York. The WB affiliates are KBWB-TV, San Francisco,
California and WDWB-TV, Detroit, Michigan.
Upon adoption of Statement of Financial Accounting Standards No. 142 on
January 1, 2002, we considered the value of the network affiliation agreements
as indefinite-lived and were not amortizing the intangible assets. In light of
stated positions by the Securities and Exchange Commission regarding
amortization of network affiliation agreements, we have changed our accounting
policy as of December 31, 2003 to amortize these assets retroactive to January
1, 2002 using a 25-year useful life. As a result, we restated our earnings for
the first quarter of 2003, and recorded additional amortization expense of
$745,000.
We believe that inflation has not had a material impact on our results of
operations for the quarter ended March 31, 2004. However, there can be no
assurance that future inflation would not have an adverse impact on our
operating results and financial condition.
Our operating revenues are generally lower in the first calendar quarter
and generally higher in the fourth calendar quarter than in the other two
quarters, due in part to increases in retail advertising in the fall months in
preparation for the holiday season, and in election years due to increased
political advertising.
Our revenues are derived principally from local and national advertising,
political advertising in an election year and, to a lesser extent, from network
compensation for the broadcast of programming and revenues from studio rental
and commercial production activities. The primary operating expenses involved in
owning and operating television stations are employee salaries, depreciation and
amortization, programming, advertising and promotion. Amounts referred to in the
following discussion have been rounded to the nearest thousand.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
Consolidated
Net revenue for our eight-station group increased $1,344,000 or 5.4% to
$26,001,000 for the three months ended March 31, 2004, from $24,657,000 for the
three months ended March 31, 2003. The increase was due primarily to an increase
of $1,140,000 in political advertising revenue and an increase in local
non-political revenue of $204,000. Non-political national revenue declined 2.5%
or $300,000 due primarily to declines in the paid programming and movie
categories at our WB affiliates offset, in part, by increases in non-political
national revenue at our Big Three affiliates.
Station operating expenses decreased $1,015,000 or 4.6% to $21,091,000 for
the three months ended March 31, 2004 from $22,106,000 for the three months
ended March 31, 2003. Lower film amortization expense resulting from write-downs
in 2003 and 2002 of certain film asset balances at our WB affiliates, as well as
the expiration of certain programs, and a reduction in the allowance for
doubtful accounts was offset, in part, by higher healthcare costs, compensation
increases and increases in power and rent resulting from the launch of digital
broadcasting. We wrote film assets down to net realizable value in 2003 by
$3,000,000.
Big Three Affiliates
Net revenue at our Big Three affiliates increased $1,140,000 or 6.9% to
$17,673,000 from $16,533,000 primarily due to a $1,140,000 increase in political
advertising. Non-political national revenue increased 3.6% and non-political
local revenue decreased 2.8%. The Big Three affiliates contributed 68% to net
revenue during the quarter.
9
Station operating expenses at our Big Three affiliates increased $673,000
or 5.2% to $13,517,000 from $12,844,000 due primarily to higher healthcare
costs, compensation increases, higher sales expense and increased power costs
resulting from the onset of digital broadcasting.
WB Affiliates
Net revenue at our WB affiliates increased $204,000 or 2.5% to $8,328,000
from $8,124,000 driven primarily by healthy local non-political growth.
Non-political national revenue decreased 11.3% due primarily to declines in the
paid programming and movie categories. The WB affiliates do not generate
meaningful political revenue, as they do not broadcast local news. The WB
affiliates contributed 32% to net revenue during the quarter.
Station operating expenses at our WB affiliates decreased $1,688,000 or
18.2% to $7,574,000 from $9,262,000 primarily due to write-downs in 2003 and
2002 of certain film asset balances, as well as the expiration of certain
programs, and a reduction of the allowance for doubtful accounts. We wrote film
assets down to net realizable value in 2003 by $3,000,000.
Consolidated
Amortization expense decreased $1,232,000 or 40% during the three months
ended March 31, 2004 compared to the same period a year earlier. The decrease
was primarily due to a reduction in amortization of a covenant not to compete.
Depreciation expense increased $231,000 or 15% during the three months ended
March 31, 2004 compared to the same period a year earlier. The increase was
primarily due to increased capital expenditures in 2003 related to the
conversion to digital broadcasting.
Corporate expense totaled $3,545,000; an increase of $725,000 or 26%
compared to $2,820,000 for the three months ended March 31, 2003. Included in
corporate expense for the three months ended March 31, 2004 is $524,000 of
expense associated with a performance award granted to certain officers of the
Company during 2003 that will be used primarily to repay their outstanding loans
to us on January 25, 2006. The performance award expense for the year ended
December 31, 2004 is expected to be $2,096,000. The remaining increase of
$201,000 is due to increased professional fees and directors' and officers'
liability insurance. Non-cash compensation expense decreased $83,000 or 21% due
to a reduction in stock awards granted to certain executives.
Interest expense totaled $9,873,000; an increase of $2,246,000 or 29%
compared to $7,627,000 for the three months ended March 31, 2003. The increase
was primarily due to higher debt balances on our outstanding senior secured
notes. Interest income totaled $233,000; an increase of $19,000, or 9% compared
to the three months ended March 31, 2003 primarily due to interest accrued on
the marketable securities. Non-cash interest expense totaled $1,146,000, an
increase of $75,000 or 7% primarily due to imputed interest on our obligation to
the WB network under the affiliation agreements, offset in part by reduced
amortization of deferred financing fees.
We recorded as an expense the accrual of dividends on our 12 3/4%
Cumulative Exchangeable Preferred Stock totaling $6,387,000 during the three
months ended March 31, 2004 as required by Statement of Financial Accounting
Standards No. 150. For the quarter ended March 31, 2003, dividends on the
Preferred Stock were treated as a reduction of stockholders' equity.
During the three months ended March 31, 2004, we recorded a deferred tax
benefit of $2,484,000, compared to a current tax benefit of $4,471,000 for the
three months ended March 31, 2003. As of December 31, 2003, we utilized
substantially all of our available net operating loss carry-backs resulting in a
$16 million income tax receivable, which we expect to receive in the second
quarter of 2004. Accordingly, any future net operating losses will be carried
forward and will only be realized upon the generation of future book income or
reversal of deferred tax liabilities.
Liquidity and Capital Resources
On December 22, 2003, we completed a $405,000,000 offering 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
December 1 and June 1 of each year, beginning on June 1, 2004. The Notes are
secured by substantially all of our assets. We used the net proceeds from the
offering in part to (i) repay all outstanding borrowings, plus accrued interest,
under our senior credit agreement, (ii) redeem at par, plus accrued interest,
all of our 9 3/8% and 10 3/8% senior subordinated notes due May and December
2005, respectively, and (iii) to repurchase at par, plus accrued interest, all
of our 8 7/8% senior subordinated notes due May 2008. The remaining proceeds are
being used for general working capital purposes.
We have established an investment policy for investing cash that is not
immediately required for working capital purposes. Our investment objectives are
to preserve capital, maximize our return on investment and to ensure we have
10
appropriate liquidity for our cash needs. The investments are considered to be
available-for-sale as defined under Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. As of
March 31, 2004, we had approximately $79,770,000 of cash and cash equivalents
and $8,742,000 of marketable securities. The marketable securities, which
include direct obligations of the U.S. Government, domestic commercial paper and
domestic certificates of deposits, have maturities of one year or less and have
active markets to ensure portfolio liquidity. We believe that cash and cash
equivalents together with the marketable securities, internally generated funds
from operations and a $16,000,000 income tax refund expected to be received in
second quarter of 2004 will be sufficient to satisfy our cash requirements for
our existing operations for the next twelve months.
Under the terms of the Certificate of Designations for our 12 3/4%
Cumulative Exchangeable Preferred Stock (the "Preferred Stock"), we were
required to make the semi-annual dividends on such shares in cash beginning
October 1, 2002. The cash payment of dividends had been restricted by the terms
of the senior credit agreement and the indenture governing our senior
subordinated notes and is prohibited under the indentures governing the Notes.
Consequently we have not paid the semi-annual dividend due to the holders since
October 1, 2002. Since three or more semi-annual dividend payments have not been
paid, the holders of the Preferred Stock have the right to elect the lesser of
two directors or that number of directors constituting 25% of the members of the
Board of Directors. The right of the holders of the Preferred Stock to elect
members of the Board of Directors as set forth above will continue until such
time as all accumulated dividends that are required to be paid in cash and that
are in arrears on the Preferred Stock are paid in full in cash. We are
restricted from paying cash dividends under the Indenture governing the Notes
and do not anticipate paying cash dividends on our Preferred Stock in the
foreseeable future.
As part of an overall effort to reduce station operating expenses, we have
made substantial progress replacing unprofitable programming with competitive,
profitable programming. For example, we have replaced certain programming at our
WB stations costing approximately $8 million annually with competitive
programming that will cost approximately $500,000 annually.
Film payments at our WB affiliates were $4.9 million for the three months
ended March 31, 2004 compared to $5.0 million during the three months ended
March 31, 2003. Film payments for the year ended December 31, 2004 will
approximate $18.9 million. Based on completed negotiations and current market
conditions for the purchase of programming, we expect annual film payments at
the WB affiliates to decline by approximately 50% by 2007.
Film payments at our Big Three affiliates were $1.3 million for the three
months ended March 31, 2004 and March 31, 2003. Film payments for the year ended
December 31, 2004 will approximate $5.4 million. Based on completed negotiations
and current market conditions for the purchase of programming, we expect annual
film payments at the Big Three affiliates to decline by approximately 20% by
2007.
Net cash used in operating activities was $382,000 during the three months
ended March 31, 2004 compared to $4,102,000 during the three months ended March
31, 2003. The change from 2003 to 2004 was primarily the result of a decrease in
the payment of interest expense and an increase in operating cash flow.
Net cash used in investing activities was $10,019,000 during the three
months ended March 31, 2004 compared to $2,252,000 during the three months ended
March 31, 2003. The change from 2003 to 2004 was primarily due to purchase of
marketable securities, offset by a reduction in capital expenditures due to the
completion of our conversion to digital technology.
Net cash used in financing activities was $43,000 during the three months
ended March 31, 2004 compared to $529,000 during the three months ended March
31, 2003. The change from 2003 to 2004 primarily resulted from a decrease in the
payment of deferred financing fees.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The interest rate on our outstanding Senior Secured Notes is fixed at
9.75%. Consequently, our earnings will not be affected by changes in short-term
interest rates.
Item 4. Controls and Procedures
As of March 31, 2004, an evaluation was carried out under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective as of March 31, 2004. No significant changes were made in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On April 23, 2004, we announced that we intend to enter into a
strategic arrangement with Malara Broadcast Group Inc., or Malara
Broadcasting, under which we will provide advertising sales, promotion and
administrative services, and selected programming to certain Malara
Broadcasting-owned stations under applicable Federal Communications
Commission rules and regulations. The first implementation of the
arrangement would involve stations in Fort Wayne, Indiana and Duluth,
Minnesota-Superior, Wisconsin, as described below.
In connection with our plan to enter into a strategic arrangement
with Malara Broadcasting, we agreed to sell our Ft. Wayne ABC affiliate,
WPTA(TV), to a subsidiary of Malara Broadcasting for $45.9 million,
pursuant to the terms and conditions of an asset purchase agreement, dated
April 23, 2004, a copy of which is attached hereto as Exhibit 2.1, which
we refer to as the WPTA Purchase Agreement. In addition, we agreed to
purchase WISE-TV, the NBC affiliate serving Fort Wayne from New Vision
Group, LLC, or New Vision Television, for $44.2 million, pursuant to the
terms and conditions of a stock purchase agreement, dated April 23, 2004,
a copy of which is attached hereto as Exhibit 2.2. The price for each
transaction is subject to closing adjustments, and both transactions are
subject to regulatory approval.
In addition to a subsidiary of Malara Broadcasting entering into the
WPTA Purchase Agreement with us, a subsidiary of Malara Broadcasting on
April 23, 2004, entered into a definitive agreement to acquire KDLH(TV)
from New Vision Television and certain of its subsidiaries for $10.8
million, subject to closing adjustments and regulatory approval. It is
anticipated that financing for the foregoing Malara Broadcasting
acquisitions will be guaranteed by us. We currently own and operate
KBJR-TV, the NBC affiliate serving Duluth-Superior, in addition to seven
other stations. Under the contemplated strategic arrangements, we will
provide the services mentioned above to Malara Broadcasting's KDLH(TV) in
Duluth-Superior and WPTA(TV) in Ft. Wayne.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.1 Purchase and Sale Agreement, dated as of April 23, 2004,
by and among Malara Broadcast Group of Fort Wayne, LLC,
WPTA-TV, Inc., WPTA-TV License, Inc. and Granite
Broadcasting Corporation
2.2 Stock Purchase Agreement, dated as of April 23, 2004, by
and among Granite Broadcasting Corporation, NVG-Fort
Wayne, Inc. and New Vision Group, LLC
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
Section 7241)
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C.
Section 7241)
32 Certifications of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241)
b. Reports on Form 8-K
Current Report on Form 8-K filed March 2, 2004, disclosing the
release of our earnings for the fourth quarter and year ended
December 31, 2003.
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SIGNATURES
Pursuant to the requirements 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
the undersigned thereunto duly authorized.
GRANITE BROADCASTING CORPORATION
Registrant
Date: May 10, 2004 /s/ W. DON CORNWELL
----------------------------------------------------
(W. Don Cornwell)
Chief Executive Officer
Date: May 10, 2004 /s/ LAWRENCE I. WILLS
----------------------------------------------------
(Lawrence I. Wills)
Senior Vice President - Chief Administrative Officer
(Principal Accounting Officer)
13