<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1998
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 or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
767 Third Avenue
34th Floor
New York, New York 10017
Telephone number: (212) 826-2530
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_____
------
(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 September 30, 1998; Common Stock (Non-voting), par value $.01 per
share - 10,473,545 shares outstanding at September 30, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
GRANITE BROADCASTING CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------ ------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,512,081 $ 2,170,927
Accounts receivable, net 28,937,768 35,308,464
Film contract rights 11,091,714 10,097,262
Other assets 7,795,041 10,958,742
------------ ------------
Total current assets 50,336,604 58,535,395
Property and equipment, net 31,765,279 36,004,876
Film contract rights and other noncurrent assets 5,817,765 7,041,000
Deferred financing fees, net 12,860,912 10,213,314
Intangible assets, net 639,412,774 521,819,428
------------ ------------
$740,193,334 $633,614,013
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 4,120,050 $ 3,885,239
Accrued interest 14,117,509 4,387,546
Other accrued liabilities 4,123,415 5,682,202
Film contract rights 13,579,464 10,554,088
Other current liabilities 10,299,825 3,225,603
------------ ------------
Total current liabilities 46,240,263 27,734,678
Long-term debt 421,351,320 392,779,025
Film contract rights payable 6,650,299 6,905,486
Deferred tax and other noncurrent liabilities 53,923,497 31,751,733
Commitments
Redeemable preferred stock 214,698,166 207,699,808
Stockholders' deficit:
Common Stock: 41,000,000 shares authorized consisting of
1,000,000 shares of Voting Common Stock, $.01 par value,
and 40,000,000 shares of Common Stock (Nonvoting), $.01
par value; 178,500 shares of Voting Common Stock and
10,473,545 shares of Common Stock (Nonvoting) (8,676,157
shares at December 31,1997) issued and outstanding 109,481 88,546
Additional paid-in capital 16,553,179 24,529,712
Accumulated deficit (15,521,920) (54,411,868)
Less: Unearned compensation (2,877,076) (2,529,232)
Treasury stock (47,000) (47,000)
Note receivable from officer (886,875) (886,875)
------------ ------------
Total stockholders' deficit (2,670,211) (33,256,717)
------------ ------------
$740,193,334 $633,614,013
============ ============
</TABLE>
See accompanying notes.
-1-
<PAGE>
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
---------------- ------------- --------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 35,917,480 $ 37,159,092 $116,376,621 110,789,033
Station operating expenses 21,295,176 20,967,636 65,982,640 61,516,945
Time brokerage agreement fees 111,124 150,000 427,810 450,000
Depreciation expense 1,318,128 1,418,000 4,063,965 4,175,671
Amortization expense 5,160,835 3,556,073 12,339,347 10,268,134
Corporate expense 1,996,203 1,665,539 5,947,835 4,951,609
Non-cash compensation expense 210,157 296,627 759,385 675,146
---------------- ------------- --------------- -------------
Operating income 5,825,857 9,105,217 26,855,639 28,751,528
Other expenses:
Equity in net loss of investee - 400,000 973,439 1,200,000
Interest expense, net 10,062,300 9,697,306 28,857,559 29,485,907
Non-cash interest expense 462,016 543,298 1,370,939 1,685,786
Gain on sale of stations (57,775,928) - (57,775,928) -
Other 520,557 439,717 1,037,172 738,757
---------------- ------------- --------------- -------------
Income (loss) before
income taxes and extraordinary item 52,556,912 (1,975,104) 52,392,458 (4,385,922)
Provision for income taxes 7,369,000 205,700 10,540,000 583,100
---------------- ------------- --------------- -------------
Income (loss) before extraordinary item 45,187,912 (2,180,804) 41,852,458 (4,942,022)
Extraordinary loss on early
extinguishment of debt, net of taxes of
$120,000 and $1,595,000 for the three
and nine months ended September 30,
1998, respectively (222,772) (5,248,315) (2,962,510) (5,569,119)
---------------- ------------- --------------- -------------
Net income (loss) $ 44,965,140 $ (7,429,119) $ 38,889,948 (10,511,141)
================ ============= =============== =============
Net income (loss) attributable to common
shareholders $ 38,612,518 $(13,317,709) $ 20,000,528 (26,480,832)
================ ============= =============== =============
Per common share:
Basic income (loss) before extraordinary item $3.65 $(0.92) $2.29 $(2.39)
Basic extraordinary loss (0.02) (0.60) (0.30) (0.64)
---------------- ------------- --------------- -------------
Basic net income (loss) $3.63 $(1.52) $1.99 $(3.03)
================ ============= =============== =============
Weighted average common shares outstanding 10,652,000 8,767,000 10,029,000 8,756,000
Net income (loss) attributable to common
shareholders - assuming dilution $39,312,915 $(13,317,709) $22,264,518 $(26,480,832)
================ ============= =============== =============
Per common share:
Diluted income (loss) before extraordinary item $2.19 $(0.92) $1.43 $(2.39)
Diluted extraordinary loss (0.01) (0.60) (0.17) (0.64)
---------------- ------------- --------------- -------------
Diluted net income (loss) $2.18 $(1.52) $1.26 $(3.03)
================ ============= =============== =============
Adjusted weighted average common shares outstanding
- assuming dilution 18,018,000 8,767,000 17,603,000 8,756,000
</TABLE>
See accompanying notes.
-2-
<PAGE>
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Class A Common Additional
Common Stock Paid-in Accumulated
Stock (Nonvoting) Capital Deficit
----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $1,785 $86,761 $24,529,712 $(54,411,868)
Dividends on redeemable
preferred stock (18,514,309)
Accretion of offering costs
related to Cumulative
Exchangeable Preferred Stock (375,111)
Exercise of stock options 551 266,605
Conversion of redeemable
preferred stock into Common
Stock (Nonvoting) 19,254 9,607,821
Issuance of Common Stock
(Nonvoting) 1,130 (1,130)
Grant of stock award under
stock plans 1,107,229
Stock expense related to
stock plans (67,638)
Net income 38,889,948
----------- ------------ ------------- --------------
Balance at September 30, 1998 $1,785 $107,696 $16,553,179 $(15,521,920)
=========== ============ ============= ==============
<CAPTION>
Total
Unearned Note Receivable Treasury Stockholders'
Compensation from Officer Stock Deficit
--------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $(2,529,232) $(886,875) $(47,000) $(33,256,717)
Dividends on redeemable
preferred stock (18,514,309)
Accretion of offering costs
related to Cumulative
Exchangeable Preferred Stock (375,111)
Exercise of stock options 267,156
Conversion of redeemable
preferred stock into Common
Stock (Nonvoting) 9,627,075
Issuance of Common Stock
(Nonvoting) -
Grant of stock award under
stock plans (1,107,229) -
Stock expense related to
stock plans 759,385 691,747
Net income 38,889,948
--------------- --------------- ------------- --------------
Balance at September 30, 1998 $(2,877,076) $(886,875) $(47,000) $(2,670,211)
=============== =============== ============= ==============
</TABLE>
See accompanying notes
-3-
<PAGE>
GRANITE BROADCASTING CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 38,889,948 $ (10,511,141)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization of intangible assets 12,339,347 10,268,134
Depreciation 4,063,965 4,175,671
Non-cash compensation expense 759,385 675,146
Non-cash interest expense 1,370,939 1,685,786
Equity in net loss of investee 973,439 1,200,000
Extraordinary loss 4,557,510 5,569,119
Gain on sale of stations (57,775,928) ---
Deferred income tax provision 4,749,000 ---
Change in assets and liabilities net of effects from
acquisition and dispositions of stations:
Decrease (increase) in accounts receivable 6,370,696 (3,199,965)
Increase in accounts payable and accrued liabilities 7,117,625 4,740,878
Decrease (increase) in film contract rights and other current assets 1,421,224 (3,334,884)
Increase in film contract rights payable and other current liabilities 5,622,273 3,982,266
Decrease in deferred tax liability and other non current liabilities (9,400,236) (469,955)
Decrease (increase) in other assets 2,576,729 (2,675,860)
------------- -------------
Net cash provided by operating activities 23,635,916 12,105,195
Cash flows from investing activities:
Payment for acquisitions of stations (170,869,424) (172,713,906)
Proceeds from sale of stations, net 149,990,381 ---
Network affiliation payment (14,500,000) ---
Investment in Datacast (500,000) (1,000,000)
Capital expenditures (5,264,108) (4,115,936)
------------- -------------
Net cash (used in) investing activities (41,143,151) (177,829,842)
Cash flows from financing activities:
Proceeds from bank loan 38,000,000 121,500,000
Repayment of bank debt (151,500,000) (11,000,000)
Retirement of senior subordinated notes (33,922,700) (82,897,588)
Proceeds from senior subordinated notes, net 174,482,000 ---
Proceeds from preferred stock offering, net --- 143,889,789
Dividends paid (2,296,531) (2,642,992)
Payment of deferred financing fees (7,113,347) (210,873)
Other financing activities 198,967 (37,812)
------------- -------------
Net cash provided by financing activities 17,848,389 168,600,524
------------- -------------
Net increase in cash and cash equivalents 341,154 2,875,877
Cash and cash equivalents, beginning of period 2,170,927 555,753
------------- -------------
Cash and cash equivalents, end of period $ 2,512,081 $ 3,431,630
============= =============
Supplemental information:
Cash paid for interest $ 19,547,000 $ 25,085,000
Income taxes paid 154,000 193,000
Non-cash capital expenditures 478,000 394,000
Non-cash dividend 10,392,000 3,241,000
</TABLE>
See accompanying notes.
-4-
<PAGE>
GRANITE BROADCASTING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of presentation
- -------------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Granite Broadcasting Corporation and its subsidiaries (the
"Company"), have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Operating
results for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1997
which were included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. All significant intercompany accounts and transactions
have been eliminated. Data at and for the year ended December 31, 1997 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.
Note 2 - Long Term Debt
- -----------------------
On May 11, 1998, the Company completed an offering of $175,000,000 principal
amount of its 8 7/8% Senior Subordinated Notes, due May 15, 2008 (the "8 7/8%
Notes"), at a discount, resulting in proceeds to the Company of $174,482,000.
The proceeds of this offering were used to repay all of the then outstanding
borrowings under the Company's then existing bank credit agreement and to
repurchase $22,960,000 of its 10 3/8% Senior Subordinated Notes, due May 15,
2005 (the "10 3/8% Notes") at a repurchase price of 105.75%. In connection with
the repayment of borrowings under the then existing bank credit agreement and
the repurchase of the 10 3/8% Notes, the Company incurred an extraordinary loss
of $4,215,000 related to the write-off of deferred financing costs and the
premium paid on the repurchase of the 10 3/8% Notes.
On June 10, 1998, the Company entered into a new bank credit agreement which,
subject to the satisfaction of certain conditions, allows for revolving credit
borrowings of $260,000,000 and permits borrowings of up to an additional
$240,000,000 on an uncommitted basis. The bank facility can be used to fund
future acquisitions of broadcast stations and for general working capital
purposes.
On September 24, 1998, the Company repurchased $9,500,000 of its 10 3/8% Notes
at a repurchase price of 101.5%. In connection with the repurchase of the 10
3/8% Notes, the Company incurred an extraordinary loss of $343,000 related to
the write-off of deferred financing costs and the premium paid on the repurchase
of the 10 3/8% Notes.
Note 3 - Acquisition and dispositions
- -------------------------------------
On July 15, 1998, the Company completed the disposition of WWMT-TV, the CBS
affiliate serving Grand Rapids-Kalamazoo-Battle Creek, Michigan, to Freedom
Communications, Inc. ("Freedom") for $150,540,000 in cash. On August 17, 1998,
the Company exercised its option to purchase WLAJ-TV, the ABC affiliate serving
Lansing, Michigan, for $19,500,000 in cash and simultaneously sold the station
to Freedom for $18,950,000 in cash. The Company recognized a pre-tax gain for
financial statement reporting
-5-
<PAGE>
purposes on the sale of these stations of $57,776,000. The Company has
sufficient net operating loss carryforwards to offset regular federal taxes on
the gain. However, the third quarter tax provision includes a cash tax of
approximately $2,100,000 consisting of federal alternative minimum taxes and
state income taxes related to the gain and a deferred tax of $4,749,000
resulting from the release of a valuation allowance previously recorded against
deferred tax assets relating primarily to net operating loss carryforwards.
On July 20, 1998, the Company completed the acquisition of KBWB-TV (formerly
KOFY-TV), the WB affiliate serving San Francisco-Oakland-San Jose California, by
acquiring the stock of Pacific FM Incorporated ("Pacific"), the owner of KBWB-
TV. The total purchase price for all of the stock of Pacific was $143,750,000.
In addition, the Company paid $30,000,000 to the principal shareholders of
Pacific for a covenant not to compete in the San Francisco-Oakland-San Jose
television market for a period of five years from the closing. The acquisition
was financed with the proceeds from the Company's sale of WWMT-TV, which
occurred on July 15, 1998, and with borrowings under the Company's bank credit
facility. In approving the Company's acquisition of KBWB-TV, the Federal
Communications Commission (the "FCC") granted the Company a nine-month waiver of
its current duopoly rule, enabling the Company to continue to operate KNTV in
San Jose, California for nine months after the closing of the acquisition of
KBWB-TV. The Company has filed a petition for reconsideration of this ruling,
requesting a permanent waiver of the duopoly rule or, alternatively, an interim
duopoly waiver conditioned upon the outcome of the FCC's pending television
ownership rulemaking proceeding. Chronicle Publishing Company, licensee of KRON-
TV, San Francisco, California has filed an opposition to the Company's petition
for reconsideration.
In connection with the purchase of KBWB-TV, the WB Network agreed to enter into
a ten-year affiliation agreement with the Company instead of another television
station in the San Francisco market in return for total consideration of
$31,572,000. The Company paid $14,500,000 to the WB Network after the closing of
the acquisition and will pay the remaining $17,072,000 over a five year period.
The Company will amortize the total consideration paid over ten years.
Note 4 - Per-share calculations
- ---------------------------------
The per-share calculations shown on the face of the income statement for the
three and nine month periods ended September 30, 1998 and 1997 are computed in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share." The following table sets forth the computation of basic
and diluted earnings per share:
-6-
<PAGE>
<TABLE>
<CAPTION>
Three months Nine months
ended September Three months ended Nine months ended ended September
30, 1998 September 30, 1997 September 30, 1998 30, 1997
------------------ ---------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Income (loss) before
extraordinary item $45,187,912 $ (2,180,804) $41,852,458 $ (4,942,022)
Extraordinary loss on early
extinguishment of debt (222,772) (5,248,315) (2,962,510) (5,569,119)
------------------ ---------------------- ------------------ ------------------
Net Income (loss) $44,965,140 $ (7,429,119) $38,889,948 $(10,511,141)
LESS:
- -Preferred stock dividends
Convertible preferred 700,397 880,836 2,263,990 2,643,153
Exchangeable preferred 5,527,188 4,884,557 16,250,319 13,009,739
- -Accretion on exchangeable
preferred 125,037 123,197 375,111 316,799
------------------ ---------------------- ------------------ ------------------
Income (loss)attributable
to common shareholders
$38,612,518 $(13,317,709) $20,000,528 $(26,480,832)
================== ====================== ================== ==================
Effect of dilutive
securities:
PLUS:
Convertible preferred
stock dividends 700,397 (a) 2,263,990 (a)
------------------ ------------------
Income (loss) attributable
to common shareholders -
assuming dilution $39,312,915 $(13,317,709) $22,264,518 $(26,480,832)
================== ====================== ================== ==================
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding for basic
income (loss) per share 10,652,000 8,767,000 10,029,000 8,756,000
================== ====================== ================== ==================
ADD:
Effect of dilutive
securities:
Preferred stock conversions 7,107,000 7,107,000
Stock award plans - 30,000
Stock options 259,000 437,000
------------------ ------------------
Total potentially dilutive
common shares 7,366,000 (a) 7,574,000 (a)
Adjusted weighted average
Common shares outstanding-
assuming dilution 18,018,000 8,767,000 17,603,000 8,756,000
================== ====================== ================== ==================
Per Common Share:
Basic income (loss) before
extraordinary item $ 3.65 $ (0.92) $ 2.29 $ (2.39)
Basic extraordinary loss (0.02) (0.60) (0.30) (0.64)
------------------ ---------------------- ------------------ ------------------
Basic income (loss) per share $ 3.63 $ (1.52) $ 1.99 $ (3.03)
Diluted income (loss) before
extraordinary item $ 2.19 $ (0.92) $ 1.43 $ (2.39)
Diluted extraordinary loss (0.01) (0.60) (0.17) (0.64)
------------------ ---------------------- ------------------ ------------------
Diluted income (loss) per share $ 2.18 $ (1.52) $ 1.26 $ (3.03)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Since the Company had net losses during the three and nine month periods
ended September 30, 1997, no adjustments were made to the dilutive per share
calculation, as doing so would have been antidilutive in both periods.
-7-
<PAGE>
Note 5 - Recent pronouncements
- -------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information" which
is effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating segments and for
related disclosures about products, services, geographic areas and major
customers. The Company has not yet made a determination of the effect, if any,
SFAS 131 will have on the manner in which the Company currently reports.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain sections of this Form 10-Q contain various forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, which
represent the Company's expectations or beliefs concerning future events. The
forward-looking statements include, without limitation, the Company's ability to
meet its future liquidity needs and its disclosure concerning Year 2000 issues.
The Company cautions that these forward-looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. Such factors include, without
limitation, general economic conditions, competition in the markets in which the
Company's stations are located, technological change and innovation in the
broadcasting industry and proposed legislation.
Introduction
- ------------
The Company is a group broadcaster that operates ten network-affiliated
television stations and one radio station. The Company's revenues are derived
principally from local and national advertising 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 and advertising and promotion
expenses. Comparisons of the Company's consolidated financial statements for the
three and nine month periods ended September 30, 1998 against prior periods have
been affected by the acquisition of KBWB-TV, which occurred on July 20, 1998,
the sale of WWMT-TV, which occurred on July 15, 1998, and the sale of WLAJ-TV,
which occurred on August 17, 1998. It is anticipated that comparisons of the
Company's consolidated financial statements for the year ended December 31, 1998
against prior periods will be affected by the aforementioned transactions.
Numbers referred to in the following discussion have been rounded to the nearest
thousand.
The following table sets forth certain operating data for the three and nine
months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating income $ 5,826,000 $ 9,105,000 $26,856,000 $28,751,000
Add:
Time brokerage agreement fees 111,000 150,000 428,000 450,000
Depreciation and amortization 6,479,000 4,974,000 16,403,000 14,444,000
Corporate expense 1,996,000 1,665,000 5,948,000 4,952,000
Non-cash compensation 210,000 297,000 759,000 675,000
----------- ----------- ----------- -----------
Broadcast cash flow $14,622,000 $16,191,000 $50,394,000 $49,272,000
=========== =========== =========== ===========
</TABLE>
"Broadcast cash flow" means operating income plus time brokerage agreement fees,
depreciation, amortization, corporate expense and non-cash compensation. The
Company has included broadcast cash flow data because such data are commonly
used as a measure of performance for broadcast companies and are also used by
investors to measure a company's ability to service debt. Broadcast cash flow
is not, and should not be used as, an indicator or alternative to operating
income, net income or cash flow as reflected in
-9-
<PAGE>
the consolidated financial statements, is not a measure of financial performance
under generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
Three months ended September 30, 1998 and 1997
- ----------------------------------------------
Net revenue totaled $35,917,000 for the three months ended September 30, 1998; a
decrease of $1,242,000 or 3 percent compared to $37,159,000 for the three months
ended September 30, 1997. The decrease was primarily a result of the
disposition of WWMT-TV and WLAJ-TV during the quarter as well as the impact of
the strike at General Motors, offset in part by the addition of KBWB-TV and
strong political spending in an election year.
Station operating expenses totaled $21,295,000 for the three months ended
September 30, 1998; an increase of $327,000 or 2 percent compared to $20,968,000
for the three months ended September 30, 1997. The increase was primarily due to
increased programming and promotion expense and the inclusion of KBWB-TV, offset
in part by the disposition of WWMT-TV and WLAJ-TV during the quarter.
Broadcast cash flow (net revenue less station operating expenses) totaled
$14,622,000 for the three months ended September 30, 1998; a decrease of
$1,569,000 or 10 percent compared to $16,191,000 for the three months ended
September 30, 1997. Operating cash flow (broadcast cash flow less corporate
expenses) was $12,627,000, a decrease of $1,899,000 or 13 percent compared to
$14,526,000 for the three months ended September 30, 1997.
Depreciation and amortization increased $1,505,000, or 30 percent during the
three months ended September 30, 1998 compared to the same period a year earlier
primarily due to the acquisition of KBWB-TV, offset, in part, by the disposition
of WWMT-TV and WLAJ-TV. Corporate expense increased $331,000 or 20 percent
during the three months ended September 30, 1998 compared to the same period a
year earlier, primarily due to higher cash compensation paid to certain
executive officers.
Net interest expense increased only 4 percent or $365,000 during the three
months ended September 30, 1998 as compared to the same period a year earlier
despite higher levels of outstanding indebtedness as the Company continued its
strategic plan to reduce its cost of borrowing. In September 1997, the Company
redeemed the entire outstanding amount of its $60,000,000 principal amount of
its 12.75% Senior Subordinated Debentures, due September 1, 2002 (the "12.75%
Debentures"). This debt was replaced with credit agreement borrowings of a
lower rate. During the second quarter of 1998, the Company completed an
offering of $175,000,000 of its 8 7/8% Senior Subordinated Debentures, due May
15, 2008 (the "8 7/8% Notes"). The proceeds of the offering were used to repay
all of the then outstanding borrowings under the Company's then existing bank
credit agreement and to repurchase $22,960,000 of its 10 3/8% Senior
Subordinated Notes, due May 15, 2005 (the "10 3/8% Notes") at a repurchase price
of 105.75%. During the third quarter, the Company used lower rate bank
borrowings to repurchase an additional $9,500,000 of its 10 3/8% Notes at a
repurchase price of 101.50%. In October, the Company repurchased an additional
$46,100,000 of subordinated debt at a discount and replaced it with bank
borrowings at a lower rate.
In connection with the sale of WWMT-TV and WLAJ-TV, the Company recognized a
pre-tax gain for financial statement purposes of $57,776,000 during the third
quarter. The Company has sufficient net operating loss carryforwards to offset
regular federal taxes on the gain. However, the third quarter tax provision
includes a cash tax of approximately $2,100,000 consisting of federal
alternative minimum taxes
-10-
<PAGE>
and state income taxes related to the gain and a deferred tax of $4,749,000
resulting from the release of a valuation allowance previously recorded against
deferred tax assets relating primarily to net operating loss carryforwards.
In connection with the repurchase of the 10 3/8% Notes, the Company incurred an
extraordinary loss during the three months ended September 30, 1998 of $343,000
related to the premium paid and the write-off of deferred financing costs. In
conjunction with the redemption of the 12.75% Debentures, the Company recognized
an extraordinary loss during the three months ended September 30, 1997 of
$5,248,000 related to the premium paid and the write-off of the related deferred
financing fees.
Nine months ended September 30, 1998 and 1997
- ---------------------------------------------
Net revenue totaled $116,377,000 for the nine months ended September 30, 1998;
an increase of $5,588,000 or 5 percent compared to $110,789,000 for the nine
months ended September 30, 1997. Of this increase, $1,193,000 was due to the
inclusion of one additional month of operations of WDWB-TV, which was acquired
on January 30, 1997. The remaining increase was primarily due to increases in
local and national advertising revenue driven largely by Olympic spending at the
Company's CBS affiliated stations during the first quarter, heavy political
spending, and the impact of the acquisition of KBWB-TV, offset in part, by the
disposition of WWMT-TV and WLAJ-TV.
Station operating expenses totaled $65,983,000 for the nine months ended
September 30, 1998; an increase of $4,466,000 or 7 percent compared to
$61,517,000 for the nine months ended September 30, 1997. Of this increase,
$733,000 was due to the inclusion of one additional month of operations of WDWB-
TV. The remaining increase was primarily due to increased programming and sales
expense and the inclusion of KBWB-TV, offset in part by the disposition of WWMT-
TV and WLAJ-TV.
Broadcast cash flow (net revenue less station operating expenses) totaled
$50,394,000 for the nine months ended September 30, 1998; an increase of
$1,122,000 or 2 percent compared to $49,272,000 for the nine months ended
September 30, 1997. Operating cash flow (broadcast cash flow less corporate
expenses) totaled $44,446,000, an increase of less than one percent compared to
$44,320,000 for the nine months ended September 30, 1997.
Depreciation and amortization increased $1,959,000, or 14 percent during the
nine months ended September 30, 1998 compared to the same period a year earlier
primarily due to the acquisition of KBWB-TV, offset, in part, by the disposition
of WWMT-TV and WLAJ-TV, as well as the inclusion of one additional month of
operations of WDWB-TV, which was acquired in January 1997. Corporate expense
increased $996,000 or 20 percent during the nine months ended September 30, 1998
compared to the same period a year earlier, primarily due to higher cash
compensation paid to certain executive officers. Non-cash compensation expense
increased $84,000 or 12 percent during the nine months ended September 30, 1998
compared to the same period a year earlier due to the granting of additional
awards payable in Common Stock (Nonvoting) to certain executive employees of the
Company under the Company's Management Stock Plan.
The equity in net loss of investee of $973,000 for the nine months ended
September 30, 1998 and $1,200,000 for the nine months ended September 30, 1997
resulted from the Company recognizing its pro rata share of the net loss of
Datacast, LLC under the equity method of accounting. As of June 30, 1998, the
Company has written off its entire investment and no additional investment is
planned.
-11-
<PAGE>
Net interest expense decreased 2 percent during the nine months ended September
30, 1998 as compared to the same period a year earlier despite higher levels of
outstanding indebtedness as the Company continued its strategic plan to reduce
its cost of borrowing. As previously discussed, the Company replaced its 12.75%
Debentures in September 1997 with credit agreement borrowings of a lower rate.
During the second quarter of 1998, the Company used the proceeds from the
offering of its 8 7/8% Notes to repay all of the then outstanding borrowings
under its bank credit agreement and to repurchase $22,960,000 of its 10 3/8%
Notes. During the third quarter of 1998, the Company used lower rate bank
borrowings to repurchase an additional $9,500,000 of its 10 3/8% Notes. In
October, the Company repurchased an additional $46,100,000 of subordinated debt
at a discount and replaced it with bank borrowings at a lower rate.
The Company incurred extraordinary losses during the nine months ended September
30, 1998 and 1997 of $4,558,000 and $5,569,000, respectively, related to the
early extinguishment of debt. During the second quarter of 1998, the Company
repurchased $22,960,000 of its 10 3/8% Notes and repaid all of the then
outstanding borrowings under its then outstanding bank credit agreement. During
the third quarter, the Company repurchased $9,500,000 of its 10 3/8% Notes. In
connection with these repurchases and repayments, the Company incurred an
extraordinary loss for the nine months ended September 30, 1998 of $4,558,000
related to the premiums paid on the repurchases and the write-off of related
deferred financing costs. During the nine months ended September 30, 1997, the
Company purchased $19,405,000 face amount of its 9 3/8% Senior Subordinated
Notes due December 1, 2005 and redeemed the entire outstanding $60,000,000
principal amount of its 12.75% Notes at a redemption price of 106.375% of the
principal amount thereof. In connection with the redemption of this debt, the
Company recognized an extraordinary loss for the nine months ended September 30,
1997, relating to the premium paid and the write-off of a portion of related
deferred financing fees, of $5,569,000.
Liquidity and Capital Resources
- -------------------------------
On May 11, 1998, the Company completed an offering of $175,000,000 principal
amount of its 8 7/8% Notes at a discount, resulting in proceeds to the Company
of $174,482,000. The proceeds of this offering were used to repay all of the
then outstanding borrowings under the Company's then existing bank credit
agreement and to repurchase $22,960,000 of its 10 3/8% Notes at a repurchase
price of 105.75%.
On June 10, 1998, the Company entered into a new bank credit agreement (the
"Credit Agreement") which, among other things, allows for revolving credit
borrowings of $260,000,000 and permits borrowings of up to an additional
$240,000,000 on an uncommitted basis. The Credit Agreement can be used to fund
future acquisitions of broadcast stations and for general working capital
purposes. As of November 4, 1998, the Company had $66,000,000 of borrowings
outstanding under the Credit Agreement and the ability to borrow an additional
$13,690,000 for acquisitions and working capital purposes, in compliance with
the financial covenants thereunder.
On July 15, 1998, the Company completed the disposition of WWMT-TV, the CBS
affiliate serving Grand Rapids-Kalamazoo-Battle Creek, Michigan, to Freedom
Communications, Inc. ("Freedom") for $150,540,000 in cash. On August 17, 1998,
the Company exercised its option to purchase WLAJ-TV, the ABC affiliate serving
Lansing, Michigan, for $19,500,000 in cash and simultaneously sold the station
to Freedom for $18,950,000 in cash. The Company recognized a pre-tax gain for
financial statement reporting purposes on the sale of these stations of
$57,776,000. The Company has sufficient net operating loss carryforwards to
offset regular federal taxes on the gain. However, the third quarter tax
provision includes a
-12-
<PAGE>
cash tax of approximately $2,100,000 consisting of federal alternative minimum
taxes and state income taxes related to the gain and a deferred tax of
$4,749,000 resulting from the release of a valuation allowance previously
recorded against deferred tax assets relating primarily to net operating loss
carryforwards.
On July 20, 1998, the Company completed the acquisition of KBWB-TV by acquiring
the stock of Pacific FM Incorporated ("Pacific"), the owner of KBWB-TV. The
total purchase price for all of the stock of Pacific was $143,750,000. In
addition, the Company paid $30,000,000 to the principal shareholders of Pacific
for a covenant not to compete in the San Francisco-Oakland-San Jose television
market for a period of five years from the closing. The acquisition was financed
with the proceeds from the Company's sale of WWMT-TV and with borrowings under
the Company's Credit Agreement. In approving the Company's acquisition of KBWB-
TV, the Federal Communications Commission (the "FCC") granted the Company a
nine-month waiver of its current duopoly rule, enabling the Company to continue
to operate KNTV in San Jose, California for nine months after the closing of the
acquisition of KBWB-TV. The Company has filed a petition for reconsideration of
this ruling, requesting a permanent waiver of the duopoly rule or,
alternatively, an interim duopoly waiver conditioned upon the outcome of the
FCC's pending television ownership rulemaking proceeding. Chronicle Publishing
Company, licensee of KRON-TV, San Francisco, California has filed an opposition
to the Company's petition for reconsideration.
In connection with the purchase of KBWB-TV, the WB Network agreed to enter into
a ten-year affiliation agreement with the Company instead of another television
station in the San Francisco market in return for total consideration of
$31,572,000. The Company paid $14,500,000 to the WB Network on September 10,
1998 and will pay the remaining $17,072,000 over a five year period. The
Company will amortize the total consideration paid over ten years.
On September 24, 1998, the Company repurchased $9,500,000 of its 10 3/8% Notes
at a repurchase price of 101.5%. In October of 1998, the Company repurchased an
additional $46,100,000 face amount of its subordinated debt at a discount,
replacing it with lower rate borrowings under its Credit Agreement.
Cash flows provided by operating activities were $24,666,000 during the nine
months ended September 30, 1998 compared to cash flows provided by operating
activities of $12,105,000 during the nine months ended September 30, 1997, an
increase of $12,561,000 or 104 percent. The increase was primarily due to lower
cash interest expense and an increase in cash as a result of a decrease in net
operating assets.
Cash flows used in investing activities were $42,173,000 during the nine months
ended September 30, 1998 compared to $177,830,000 during the nine months ended
September 30, 1997. The decrease was primarily a result of the sale of WWMT-TV,
offset, in part, by payments made in connection with securing the WB Network
affiliation agreement relating to KBWB-TV. The Company anticipates that future
requirements for capital expenditures will include those incurred during the
ordinary course of business, which include costs associated with the
implementation of digital television technology.
Cash flows provided by financing activities were $17,848,000 during the nine
months ended September 30, 1998 compared to $168,601,000 during the nine months
ended September 30, 1997. The decrease resulted primarily from a decrease in
net bank borrowings, an increase in payments for financing fees and the issuance
of the 12-3/4% Cumulative Exchangeable Preferred Stock during the nine months
ended September 30, 1997, offset in part by the issuance of the 8 7/8% Notes and
a decrease in the amount of subordinated debt retired during the nine months
ended September 30, 1998.
-13-
<PAGE>
The Company is in the process of evaluating potential Year 2000 issues for both
its information technology (IT) and non-IT systems. The Company has completed a
preliminary internal review and has identified the systems that need to be
updated or replaced. Certain systems, such as each station's IBM AS/400, which
process the sales, traffic, accounts receivable and accounts payable, have
already been updated. Other systems, such as each station's commercial playback
system, which controls the date and time a commercial spot is aired, need to be
updated with hardware and software from the unit's vendor. There will be a need
to upgrade certain personal computers, voice mail and other IT and non-IT
systems.
The Company has retained an independent consulting firm with experience in the
broadcasting industry to perform a more thorough evaluation of potential Year
2000 issues which will include an assessment of the Company's vulnerability to
Year 2000 problems of third parties with which it has a material relationship.
The Company cannot accurately estimate its future costs relating to readying its
IT and non-IT systems until this review is completed, which is expected to occur
by January 1999. The Company cannot guarantee that its own Year 2000 compliance
and any difficulties related thereto or Year 2000 compliance problems of third
parties with which it has a material relationship will not have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company has not yet formulated a contingency plan to address
difficulties that may arise from Year 2000 noncompliance of its IT and non-IT
systems or those of key third parties.
The Company believes that internally generated funds from operations and
borrowings under the Credit Agreement will be sufficient to satisfy the
Company's cash requirements for its existing operations for the next twelve
months and for the foreseeable future thereafter. The Company expects that any
future acquisitions of television stations would be financed through funds
generated from operations and additional debt and equity financings.
-14-
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
--------
27. Financial Data Schedule
b. Reports on Form 8-K
-------------------
1. Current Report on Form 8-K, filed with the Securities and
Exchange Commission on July 1, 1998, regarding executing
definitive agreements to acquire 49% of the stock of
Pacific and entering the new Credit Agreement (Item 5
Disclosure).
2. Current Report on Form 8-K, filed with the Securities and
Exchange Commission on August 13, 1998, regarding the
acquisition of all of the outstanding stock of Pacific, the
owner and operator of KBWB-TV (Item 2 Disclosure). Audited
and proforma financial statements required by Item 7 were
included in the filing.
-15-
<PAGE>
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 by an officer
and the principal accounting officer on its behalf by the undersigned thereunto
duly authorized.
GRANITE BROADCASTING CORPORATION
Registrant
Date November 16, 1998 /s/ W. DON CORNWELL
--------------------------------------------
(W. Don Cornwell)
Chief Executive Officer
Date November 16, 1998 /s/ LAWRENCE I. WILLS
--------------------------------------------
(Lawrence I. Wills)
Vice President, Finance and Controller
(Principal Accounting Officer)
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GRANITE
BROADCASTING CORPORATION'S THIRD QUARTER FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,512,081
<SECURITIES> 0
<RECEIVABLES> 28,937,768
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,336,604
<PP&E> 31,765,279
<DEPRECIATION> 0
<TOTAL-ASSETS> 740,193,334
<CURRENT-LIABILITIES> 46,240,263
<BONDS> 421,351,320
214,698,166
0
<COMMON> 109,481
<OTHER-SE> (2,779,692)
<TOTAL-LIABILITY-AND-EQUITY> 740,193,334
<SALES> 0
<TOTAL-REVENUES> 116,376,621
<CGS> 0
<TOTAL-COSTS> 89,520,982
<OTHER-EXPENSES> (54,990,015)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,453,196
<INCOME-PRETAX> 52,392,458
<INCOME-TAX> 10,540,000
<INCOME-CONTINUING> 41,852,458
<DISCONTINUED> 0
<EXTRAORDINARY> (2,962,510)
<CHANGES> 0
<NET-INCOME> 38,889,948
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.26
</TABLE>
