-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZPwMSChYXmDdRp24NZUzzx98o9LtleL0+keynozX9nR2Wiv9CU0igZODL5N0o+B ym2g2DQJfpsOqkrpYINnwQ== 0000950130-98-005532.txt : 19981118 0000950130-98-005532.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950130-98-005532 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRANITE BROADCASTING CORP CENTRAL INDEX KEY: 0000839621 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 133458782 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19728 FILM NUMBER: 98751002 BUSINESS ADDRESS: STREET 1: 767 THIRD AVE 34TH FL CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2128262530 MAIL ADDRESS: STREET 1: 767 THIRD AVE 34TH FL CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- 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. PART I. FINANCIAL INFORMATION GRANITE BROADCASTING CORPORATION CONSOLIDATED BALANCE SHEET
September 30, December 31, ASSETS 1998 1997 ------ ------------- ------------- (Unaudited) 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 ============ ============
See accompanying notes. -1- GRANITE BROADCASTING CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine months ended September 30, September 30, ------------------------------- ------------------------------ 1998 1997 1998 1997 ---------------- ------------- --------------- ------------- (Unaudited) (Unaudited) 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
See accompanying notes. -2- GRANITE BROADCASTING CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT Nine Months Ended September 30, 1998 (Unaudited)
Class A Common Additional Common Stock Paid-in Accumulated Stock (Nonvoting) Capital Deficit ----------- ------------ ------------- -------------- 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) =========== ============ ============= ============== Total Unearned Note Receivable Treasury Stockholders' Compensation from Officer Stock Deficit --------------- --------------- ------------- -------------- 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) =============== =============== ============= ==============
See accompanying notes -3- GRANITE BROADCASTING CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, ------------------------------- 1998 1997 ---- ---- (Unaudited) 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
See accompanying notes. -4- 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- 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-
Three months Nine months ended September Three months ended Nine months ended ended September 30, 1998 September 30, 1997 September 30, 1998 30, 1997 ------------------ ---------------------- ------------------ ------------------ 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) - ----------------------------------------------------------------------------------------------------------------------
(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- 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- 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:
Three Months Ended September 30, Nine months ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 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 =========== =========== =========== ===========
"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- 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- 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- 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- 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- 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- 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- 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- EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 2,512,081 0 28,937,768 0 0 50,336,604 31,765,279 0 740,193,334 46,240,263 421,351,320 214,698,166 0 109,481 (2,779,692) 740,193,334 0 116,376,621 0 89,520,982 (54,990,015) 0 29,453,196 52,392,458 10,540,000 41,852,458 0 (2,962,510) 0 38,889,948 1.99 1.26
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