SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2001

Commission file number 0-19728

 

GRANITE BROADCASTING CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock (Nonvoting), $.01 par value per share

Cumulative Convertible Exchangeable Preferred Stock, $.01 par value per share

 

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  ý  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10-K.  o

 

As of March 22, 2002, 18,572,759 shares of Granite Broadcasting Corporation Common Stock (Nonvoting) were outstanding.  The aggregate market value (based upon the last reported sale price on the Nasdaq Small Cap Market on March 22, 2002) of the shares of Common Stock (Nonvoting) held by non-affiliates was approximately $39,002,794  (For purposes of calculating the preceding amounts only, all directors and executive officers of the registrant are assumed to be affiliates.)  As of March 22, 2002, 178,500 shares of Granite Broadcasting Corporation Class A Voting Common Stock were outstanding, all of which were held by affiliates.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:  None

 

PART I

 

Item 1.           Business

 

Granite Broadcasting Corporation (“Granite” or the “Company”), a Delaware corporation, is a group broadcasting company founded in 1988 to acquire and manage network-affiliated television stations and other media and communications-related properties.  The Company’s goal is to identify and acquire properties that management believes have the potential for substantial long-term appreciation and to aggressively manage such properties to improve their operating results.  The Company currently owns and operates nine network-affiliated television stations: WTVH-TV, the CBS affiliate serving Syracuse, New York (“WTVH”); KSEE-TV, the NBC affiliate serving Fresno-Visalia, California (“KSEE”); WPTA-TV, the ABC affiliate serving Fort Wayne, Indiana (“WPTA”); WEEK-TV, the NBC affiliate serving Peoria-Bloomington, Illinois (“WEEK–TV”); KBJR-TV, the NBC affiliate serving Duluth, Minnesota and Superior, Wisconsin (“KBJR”); WKBW-TV, the ABC affiliate serving Buffalo, New York (“WKBW”); WDWB-TV, the WB Network affiliate serving Detroit, Michigan (“WDWB”); KBWB–TV, the WB Network affiliate serving San Francisco–Oakland–San Jose, California (“KBWB”); and KNTV, the NBC affiliate serving San Francisco–Oakland–San Jose, California (“KNTV”).  The Company also owns a sixty percent indirect interest in Channel 11 License, Inc., the permittee of television station KRII, Channel 11, International Falls, Minnesota.

 

KBJR and WEEK were acquired in separate transactions in October 1988, WPTA was acquired in December 1989, KNTV was acquired in February 1990, WTVH and KSEE were acquired in December 1993, WKBW was acquired in June 1995, WDWB was acquired in January 1997 and KBWB was acquired in July 1998.  The Company owns all but one of its television stations through separate wholly owned subsidiaries (collectively, the “Subsidiaries”; references herein to the “Company” or to “Granite” include Granite Broadcasting Corporation and its Subsidiaries).  The Company received a permit to construct KRII, International Falls in September 2000, received authorization to reallocate Channel 11 from International Falls, Minnesota to Chisholm, Minnesota in October 2001, and currently has an application pending before the FCC to establish KRII as a satellite station of KBJR and to change the station's community of license from International Falls to Chisholm.

 

The Company’s long-term objective is to acquire additional television stations and to pursue acquisitions of other media and communications-related properties in the future.  The Company is committed to building its station Internet business consistent with the goal of using the unique technological capabilities of the Internet to deliver local news, weather and sports information to viewer computers at home and at work.  The Company’s Internet strategy is based on the view that via the Internet the Company’s stations can provide a high quality interactive advertising environment in which local businesses can reach consumers at home and at work.

 

Recent Developments

 

Asset Disposition

 

On December 14, 2001, the Company entered into a definitive agreement with the National Broadcasting Company, Inc. (“NBC”) to sell KNTV.  NBC will pay the Company $230,000,000 in cash plus a working capital adjustment.  In addition, at the closing, NBC will refund the Company a pro rata portion of the $30,500,000 affiliation payment due to NBC on January 1, 2002 under the terms of the KNTV NBC affiliation agreement (the “San Francisco Affiliation Agreement”), which the Company prepaid on March 6, 2001.  The consummation of the sale is contingent upon approval by the FCC and satisfaction of other customary closing conditions and is expected to close prior to May 2, 2002 as required by the Company’s senior credit facility.  Paxson Communications Corporation (“Paxson”) has filed an opposition to the Company’s application to transfer KNTV to NBC with the FCC.  The Company believes that Paxson’s opposition is without merit and anticipates that the FCC will approve the transfer prior to May 2, 2002.  The Company will use the proceeds from the sale of KNTV (i) to repay outstanding debt and deferred  interest under the existing senior credit facility, (ii) to pay income taxes and other fees associated with the sale and (iii) to the extent there are remaining proceeds, for working capital purposes.  The San Francisco Affiliation Agreement will terminate upon the closing of the sale and the Company will not be required to make any further affiliation payments to NBC (provided that the sale of KNTV closes prior to January 1, 2003).  The warrants issued to NBC as part of the San Francisco Affiliation Agreement will be returned to the Company.  The Company’s affiliation agreements for KSEE-TV, WEEK-TV, and KBJR-TV, which involve no payment obligations, will remain in effect  until their expiration on December 31, 2011.

 

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New Senior Credit Agreement

 

On March 6, 2001, the Company entered into an amended and restated $205,000,000 Senior Credit Agreement (the “Credit Agreement”).  The Credit Agreement consists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche B term loan.  The proceeds from the Credit Agreement were used (i) to repay all outstanding borrowings under the Company’s then existing senior revolving credit facility, (ii) to prepay the first installment under the San Francisco Affiliation Agreement (as described above), (iii) to pay certain fees and expenses associated with the Credit Agreement and (iv) for general working capital purposes.  The Tranche A and Tranche B term loans bear interest annually at the greater of LIBOR plus 5.50% or 12% payable monthly.  In addition, the Tranche B term loan accrues simple deferred interest at an annual rate of 6% which is payable when the Credit Agreement matures on December 31, 2003.  The Credit Agreement requires the Company to maintain compliance with certain financial tests, including but not limited to, minimum net revenue, broadcast cash flow, EBITDA and, a maximum ratio of senior debt to EBITDA.  Other provisions place limitations on payments for capital expenditures and prohibit the incurrence of additional debt, the purchase of the Company’s common stock, the repurchase of subordinated debt and the declaration and payment of cash dividends.  On October 23, 2001, the Company amended the Credit Agreement to, among other matters, modify certain financial ratios to reflect the current advertising climate.  As a result, the Company was in compliance with its amended debt covenants as of September 30, 2001 and as of December 31, 2001.  In connection with, and as condition to, amending those covenants, the Company’s senior lenders required the Company to sell certain Tranche A assets and repay the Tranche A loans in accordance with specified terms and schedules.  KNTV is not a Tranche A asset, however, the senior lenders have waived the asset sale covenant through May 2, 2002 to allow the Company to consummate the sale of KNTV.  The Company anticipates that the Credit Agreement debt will be repaid in full upon consummation of the KNTV sale.  If the sale of KNTV does not close prior to May 2, 2002 or if the Company does not repay the Tranche A loans in full following consummation of such sale, the Company may be in default under the Credit Agreement, unless the Company obtains further waivers from its senior lenders.  The Company is currently in discussion with a senior lender for a new or amended senior credit facility to be available upon the closing of the sale of KNTV.

 

The Company also granted to the Tranche B lenders a warrant to purchase 753,491 shares of Common Stock (Nonvoting), par value $.01 per share, at an exercise price of $1.75 per share.  The warrant is fully vested and remains exercisable until March 6, 2006. The fair value, estimated to be $2,065,000, has been recorded as a discount to the amount outstanding under the Credit Agreement and is being amortized over the life of the Credit Agreement.

 

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Company and Industry Overview

 

The following table sets forth general information for each of the Company’s television stations:

 

Station

Market Area

Date of Acquisition

Channel/ Frequency

Network Affiliation

Market Rank(1)

Other Commercial Stations in DMA

Expiration Date of FCC License

KBWB-TV

San Francisco -Oakland -San Jose, CA

07/20/98

20/UHF

WB

5

17

(2)

12/01/06

WDWB–TV

Detroit, MI

01/31/97

20/UHF

WB

9

7

10/01/05

WKBW-TV

Buffalo, NY

06/29/95

7/VHF

ABC

44

8

06/01/07

KNTV(TV)

San Francisco -Oakland - San Jose, CA

02/05/90

11/VHF

NBC

5

17

(2)

12/01/06

KSEE-TV

Fresno-Visalia, CA

12/23/93

24/UHF

NBC

54

10

(3)

12/01/06

WTVH-TV

Syracuse, NY

12/23/93

5/VHF

CBS

80

5

06/01/07

WPTA-TV

Fort Wayne, IN

12/11/89

21/UHF

ABC

104

4

08/01/05

WEEK-TV

Peoria - Bloomington, IL

10/31/88

25/UHF

NBC

112

4

12/01/05

KBJR-TV

Duluth, MN -Superior, WI

10/31/88

6/VHF

NBC

132

5

12/01/05

 

(1)                                  “Market rank” refers to the size of the television market or Designated Market Area (“DMA”) as defined by the A.C. Nielsen Company (“Nielsen”).  All market rank data is derived from the Nielsen Media Research web site’s 2001-2002 DMA’s.

 

(2)                                  Includes KDTV, San Francisco and KSTS, San Jose, both of which broadcast entirely in Spanish.

 

(3)                                  Includes KFTV Hanford-Fresno and KMSG, Sanger-Fresno, both of which broadcast entirely in Spanish.

 

Commercial television broadcasting began in the United States on a regular basis in the 1940s. Currently, there are a limited number of channels available for broadcasting in any one geographic area  and the license to operate a broadcast station is granted by the FCC.  Television stations can be distinguished by the frequency on which they broadcast.  Television stations which broadcast over the very high frequency (“VHF”) band of the spectrum generally have some competitive advantage over television stations that broadcast over the ultra-high frequency (“UHF”) band of the spectrum because the former usually have better signal coverage and operate at a lower transmission cost.  In

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television markets in which all local stations are UHF stations, such as Fort Wayne, Indiana, Peoria-Bloomington, Illinois and Fresno-Visalia, California, no competitive disadvantage exists.

 

Television station revenues are primarily derived from local, regional and national advertising and, to a lesser extent, from network compensation and revenues from studio rental and commercial production activities. Advertising rates are based upon a program’s popularity among the viewers an advertiser wishes to attract, the number of advertisers competing for the available time, the size and demographic make-up of the market served by the station, and the availability of alternative advertising media in the market area.  Because broadcast television stations rely on advertising revenues, declines in advertising budgets, particularly in recessionary periods, adversely affect the broadcast industry, and as a result may contribute to a decrease in the valuation of broadcast properties.

 

The Company’s Stations

 

Set forth below are the principal types of television gross revenues (before agency and representative commissions) received by the Company’s television stations for the periods indicated and the percentage contribution of each to the gross television revenues of the television stations owned by the Company.

 

GROSS REVENUES, BY CATEGORY,

FOR THE COMPANY’S STATIONS

(dollars in thousands)

 

		Years Ended December 31,
		1997					1998					1999					2000					2001
		Amount			%		Amount			%		Amount			%		Amount			%		Amount			%
Local/Regional(1)		$	87,412		48.3	%	$	89,144		46.0		$	89,626		49.2		$	82,466		48.3		$	70,876		52.0
National(2)		78,833			43.5		76,446			39.4		79,780