*

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form 10-K**

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(D) OF**

**THE SECURITIESEXCHANGE ACT OF 1934**

 

----

 

**For the fiscal year ended December 31, 2001**

**Commission file number 0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                            |   | **13-3458782**                       |
|-------------------------------------------------------------------------|--------|--------------------------------------|
| (State  of Incorporation)                                               |   | (I.R.S.Employer  Identification No.) |
|                                                                    |   |                                 |
| **767 Third Avenue, 34th Floor**                                        |
| **New York, New York 10017**                                            |
| **(212) 826-2530**                                                      |
| (Address,  including zip code, and telephone number,                    |
| including  area code, of registrant’s principal executive offices) |

 

----

 

**SecuritiesRegistered Pursuant to Section 12(b) of the Act:**

**None**

**SecuritiesRegistered Pursuant to Section 12(g) of the Act:**

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

**Cumulative Convertible ExchangeablePreferred 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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in any definitiveproxy or information statements incorporated by reference in Part III of thisForm 10–K or any amendment to this Form 10-K.  o

 

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

 

----

 

**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 in1988 to acquire and manage network-affiliated television stations and othermedia and communications-related properties. The Company’s goal is to identify and acquire properties that managementbelieves have the potential for substantial long-term appreciation and toaggressively manage such properties to improve their operating results.  The Company currently owns and operates ninenetwork-affiliated television stations: WTVH-TV, the CBS affiliate servingSyracuse, 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 andSuperior, Wisconsin (“KBJR”); WKBW-TV, the ABC affiliate serving Buffalo, NewYork (“WKBW”); WDWB-TV, the WB Network affiliate serving Detroit, Michigan(“WDWB”); KBWB–TV, the WB Network affiliate serving San Francisco–Oakland–SanJose, California (“KBWB”); and KNTV, the NBC affiliate servingSan Francisco–Oakland–San Jose, California (“KNTV”).  The Company also owns a sixty percentindirect interest in Channel 11 License, Inc., the permittee of televisionstation KRII, Channel 11, International Falls, Minnesota.

 

KBJR and WEEK were acquired in separate transactions inOctober 1988, WPTA was acquired in December 1989, KNTV was acquired in February1990, WTVH and KSEE were acquired in December 1993, WKBW was acquired in June1995, WDWB was acquired in January 1997 and KBWB was acquired in July1998.  The Company owns all but one ofits television stations through separate wholly owned subsidiaries (collectively,the “Subsidiaries”; references herein to the “Company” or to “Granite” includeGranite Broadcasting Corporation and its Subsidiaries).  The Company received a permit to constructKRII, International Falls in September 2000, received authorization toreallocate Channel 11 from International Falls, Minnesota to Chisholm,Minnesota in October 2001, and currently has an application pending before theFCC to establish KRII as a satellite station of KBJR and to change thestation's community of license from International Falls to Chisholm.

 

The Company’s long-term objective is to acquireadditional television stations and to pursue acquisitions of other media andcommunications-related properties in the future.  The Company is committed to building its station Internetbusiness consistent with the goal of using the unique technologicalcapabilities of the Internet to deliver local news, weather and sportsinformation to viewer computers at home and at work.  The Company’s Internet strategy is based on the view that via theInternet the Company’s stations can provide a high quality interactiveadvertising environment in which local businesses can reach consumers at homeand at work.

 

# ***RecentDevelopments***

 

*AssetDisposition*

 

OnDecember 14, 2001, the Company entered into a definitive agreement with theNational Broadcasting Company, Inc. (“NBC”) to sell KNTV.  NBC will pay the Company $230,000,000 incash plus a working capital adjustment. In addition, at the closing, NBC will refund the Company a pro rata portionof the $30,500,000 affiliation payment due to NBC on January 1, 2002 under theterms of the KNTV NBC affiliation agreement (the “San Francisco AffiliationAgreement”), which the Company prepaid on March 6, 2001.  The consummation of the sale is contingentupon approval by the FCC and satisfaction of other customary closing conditionsand is expected to close prior to May 2, 2002 as required by the Company’ssenior credit facility.  PaxsonCommunications Corporation (“Paxson”) has filed an opposition to the Company’sapplication to transfer KNTV to NBC with the FCC.  The Company believes that Paxson’s opposition is without meritand anticipates that the FCC will approve the transfer prior to May 2, 2002.  The Company will use the proceeds from thesale of KNTV (i) to repay outstanding debt and deferred  interest under the existing senior creditfacility, (ii) to pay income taxes and other fees associated with the sale and(iii) to the extent there are remaining proceeds, for working capitalpurposes.  The San Francisco AffiliationAgreement will terminate upon the closing of the sale and the Company will notbe required to make any further affiliation payments to NBC (provided that thesale of KNTV closes prior to January 1, 2003). The warrants issued to NBC as part of the San Francisco AffiliationAgreement 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.

# * *

2

----

 

# *NewSenior Credit Agreement*

 

### On March 6, 2001, theCompany entered into an amended and restated $205,000,000 Senior CreditAgreement (the “Credit Agreement”).  TheCredit Agreement consists of a $110,000,000 Tranche A term loan and a$95,000,000 Tranche B term loan.  Theproceeds from the Credit Agreement were used (i) to repay all outstandingborrowings under the Company’s then existing senior revolving credit facility,(ii) to prepay the first installment under the San Francisco AffiliationAgreement (as described above), (iii) to pay certain fees and expensesassociated with the Credit Agreement and (iv) for general working capitalpurposes.  The Tranche A and Tranche Bterm loans bear interest annually at the greater of LIBOR plus 5.50% or 12%payable monthly.  In addition, theTranche 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 tomaintain compliance with certain financial tests, including but not limited to,minimum net revenue, broadcast cash flow, EBITDA and, a maximum ratio of seniordebt to EBITDA.  Other provisions placelimitations on payments for capital expenditures and prohibit the incurrence ofadditional debt, the purchase of the Company’s common stock, the repurchase ofsubordinated debt and the declaration and payment of cash dividends.  On October 23, 2001, the Company amended theCredit Agreement to, among other matters, modify certain financial ratios toreflect the current advertising climate. As a result, the Company was in compliance with its amended debtcovenants 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 tosell certain Tranche A assets and repay the Tranche A loans in accordance withspecified terms and schedules.  KNTV isnot a Tranche A asset, however, the senior lenders have waived the asset salecovenant through May 2, 2002 to allow the Company to consummate the sale ofKNTV.  The Company anticipates that theCredit Agreement debt will be repaid in full upon consummation of the KNTVsale.  If the sale of KNTV does notclose prior to May 2, 2002 or if the Company does not repay the Tranche A loansin full following consummation of such sale, the Company may be in defaultunder the Credit Agreement, unless the Company obtains further waivers from itssenior lenders.  The Company iscurrently in discussion with a senior lender for a new or amended senior creditfacility to be available upon the closing of the sale of KNTV.

 

### The Company also grantedto 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 pershare.  The warrant is fully vested andremains 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 theCredit Agreement and is being amortized over the life of the Credit Agreement.

 

3

----

 

***Company and Industry Overview***

 

The following table sets forth general informationfor 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 televisionmarket or Designated Market Area (“DMA”) as defined by the A.C. Nielsen Company(“Nielsen”).  All market rank data isderived 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.

 

Commercialtelevision broadcasting began in the United States on a regular basis in the1940s. Currently, there are a limited number of channels available forbroadcasting in any one geographic area and the license to operate a broadcast station is granted by theFCC.  Television stations can bedistinguished by the frequency on which they broadcast.  Television stations which broadcast over thevery high frequency (“VHF”) band of the spectrum generally have somecompetitive advantage over television stations that broadcast over theultra-high frequency (“UHF”) band of the spectrum because the former usuallyhave better signal coverage and operate at a lower transmission cost.  In 

4

----

 

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

 

Television station revenues are primarily derivedfrom local, regional and national advertising and, to a lesser extent, fromnetwork compensation and revenues from studio rental and commercial productionactivities. Advertising rates are based upon a program’s popularity among theviewers an advertiser wishes to attract, the number of advertisers competingfor the available time, the size and demographic make-up of the market servedby the station, and the availability of alternative advertising media in themarket area.  Because broadcasttelevision stations rely on advertising revenues, declines in advertisingbudgets, particularly in recessionary periods, adversely affect the broadcastindustry, and as a result may contribute to a decrease in the valuation ofbroadcast properties.

 

*The Company’s Stations*

 

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

 

**GROSS REVENUES,BY CATEGORY,**

**FOR THECOMPANY’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 |   | 43.7 |   | 68,624 |   | 40.2 |   | 55,583 |   | 40.8 |   |
| Network Compensation(3) |   | 7,859                        |    | 4.3 |   | 6,715 |   | 3.5 |   | 5,074 |   | 2.8 |   | 4,418 |   | 2.6 |   | 4,272 |   | 3.1 |   |
| Political(4)            |   | 1,036                        |    | 0.6 |   | 15,752 |   | 8.1 |   | 2,601 |   | 1.4 |   | 10,413 |   | 6.1 |   | 1,167 |   | 1.0 |   |
| Other Revenue(5)        |   | 5,943                        |    | 3.3 |   | 5,877 |   | 3.0 |   | 5,249 |   | 2.9 |   | 4,854 |   | 2.8 |   | 4,276 |   | 3.1 |   |
| Total                   |   | $                            | 181,083 |   | 100.0 | % | $ | 193,934 |   | 100.0 | % | $ | 182,330 |   | 100.0 | % | $ | 170,775 |   | 100.0 | % | $ | 136,174 |   | 100.0 | % |

 

----

(1)                                  Represents sale of advertising time to local andregional advertisers or agencies representing such advertisers and other localsources.

(2)                                  Represents sale of advertising time to agenciesrepresenting national advertisers.

(3)                                  Represents payment by networks for broadcastingnetwork programming.

(4)                                  Represents sale of advertising time to politicaladvertisers.

(5)                                  Represents miscellaneous revenue, includingpayment for production of commercials.

 

Automobile advertising constitutes the Company’s singlelargest source of gross revenues, accounting for approximately 20% of theCompany’s total gross revenues in 2001. Gross revenues from restaurants, paid programming, andentertainment-related businesses accounted for approximately 24% of theCompany’s total gross revenues in 2001. Each other category of advertisingrevenue represents less than 5% of the Company’s total gross revenues.

 

Thefollowing is a description of each of the Company’s television stations:

 

# *KBWB:*San Francisco–Oakland–SanJose, California

 

KBWBbegan operations in 1968 and commenced operating as a WB Network affiliate in1995.

 

5

----

 

TheSan Francisco–Oakland–San Jose economy is centered around apparel,banking and finance, biosciences, engineering and architecture, film and TVproduction, health care, high technology, manufacturing, multimedia,telecommunications, tourism and wineries. The average household income in the DMA was $61,572, according toestimates provided in the BIA Investing in Television 2001 Market Report (the“BIA Report”).  Leading employers in thearea include Safeway Supermarkets, Hewlett–Packard, Seagate Technology,The Gap, Intel, Chevron, Oracle, Kaiser–Permanente and Levi–Strauss.  The San Francisco–Oakland–SanJose DMA is also the home of several universities, including the University ofCalifornia Berkeley, San Francisco State University, San Jose StateUniversity, Stanford University, California State University–Hayward,Santa Clara University and the University of San Francisco, with aggregateenrollment estimated at over 122,000.

 

*WDWB: Detroit,Michigan*

 

WDWBbegan operating in 1962 and commenced operating as a WB Network affiliate in1995.

 

Detroit is the 9th largest DMA in the UnitedStates with a total of approximately 1,874,000 television households and apopulation of approximately 4,989,000 according to the BIA Report.  Detroit’s economy is based on manufacturing,retail and health services.  The largestemployers are General Motors, Ford Motor Company, Daimler–Chrysler,Detroit Medical Center, Henry Ford Health System and Blue Cross Blue Shield ofMichigan.  The average household incomein the DMA is $50,047 according to estimates provided in the BIA Report.

 

*WKBW: Buffalo, New York*

 

WKBW began operations in 1958 and is affiliatedwith ABC.

 

The Buffalo economy is centered on manufacturing,government, health services and financial services.  The average household income in the DMA was $39,630, according toestimates provided in the BIA Report. Leading employers in the area include General Motors, Ford MotorCompany, American Axle and Manufacturing, M&T Bank, Fleet Bank, RoswellPark Cancer Institute, Buffalo General Hospital, Tops Markets and DuPont.

 

*KNTV: San Francisco–Oakland–SanJose, California*

 

KNTV began operations in 1955 and was affiliatedwith ABC until July 1, 2000.  KNTV wasoperated as an independent station until January 1, 2002, when it became an NBCaffiliate.  (See the description of theSan Francisco-Oakland-San Jose, California market above).

 

*KSEE: Fresno-Visalia, California*

 

KSEE began operations in 1953 and is affiliatedwith NBC.

 

Fresno and the San Joaquin Valley is one of themost productive agricultural areas in the world with over 6,000 square milesplanted with more than 250 different crops. Although farming continues to be the single most important part of theFresno area economy, the area now attracts a variety of service-basedindustries and manufacturing and industrial operations.  No single employer or industry dominates thelocal economy.  The average income byhousehold in the DMA was $37,107, according to estimates provided in the BIAReport.  The Fresno–Visalia DMA isalso the home of several universities, including Fresno State University, withaggregate enrollment estimated at over 40,000.

 

*WTVH: Syracuse, New York*

 

WTVH began operations in 1948 and is affiliatedwith CBS.

 

The Syracuse economy is centered on manufacturing,education and government.  The averageincome by household in the DMA was $40,426, according to estimates provided inthe BIA Report.  Prominent corporationslocated in the area include Carrier Corporation, New Venture Gear,Bristol-Myers Squibb, Crouse-Hinds, Nestle Foods 

6

----

 

and Lockheed/Martin.  TheSyracuse DMA is also the home of several universities, including SyracuseUniversity, Cornell University and Colgate University, with aggregateenrollment over 50,000 students.

 

*WPTA: Fort Wayne, Indiana*

 

WPTA began operations in 1957 and is affiliatedwith ABC.

 

The Fort Wayne economy is centered onmanufacturing, government, insurance, financial services and education.  The average income by household in the DMAwas $45,481, according to estimates provided in the BIA Report.  Prominent corporations located in the areainclude Magnavox, Lincoln National Life Insurance, General Electric, GeneralMotors, North American Van Lines, GTE, Dana, Phelps Dodge, ITT, andTokheim.  Fort Wayne is also the home ofseveral universities, including the joint campus of Indiana University andPurdue University at Fort Wayne, with aggregate enrollment over 11,000students.

 

*WEEK: Peoria-Bloomington, Illinois*

 

WEEK began operations in 1953 and is affiliated with NBC.

 

The Peoria economy is centered on agriculture and heavyequipment manufacturing but has achieved diversification with the growth ofservice-based industries such as conventions, healthcare and higher technologymanufacturing.  Prominent corporationslocated in Peoria include Caterpillar, Bemis, Central Illinois Light Company,Commonwealth Edison Company, Komatsu-Dresser Industries, IBM, Trans–TechnologyElectronics and Keystone Steel & Wire. In addition, the United States Department of Agriculture’s secondlargest research facility is located in Peoria, and the area has become a majorregional healthcare center.  The economyof Bloomington, on the other hand, is focused on insurance, education,agriculture and manufacturing. Prominent corporations located in Bloomington include State Farm InsuranceCompany, Country Companies Insurance Company and Diamond-Star MotorsCorporation (a subsidiary of Mitsubishi). The average income by household in the DMA was $48,223, according toestimates provided in the BIA Report. The Peoria-Bloomington area is also the home of numerous institutions ofhigher education including Bradley University, Illinois Central College,Illinois Wesleyan University, Illinois State University, Eureka College and theUniversity of Illinois College of Medicine, with aggregate enrollment over38,000 students.

 

*KBJR: Duluth, Minnesota and Superior, Wisconsin*

 

KBJR began operations in 1954 and is affiliatedwith NBC.

 

Thearea’s primary industries include mining, fishing, food products, paper,medical, shipping, tourism and timber. The average income by household in the DMA was $34,895, according toestimates provided in the BIA Report. Duluth is one of the major ports in the United States out of which ironore, coal, limestone, cement, grain, paper and chemicals are shipped.  Prominent corporations located in the areainclude Northwest Airlines, Minnesota Power, U.S. West, Mesabi & Iron RangeRailway Co., Walmart, Jeno Paulucci International, Lake Superior Industries,Potlatch Corporation, Boise Cascade, Burlington Northern Railway, Target(Dayton-Hudson Corporation), ConAgra, International Multifoods, Peavey,Cargill, U.S. Steel, Cleveland-Cliffs Corporation, NorWest Bank, Shopko, CubFoods and Advanstar.  TheDuluth-Superior area is also the home of numerous educational institutions suchas the University of Minnesota-Duluth, the University of Wisconsin-Superior andthe College of St. Scholastica, with aggregate enrollment over 12,000 students.

 

*Network Affiliation*

 

Whether or not a station is affiliated with one ofthe major networks, NBC, ABC, CBS, Fox (the “Traditional Networks”), the WarnerBrothers Network (the “WB Network”) or United Paramount Networks (“UPN” andcollectively with the WB Network and the Traditional Networks, the “Networks”),has a significant impact on the composition of the station’s revenues, expensesand operations.  A typical TraditionalNetwork affiliate receives a significant portion of its programming each dayfrom the Network.  The TraditionalNetwork in exchange for a substantial majority of the advertising inventoryprovides this programming, along with cash payments in some cases, to 

 

7

----

 

the affiliate during Network programs. The Traditional Network then sells this advertising time and retains therevenues so generated.  A typical WBNetwork or UPN affiliate receives prime time programming from the Networkpursuant to arrangements agreed upon by the affiliate and the Network.

 

In contrast, a fully independent station purchasesor produces all of the programming that it broadcasts, resulting in generallyhigher programming costs, although the independent station is, in theory, ableto retain its entire inventory of advertising and all of the revenue obtainedtherefrom.  However, barter andcash-plus-barter arrangements are becoming increasingly popular.  Under such arrangements, a national programdistributor typically retains up to 50% of the available advertising time forprogramming it supplies, in exchange for reduced fees for such programming.

 

Each of the Company’s stations is affiliated witha Network pursuant to an affiliation agreement.  KSEE, WEEK, KBJR, and KNTV are affiliated with NBC; WPTA and WKBWare affiliated with ABC; WTVH is affiliated with CBS; and KBWB and WDWB areaffiliated with the WB Network.

 

In substance, each Traditional Network affiliationagreement provides the Company’s station with the right to broadcast allprograms transmitted by the Network with which it is affiliated.  In exchange, the Network has the right tosell a substantial majority of the advertising time during such broadcast.  In addition, for every hour that the stationelects to broadcast Traditional Network programming, generally the Network paysthe station a fee, specified in each affiliation agreement, which varies withthe time of day.  Typically,“prime-time” programming (Monday through Saturday 8–11 p.m. andSunday 7–11 p.m. Eastern Time) generates the highest hourlyrates.  Rates are subject to increase ordecrease by the Network during the term of each affiliation agreement, withprovisions for advance notice to, and right of termination by, the station inthe event of a reduction in rates. NBC’s obligation to pay such fees to KSEE,WEEK and KBJR terminated on December 31, 2001. In addition, the Company will not receive any such fees for KNTV, whichbecame an NBC affiliate on January 1, 2002.

 

Under each WB Network affiliation agreement, theCompany’s stations receive “prime–time” programming from the WBNetwork.  KBWB and WDWB pay anaffiliation fee for the programming it receives pursuant to its affiliationagreement.

 

The Network affiliation agreements provide fororiginal contract terms of ten years (other than the WB Affiliation agreementfor WDWB, which is seven years).  Undereach of the Company’s affiliation agreements, the Networks may, under certaincircumstances, terminate the agreement upon advance written notice.  Under the Company’s ownership, none of itsstations has received a termination notice from its respective Network.

 

*Competition*

 

The financial success of the Company’s televisionstations is dependent on audience ratings and revenues from advertisers withineach station’s geographic market. The Company’s stations compete for revenueswith other television stations in their respective markets, as well as withother advertising media, such as newspapers, radio, magazines, outdooradvertising, transit advertising, yellow page directories, the Internet, directmail and local cable systems. Some competitors are part of larger companies withsubstantially greater financial resources than the Company.

 

Competition in the broadcastingindustry occurs primarily in individual markets. Generally, a televisionbroadcasting station in one market does not compete with stations in othermarket areas. The Company’s television stations are located in highlycompetitive markets.

 

In addition to managementexperience, factors that are material to a television station’s competitiveposition include signal coverage, local program acceptance, Network affiliation,audience characteristics, assigned frequency and strength of local competition.The broadcasting industry is continuously faced with technological change andinnovation, the possible rise in popularity of competing entertainment andcommunications media, changes in labor conditions, any of which could possiblyhave a material adverse effect on the Company’s operations and results.

 

8

----

 

These other programming,entertainment and video distribution systems can increase competition for abroadcasting station by bringing into its market distant broadcasting signalsnot otherwise available to the station’s audience and also by serving asdistribution systems for non-broadcast programming. Programming is now beingdistributed to cable television systems by both terrestrial microwave systemsand by satellite. Other sources of competition include home entertainmentsystems (including video cassette recorders and playback systems, video discsand television game devices), the Internet, multi-point distribution systems,multichannel multi-point distribution systems, video programming servicesavailable through the Internet and other video delivery systems. The Company’stelevision stations also face competition from direct broadcast satelliteservices which transmit programming directly to homes equipped with specialreceiving antennas and from video signals delivered over telephone lines.Satellites may be used not only to distribute non-broadcast programming and distantbroadcasting signals but also to deliver certain local broadcast programmingwhich otherwise may not be available to a station’s audience. An additionalchallenge is posed by wireless cable systems, including multichanneldistribution services (“MDS”).  Twofour-channel MDS licenses have been granted in most television markets.  MDS operations can provide commercialprogramming on a paid basis.  A similarservice also can be offered using the instructional television fixed service(“ITFS”).  The FCC allows theeducational entities that hold ITFS licenses to lease their excess capacity forcommercial purposes.  The multichannelcapacity of ITFS could be combined with either an existing single channel MDSor a newer multichannel multi-point distribution service to increase the numberof available channels offered by an individual operator.

 

The broadcasting industry iscontinuously faced with technological change and innovation, which couldpossibly have a material adverse effect on the Company’s operations andresults. Video compression techniques, now in use with direct broadcastsatellites and in development for cable, are expected to permit greater numbersof channels to be carried within existing bandwidth. These compressiontechniques, as well as other technological developments, are applicable to allvideo delivery systems, including over-the-air broadcasting and othernon-broadcast commercial applications, and have the potential to provide vastlyexpanded programming to highly targeted audiences. Reduction in the cost ofcreating additional channel capacity could lower entry barriers for newchannels and encourage the development of increasingly specialized nicheprogramming. This ability to reach very narrowly defined audiences may alterthe competitive dynamics for advertising expenditures. The Company is unable topredict the effect that technological changes will have on the Company.Commercial television broadcasting may face future competition from interactivevideo and data services that provide two-way interaction with commercial videoprogramming, along with information and data services that may be delivered bycommercial television stations, cable television, direct broadcast satellites,multi-point distribution systems, multichannel multi-point distribution systemsor other video delivery systems. In addition, recent actions by the FCC,Congress and the courts all presage significant future involvement in theprovision of video services by telephone companies. The Telecommunications Actof 1996 lifts the prohibition on the provision of cable television services bytelephone companies in their own telephone areas subject to regulatorysafeguards and permits telephone companies to own cable systems under certaincircumstances. It is not possible to predict the impact on the Company’stelevision stations of any future relaxation or elimination of the existinglimitations on the ownership of cable systems by telephone companies. Theelimination or further relaxation of the restriction, however, could increasethe competition the Company’s television stations face from other distributorsof video programming.

 

*FCC Regulation of Television Broadcasting*

 

Television broadcasting issubject to the jurisdiction of the FCC under the Communications Act of 1934, asamended (the “Communications Act”). The Communications Act prohibits theoperation of television broadcasting stations except under a license issued bythe FCC and empowers the FCC, among other things, to issue, revoke and modifybroadcasting licenses, determine the locations of stations, regulate theequipment used by stations, adopt regulations to carry out the provisions ofthe Communications Act and impose penalties for violation of such regulations.The Telecommunications Act of 1996, which amends major provisions of theCommunications Act, was enacted on February 8, 1996. The FCC has commenced, butnot yet completed, implementation of the provisions of the TelecommunicationsAct of 1996.

 

*License Issuance and Renewal*

 

Television broadcasting licensesgenerally are granted and renewed for a period of eight years, but may be

 

9

----

 

renewed for a shorter period upon a finding bythe FCC that the “public interest, convenience and necessity” would be servedthereby. At the time application is made for renewal of a television license,parties in interest as well as members of the public may apprise the FCC of theservice the station has provided during the preceding license term and urge thegrant or denial of the application. Under the Telecommunications Act of 1996 asimplemented in the FCC’s rules, a competing application for authority tooperate a station and replace the incumbent licensee may not be filed against arenewal application and considered by the FCC in deciding whether to grant arenewal application. The statute modified the license renewal process toprovide for the grant of a renewal application upon a finding by the FCC thatthe licensee (1) has served the public interest, convenience, and necessity;(2) has committed no serious violations of the Communications Act or the FCC’srules; and (3) has committed no other violations of the Communications Act orthe FCC’s rules which would constitute a pattern of abuse. If the FCC cannotmake such a finding, it may deny a renewal application, and only then may theFCC accept other applications to operate the station of the former licensee. Inthe vast majority of cases, the FCC renews broadcast licenses even whenpetitions to deny are filed against broadcast license renewal applications. Allof the Company’s existing licenses are in effect and are subject to renewal atvarious times during 2005, 2006 and 2007. Although there can be no assurancethat the Company’s licenses will be renewed, the Company is not aware of anyfacts or circumstances that would prevent the Company from having its licensesrenewed.

 

*Ownership Restrictions*

 

The Communications Act alsoprohibits the assignment of a license or the transfer of control of a licenseewithout prior approval of the FCC.  Inits review process, the FCC considers financial and legal qualifications of theprospective assignee or transferee and also determines whether the proposedtransaction complies with rules limiting the common ownership of certain attributableinterests in broadcast, cable, and newspaper media on a local and nationallevel.  The FCC’s restrictions onmultiple ownership could limit the acquisitions and investments that theCompany makes or the investments other parties make in the Company, however, noneof the Company’s officers, directors or holders of voting common stockcurrently have attributable or non-attributable interests that violate theFCC’s ownership rules.

# * *

10

----

 

*Attribution.*

# * *

# *Ownershipof television licensees generally is attributed to officers, directors andshareholders who own 5% or more of the outstanding voting stock of a licensee,except that certain institutional investors who exert little or no control orinfluence over a licensee may own up to 20% of such outstanding voting stockbefore attribution results.  Under theFCC’s “equity-debt plus” rule, a party’s interest will be deemed to beattributable if the party owns equity (including all stockholdings, whether votingor non-voting, common or preferred) and debt interests, in the aggregate,exceeding 33% of the total asset value (including debt and equity) of thelicensee and it either provides 15% of the station’s weekly programming or ownsan attributable interest in another broadcast station, cable system or dailynewspaper in the market.  In contrast,debt instruments, non-voting stock and certain limited partnership interests(provided the licensee certifies that the limited partners are not “materiallyinvolved” in the media-related activities of the partnership) will not resultin attribution.  In December 2000, theFCC revised its rules to eliminate the single majority shareholder exemptionfrom the broadcast attribution rules. Under that exception, the interest of a minority voting shareholderwould not be attributable if one person or entity held more than 50% of thecombined voting power of the common stock company holding or controlling abroadcast license.  Any minority votingstock interest in a company with a single majority shareholder was grandfathered as non-attributable if the interest was acquired before December 14,2000.  The FCC’s decision eliminatingthe single majority shareholder exception as it applies to cable systemownership was appealed to the United States Court of Appeals for the Districtof Columbia Circuit, and in March 2001, the court reversed the decision andremanded the case to the FCC.  InDecember 2001, the FCC suspended its repeal of the single majority shareholderexception for broadcast attribution rules, effectively reinstating theexception, until it could act on the court remand.  Thus, the single majority shareholder exception from thebroadcast attribution rules currently is in effect*.

 

In addition, for purposes of itsnational and local multiple ownership rules, the FCC attributes local marketingagreements (“LMAs”) that involve more than 15% of the brokered station’s weeklyprogram time.  Thus, if an entity ownsone television station in a market and has a qualifying LMA with anotherstation in the same market, this arrangement must comply with all of the FCC’sownership rules including the television duopoly rule.  LMA arrangements entered into prior toNovember 5, 1996 are grand fathered until 2004, while LMAs entered into on orafter November 5, 1996 were grand fathered temporarily until August 2001.  The Company does not operate any stationspursuant to an LMA.  One broadcastentity has appealed the FCC’s treatment of LMAs entered into after November 5,1996 to the United States Court of Appeals for the District of ColumbiaCircuit.  Oral argument in that case washeld in January 2002, however, the Company is unable to predict how the courtwill rule or how its ruling potentially could affect the Company.

 

*National OwnershipRules*

 

FCC rules provide that noindividual or entity may have an attributable interest in television stationsthat reach more than 35% of the national television viewing audience.  For purposes of this calculation, stationsin the UHF band, which covers channels 14 - 69, are attributed with only 50% ofthe households attributed to stations in the VHF band, which covers channels 2- 13. Under its recently revised ownership rules, if an entity has attributableinterests in two television stations in the same market, the FCC will count theaudience reach of that market only once for purposes of applying the nationalownership cap.  In its most recentBiennial review of this restriction, the FCC decided not to relax the 35%cap.  In response to a judicialchallenge of the FCC’s decision, in February 2002, the United States Court ofAppeals for the District of Columbia Circuit reversed the FCC’s decision andremanded the 35% broadcast ownership rule back to the FCC for furtherconsideration.  Specifically, the Courtfound that the FCC failed to adequately justify its decision not to repeal ormodify the national ownership cap rule as required by the CommunicationsAct.  The national television ownershipcap remains in effect while the FCC reconsiders its decision in light of thefederal court directive.  Furtherrelaxation of the national television ownership rule could result in additionaltelevision station ownership consolidation.

 

*TelevisionDuopoly Rule*

 

TheFCC’s television duopoly rule permits a party to have attributable interests intwo television stations without regard to signal contour overlap provided thestations are licensed to separate DMAs, as determined by Nielsen. In addition,the rule permits parties to own up to two television stations in the same DMAas long as at 

 

11

----

 

leasteight independently owned and operating full-power television stations remainin the market at the time of acquisition, and at least one of the two stationsis not among the top four ranked stations in the DMA based on specifiedaudience share measures. Under the FCC’s rules, once a company acquires atelevision station duopoly, the joint owner is not required to divest eitherstation if subsequently the number of operating television stations within themarket falls below eight, or if either of the two jointly owned stations islater ranked among the top four stations in the market.  The FCC also may grant a waiver of the televisionduopoly rule if one of the two television stations is a “failed” or “failing”station, if the proposed transaction would result in the construction of anunbuilt television station or if compelling public interest factors arepresent. With the changes in the FCC’s rule on television duopolies, theCompany’s common ownership of KNTV and KBWB is fully consistent with theCommission’s rules. Additionally, satellite stations authorized to rebroadcastthe programming of a parent station located in the same DMA are exempt from theduopoly rule.  Thus, the Company’scommon ownership of KBJR and KRII is fully consistent with the televisionduopoly rule.  Interested parties havechallenged the duopoly rule in a proceeding currently pending before the UnitedStates Court of Appeals for the District of Columbia Circuit in which oralargument was held in January 2002.  TheCompany is unable to predict the outcome of this judicial proceeding and thuscannot determine the effect, if any, it will have on the Company’s business.

 

*Cross-OwnershipRules*

 

The FCC’s rules prohibit theholder of an attributable interest in a television station from also holding anattributable interest in a daily newspaper or cable television system serving acommunity located within the coverage area of that television station.  In February 2002, the United States Court ofAppeals for the District of Columbia Circuit vacated the FCC’s rule prohibitingthe common ownership of a television station and a cable television system inthe same market.  Specifically, thecourt held that the FCC had no basis for not repealing or modifying thebroadcast/ cable cross-ownership restriction. The court’s vacation of the rule has not gone into effect because therehearing and appeals process has not concluded.  The Company cannot predict whether any of these future appealswill be sought and cannot determine the outcome of such appeals.

 

The FCC further prohibits thecommon ownership of a broadcast television station and a daily newspaper in thesame local market.  The FCC hasinitiated a rulemaking seeking public comment on whether to modify thebroadcast/ newspaper cross-ownership provision.  The FCC also restricts the common ownership of television andradio stations in the same market. One entity may now own up to two televisionstations and six radio stations in the same market provided that: (1) 20independent voices (including certain newspapers and a single cable system)will remain in the relevant market following consummation of the proposedtransaction, and (2) the proposed combination is consistent with the televisionduopoly and local radio ownership rules. If fewer than 20 but more than 9independent voices will remain in a market following a proposed transaction,and the proposed combination is otherwise consistent with the FCC’s rules, asingle entity may have attributable interests in up to two television stationsand four radio stations. If neither of these various “independent voices” testsare met, a party generally may have an attributable interest in no more thanone television station and one radio station in a market.

 

# *Antitrust Review*

 

The Department of Justice andthe Federal Trade Commission (together the “Antitrust Agencies”) have theauthority to determine that a particular transaction presents antitrustconcerns. The Antitrust Agencies have increased their scrutiny of thetelevision and radio industries, and have indicated their intention to reviewmatters related to the concentration of ownership within markets (includingLMAs) even when the ownership or LMA in question is permitted under theregulations of the FCC.  In March 2002,the Antitrust Agencies reached an agreement through which the Department ofJustice would assume primary control over all merger reviews in the media andentertainment industry, however, the Senate Commerce committee has stated anintention to formally review the Antitrust Agencies’ decision to assign mediamergers to the Department of Justice. There can be no assurance that futurepolicy and rulemaking activities of the Antitrust Agencies will not impact theCompany’s operations.

 

12

----

 

*Alien Ownership*

 

Foreign governments,representatives of foreign governments, non-citizens, representatives ofnon-citizens, and corporations or partnerships organized under the laws of aforeign nation are barred from holding broadcast licenses. Non-citizens,however, may own up to 20% of the capital stock of a licensee and up to 25% ofthe capital stock of a United States corporation that, in turn, owns a controllinginterest in a licensee. A broadcast license may not be granted to or held byany corporation that is controlled, directly or indirectly, by any othercorporation of which more than one-fourth of the capital stock is owned orvoted by non-citizens or their representatives, by foreign governments or theirrepresentatives, or by non-U.S. corporations, if the FCC finds that the publicinterest will be served by the refusal or revocation of such license. Under theTelecommunications Act of 1996, non-citizens may serve as officers anddirectors of a broadcast licensee and any corporation controlling, directly orindirectly, such licensee. The Company is restricted by the Communications Actfrom having more than one-fourth of its capital stock owned by non-citizens,foreign governments or foreign corporations, but not from having an officer ordirector who is a non-citizen.

 

# *Equal Employment Opportunity*

 

In early 2000, the FCC revisedits rules requiring broadcast licensees to maintain programs designed to promoteequal employment opportunities (“EEO”). In January 2001, the United States Court of Appeals for the District ofColumbia Circuit held that the recruitment, outreach, and reportingrequirements were unconstitutional.  Inresponse to the court’s ruling, the FCC suspended enforcement of its EEO ruleson January 31, 2001.  In December 2001,the Commission initiated a proceeding to seek public comment on proposed newEEO rules.  This rulemaking proceedingis pending and the Company cannot predict the outcome or its effect on theCompany.  Although the EEO rules struckdown by the court are no longer in effect, the general prohibition againstemployment discrimination remains applicable.

 

*Must Carry/Retransmission Consent*

 

The Cable Television ConsumerProtection and Competition Act of 1992 (the “Cable Act”) and the FCC’simplementing regulations give television stations the right to control the useof their signals on cable television systems. Under the Cable Act, at threeyear intervals beginning in June 1993, every qualified television station isrequired to elect whether it wants to avail itself of must-carry rights or,alternatively, to grant retransmission consent. Whether a station is qualifieddepends on factors such as the number of activated channels on a cable system,the location and size of a cable system, the amount of duplicative programmingon a broadcast station and the signal quality of the station at the cablesystem’s head end..  If a televisionstation elects retransmission consent, cable systems are required to obtain theconsent of that television station for the use of its signal and could berequired to pay the television station for such use.  The Cable Act further requires mandatory cable carriage of allqualified local television stations electing their must-carry rights or notexercising their retransmission rights. Under the FCC’s rules, televisionstations were required to make their election between must-carry andretransmission consent status by October 1, 1999, for the period from January1, 2000 through December 31, 2002. Television stations that fail to make anelection by the specified deadline are deemed to have elected must-carry statusfor the relevant three-year period. For the three year period beginning January1, 2000, each of the Company’s stations has either elected its must-carryrights, entered into retransmission consent agreements, or obtained anextension to permit the Company to continue negotiating a retransmissionconsent agreement with substantially all cable systems in its DMA. The FCCcurrently is conducting a rulemaking proceeding to determine the scope of thecable systems’ carriage obligations with respect to digital broadcast signalsduring and following the transition from analog to DTV service. In its initialorder, the FCC tentatively concluded that broadcasters would not be entitled tomandatory carriage of both their analog and DTV signals and that broadcasterswith multiple DTV video programming streams would be required to designate asingle primary video stream eligible for mandatory carriage.  Alternatively, a broadcaster may negotiatewith cable systems for carriage of its DTV signal in addition to its analogsignal under retransmission consent.

 

13

----

 

*Satellite Home Viewer Improvement Act*

 

Under the Satellite Home ViewerImprovement Act (“SHVIA”) a satellite carrier generally must obtainretransmission consent before carrying a television station’s signal.  Specifically, the SHVIA: (1) provides a statutorycopyright license to enable satellite carriers to retransmit a local televisionbroadcast station into the station’s local market (i.e., provide“local-into-local” service); (2) permits the continued importation of distantnetwork signals (i.e., network signals that originate outside of a satellitesubscriber’s local television market or designated market areas (“DMA”) (1) forcertain existing subscribers; (3) provides broadcast stations withretransmission consent rights in their local markets; and (4) mandates carriageof broadcast signals in their local markets after a phase-in period.  “Local markets” are defined to include botha station’s DMA and its county of license.

 

The SHVIA permits satellitecarriers to provide distant or nationally broadcast programming to subscribersin “unserved” households (i.e., households are unserved by a particular networkif they do not receive a signal of at least Grade B intensity from a stationaffiliated with that network) until December 31, 2004.  However, satellite television providers canretransmit the distant signals of no more than two stations per day for eachtelevision network.  As of January 1,2002, a satellite carrier retransmitting the signal of any local broadcaststation into the station’s local market generally must carry all stationslicensed to the carried station’s local market upon request.

 

Pursuant to the SHVIA, satellite carriers arebeginning to offer local broadcast signals to subscribers in some of thenation’s largest television markets.  Asof March 2002, satellite carriers currently carry the signals of KNTV, KBWB andWDWB.  DirecTV announced plans to expandtheir local-into-local broadcast offerings into ten new markets, but has notcommitted to any new markets in which the Company owns a station.  EchoStar and DirecTV have stated that iftheir proposed merger is approved and consummated, they intend to offerlocal-into-local service in every market, however, the Company cannot predictwhether this announced plan will go into effect.

 

Satellite carriers have challenged theconstitutionality of the satellite must carry requirements.  In June 2001, the United States DistrictCourt of the Eastern District of Virginia upheld the must carry provisions, andin December 2001, the United States Court of Appeals for the Fourth Circuitaffirmed this decision.  EchoStarrecently petitioned the United States Supreme Court for review of the FourthCircuit’s decision.  The Company cannotpredict whether the Supreme Court will agree to review the Fourth Circuit’sdecision or the outcome of the Supreme Court’s potential review.

 

*Digital Television*

 

Pursuantto the Telecommunications Act of 1996, the FCC has adopted rules authorizingand implementing DTV service, technology that should improve the quality ofboth the audio and video signals of television stations. The FCC has “setaside” channels within the existing television spectrum for DTV and limitedinitial DTV eligibility to existing television stations and certain applicantsfor new television stations (“Existing Broadcasters”). The FCC has adopted aDTV table of allotments as well as service and licensing rules to implement theservice. The DTV allotment table provides a channel for DTV operations for eachExisting Broadcaster and is intended to enable Existing Broadcasters toreplicate their existing service areas. The affiliates of CBS, NBC, ABC and Foxin the ten largest U.S. television markets were required to initiate commercialDTV service with a digital signal by May 1, 1999. Affiliates of these networkslocated in the 11th through the 30th largest U.S. television markets wererequired to begin DTV operation by November 1, 1999. All other commercialstations are required to begin DTV broadcasts by May 1, 2002.  In November 2001, the FCC modified itsdigital television transition rules in an effort to ease the burden of therequired build out.  Among otherchanges, the FCC relaxed its initial build out requirement.  Under the new rules, a station will not haveto replicate its entire analog service area until a date to be set in a laterproceeding.  By 2006, broadcasters willhave to convert to DTV service, terminate their existing analog service andsurrender one of their two television channels to the FCC. This 2006 transitiondate may be extended, however, upon the request of a station, in the eventthat: (i) one or more of the stations in the station’s market that are licensedto or affiliated with one of the top four largest national television networksare not broadcasting a digital television signal, and the FCC finds that eachsuch station has exercised due diligence and satisfies the conditions for anextension of the applicable construction deadlines for digital televisionservice in that market; (ii) digital-to-analog converter technology is notgenerally available in such market; or (iii) if 85% of television households ina market do not have television receivers capable of receiving the DTV signalsof local stations.

 

14

----

 

The FCC also has adopted rules that permit DTV licenseesto offer ancillary or supplementary services on their DTV channels undercertain circumstances.  The FCC rulesfurther require DTV licensees to pay a fee of 5% of the gross revenues receivedfrom any ancillary or supplemental uses of the DTV spectrum for which theCompany charges subscription fees or other specified compensation.  No fees will be due for commercialadvertising revenues received from free over-the-air broadcastingservices.  The Commission also hasinitiated a notice of inquiry to examine whether additional public interestobligations should be imposed on DTV licensees.  Various proposals in this proceeding would require DTV stationsto increase their program diversity, political discourse, access for disabledviewers and to improve emergency warning systems.

 

Company-owned stations KBWB and KNTV have constructedand begun operating their DTV facilities. Stations WDWB, WTVH, and WPTA filedtimely applications for DTV stations but have not yet received permits toconstruct their DTV stations. The pending DTV applications are delayed forvarious reasons, including alleged interference with Canadian broadcaststations and a mutually exclusive application filed by another broadcastingstation seeking DTV authority. In March 2002, stations WKBW, KSEE, WEEK, andKBJR each applied for an extension of the DTV buildout period, pursuant to theextension guidelines adopted by the FCC. Each station cited the Company'scurrent financial conditions as a reason for delay.  Approximately forty percent of all broadcast stations applied forextensions of the DTV construction period. The FCC has not yet acted on theCompany stations' requests.

 

*Class A Television Stations*.

 

In November 1999, Congress enacted the CommunityBroadcasters Protection Act, which created a new “Class A” status for low powertelevision stations.  Under thisstatute, certain LPTV stations which previously had secondary status to fullpower television stations are eligible for “Class A” status and are entitled toprotection from future displacement by full-power television stations undercertain circumstances. The FCC has adopted rules governing the extent ofinterference protection that must be afforded to Class A stations and theeligibility criteria for these stations. Because Class A stations are required to provide interference protectionto full-power television stations, these new facilities are not expected toadversely affect the operations of the Company’s television stations.

 

*Proposed Legislation and Regulations*

 

The FCC currently has underconsideration and the Congress and the FCC may in the future consider and adoptnew or modify existing laws, regulations and policies regarding a wide varietyof matters that could, directly or indirectly, affect the operation, ownership,and profitability of the Company’s broadcast properties, result in the loss ofaudience share and advertising revenues for the Company’s stations, and affectthe ability of the Company to acquire additional stations or finance suchacquisitions. Such matters include but are not limited to: (i) fees imposed onFCC licensees; (ii) matters relating to minority and female involvement in thebroadcasting industry; (iii) political broadcasting and advertising matters; (iv)technical and frequency allocation matters; (v) changes to broadcast technicalrequirements; (vi) changes to the standards governing the evaluation andregulation of television programming directed towards children; (viii) anexamination of whether the cable must-carry requirement mandates carriage ofboth analog and digital television signals; (ix) an examination of legislationand FCC rules governing the ability of viewers to receive local and distanttelevision network programming directly via satellite; and (x) an examinationof issues that have arisen during the transition from analog to digitaltelevision service. The Company cannot predict whether such changes will beadopted or, if adopted, the effect that such changes would have on the businessof the Company.

 

*Seasonality*

 

The Company’s operating revenues are generallylower in the first calendar quarter and generally higher in the fourth calendarquarter than in the other two quarters, due in part to increases in retailadvertising in the fall months in preparation for the holiday season, and inelection years due to increased political advertising.

 

*Employees*

 

The Company and its subsidiaries currently employapproximately 936 persons, of whom approximately 262 are represented by threeunions pursuant to agreements expiring in 2002, 2003 and 2004 at the Company’sstations.  The Company believes itsrelations with its employees are good.

 

15

----

 

**Item 2.    Properties**

 

The Company’s principal executive offices arelocated in New York, New York.  Thelease agreement, for approximately 9,500 square feet of office space in NewYork, expires January 31, 2011.

 

Thetypes of properties required to support each of the Company’s stations includeoffices, studios, transmitter sites and antenna sites.  A station’s studios are generally housedwith its offices in downtown or business districts.  The transmitter sites and antenna sites are generally located soas to provide maximum market coverage. The following table contains certain information describing the generalcharacter of the Company’s properties:

 
| **Station** |   | **Metropolitan  Area and Use**         |   | **Owned or  Leased**              |   | **Approximate Size** |   | **Expiration  of Lease** |   |
|-------------|--------|----------------------------------------|--------|-----------------------------------|--------|----------------------|--------|--------------------------|--------|
|        |   |                                   |   |                              |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| KNTV        |   | San Jose, California                   |   |                              |   |                 |   |                     |   |
|        |   |    Office and Studio              |   | Owned                             |   | 26,469  sq. feet     |   | —                   |   |
|        |   |   Tower Site                      |   | Leased                            |   | 2,080 sq. feet       |   | 9/30/02                  |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| WTVH        |   | Syracuse, New York                     |   |                              |   |                 |   |                     |   |
|        |   |   Office and Studio               |   | Owned                             |   | 41,500 sq. feet      |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
|        |   | Onondaga,  New York                    |   |                              |   |                 |   |                     |   |
|        |   |   Tower Site                      |   | Owned                             |   | 2,300 sq. feet       |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| KSEE        |   | Fresno, California                     |   |                              |   |                 |   |                     |   |
|        |   |   Office and Studio               |   | Owned                             |   | 32,000 sq. feet      |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
|        |   | Bear  Mountain, Fresno                 |   |                              |   |                 |   |                     |   |
|        |   | County,  California                    |   |                              |   |                 |   |                     |   |
|        |   |   Tower Site                      |   | Leased                            |   | 9,300 sq. feet       |   | 3/22/51                  |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| WPTA        |   | Fort Wayne, Indiana                    |   |                              |   |                 |   |                     |   |
|        |   |   Office, Studio and Tower Site   |   | Owned                             |   | 18,240 sq. feet      |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| WEEK        |   | Peoria, Illinois                       |   |                              |   |                 |   |                     |   |
|        |   |   Office, Studio and Tower Site   |   | Owned                             |   | 20,000 sq. feet      |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| KBJR        |   | Duluth, Minnesota, Superior, Wisconsin |   |                              |   |                 |   |                     |   |
|        |   |   Office and Studio               |   | Owned                             |   | 20,000 sq. feet      |   | —                   |   |
|        |   |   Tower Site                      |   | Owned                             |   | 3,300 sq. feet       |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| KBWB        |   | San Francisco, California              |   |                              |   |                 |   |                     |   |
|        |   |   Office and Studio               |   | Leased                            |   | 25,777 sq. feet      |   | 8/31/02                  |   |
|        |   |   Tower Site                      |   | Leased                            |   | 2,750 sq. feet       |   | 2/28/05                  |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| WKBW        |   | Buffalo, New York                      |   |                              |   |                 |   |                     |   |
|        |   |   Office and Studio               |   | Owned                             |   | 32,000 sq. feet      |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
|        |   | Colden,  New York                      |   |                              |   |                 |   |                     |   |
|        |   |   Tower Site                      |   | Owned                             |   | 3,406 sq. feet       |   | —                   |   |
|        |   |                                   |   |                              |   |                 |   |                     |   |
| WDWB        |   | Southfield, Michigan                   |   |                              |   |                 |   |                     |   |
|        |   |   Office                          |   | Leased                            |   | 8,850 sq. feet       |   |                     |   |
|        |   |   Studio and Tower Site           |   |     Leased(1) |   | 30,000 sq. feet      |   | 9/30/06                  |   |

 

----

(1)                                  The Company owns a 3,400 square foot building onthe property.

 

16

----

 

**Item 3.    Legal Proceedings**

 

Not Applicable

 

**Item 4.    Submission ofMatters to a Vote of Security Holders**

 

OnFebruary 15, 2001, the holders of all of the Company’s Voting Common Stockadopted resolutions by unanimous written consent in lieu of a special meeting(i) amending the Granite Broadcasting Corporation Management Stock Plan toincrease the number of shares of Common Stock (Nonvoting) in the bonus sharereserve to 1,500,000, and (ii) approving the amendment and consolidation of all loans and advancesbetween the Company and each of Messrs. Cornwell and Beck, effective January 1,2001.

 

On May 9, 2001, the holders of all of theCompany’s Voting Common Stock adopted resolutions by unanimous written consentin lieu of an annual meeting (i) appointing Ernst & Young LLP asindependent auditors of the Company and (ii) electing W. Don Cornwell, StuartJ. Beck, James L. Greenwald, Martin F. Beck, Edward Dugger III, Thomas R.Settle, Charles J. Hamilton, Jr., Robert E. Selwyn, Jr., Jon E. Barfield,Milton Frederick Brown and Veronica Pollard as directors of the Company.

 

17

----

 

**PART II**

 

**Item 5.    Market forRegistrant’s Common Equity and Related Stockholder Matters**

 

Effective April 23, 2001 the Company’s listing of itsCommon Stock (Nonvoting) has moved from the Nasdaq National Market to theNasdaq Small Cap Market.  The Company’sCommon Stock (Nonvoting) continues to trade under the stock symbol GBTVK.  As of March 22, 2002, the approximate numberof record holders of Common Stock (Nonvoting) was 189.

 

The range of high and low prices for the Common Stock(Nonvoting) for each full quarterly period during 2000 and 2001 is set forth inNote 15 to the Consolidated Financial Statements in Item 8 hereof.  At March 22, 2002, the closing price of theCommon Stock (Nonvoting) was $2.10 per share.

 

There is no established public trading market for theCompany’s Class A Voting Common Stock, par value $.01 per share (the “VotingCommon Stock;” the Voting Common Stock and the Common Stock (Nonvoting) arereferred to herein collectively as the “Common Stock”).  As of March 22, 2002, the number of recordholders of Voting Common Stock was 2.

 

The Company has never declared or paid a cash dividend onits Common Stock and does not anticipate paying a dividend on its Common Stockin the foreseeable future.  The paymentof cash dividends on any equity securities of the Company is subject to certainlimitations under the Indentures governing the Company’s 10 3/8% SeniorSubordinated Notes due May 15, 2005, 9 3/8% Senior Subordinated Notes dueDecember 1, 2005 and the 8 7/8% Senior Subordinated Notes due May 15, 2008 andunder the Certificate of Designations of the Company’s 12 3/4% CumulativeExchangeable Preferred Stock.  Thepayment of cash dividends on any equity securities of the Company is prohibitedunder the Company’s Credit Agreement. The Company is also prohibited from paying dividends on any Common Stockuntil all accrued but unpaid dividends on the Company’s Series A ConvertiblePreferred Stock, par value $.01 per share (the “Series A Preferred Stock”), arepaid in full.  All outstanding shares ofSeries A Preferred Stock were converted into Common Stock (Nonvoting) in August1995.  Accrued dividends on the Series APreferred Stock, which totaled $262,844 at December 31, 2001, are payable onthe date on which such dividends may be paid under the Company’s existing debtinstruments.

 

18

----

 

**Item 6.    Selected Financial Data**

 

The information set forth below should be read inconjunction with the consolidated financial statements and notes theretoincluded at Item 8 herein.  The selectedconsolidated financial data has been derived from the Company’s auditedConsolidated Financial Statements.

 

The acquisitions and dispositions by the Company of its operatingproperties during the periods reflected in the following selected financialdata materially affect the comparability of such data from one period toanother.

 
|                                                                                   |   | **Years Ended December 31,**                       |       |
|----------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                                   |   | **1997**                                           |       | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
| **Statement of Operations Data:**                                                      |   | **(Dollars in thousands except per  share data )** | ** ** |
| Net revenue                                                                            |   | $                                                  | 153,512    |   | $ | 161,104 |   | $ | 149,847 |   | $ | 140,070 |   | $ | 113,075 |   |
| Station operating expenses                                                             |   | 83,729                                             |       | 89,812 |   | 92,874 |   | 102,680 |   | 116,374 |   |
| Time brokerage agreement fees                                                          |   | 600                                                |       | 428 |   | — |   | — |   | — |   |
| Write-off of film contract  rights                                                     |   | —                                             |       | — |   | — |   | 1,716 |   | — |   |
| Depreciation                                                                           |   | 5,718                                              |       | 5,388 |   | 5,455 |   | 5,725 |   | 6,076 |   |
| Amortization of intangible  assets                                                     |   | 13,824                                             |       | 18,493 |   | 26,667 |   | 26,865 |   | 26,735 |   |
| Corporate expense                                                                      |   | 6,639                                              |       | 8,179 |   | 8,862 |   | 10,392 |   | 9,687 |   |
| Non-cash compensation expense                                                          |   | 986                                                |       | 977 |   | 935 |   | 1,974 |   | 1,473 |   |
| Operating income (loss)                                                                |   | 42,016                                             |       | 37,827 |   | 15,054 |   | (9,282 | ) | (47,270 | ) |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| Other expenses                                                                         |   | 1,167                                              |       | 1,381 |   | 1,616 |   | 2,079 |   | 1,141 |   |
| Equity in net loss of investee                                                         |   | 1,531                                              |       | 973 |   | 254 |   | — |   | — |   |
| Gain on sale of assets                                                                 |   | —                                             |       | (57,776 | ) | (101,292 | ) | — |   | — |   |
| Gain from insurance claim                                                              |   | —                                             |       | (2,159 | ) | (4,079 | ) | (1,247 | ) | — |   |
| Interest expense, net                                                                  |   | 38,986                                             |       | 38,896 |   | 36,352 |   | 28,975 |   | 45,923 |   |
| Non-cash interest expense                                                              |   | 2,182                                              |       | 2,095 |   | 3,115 |   | 3,008 |   | 7,951 |   |
| (Loss) income before taxes and  extraordinary item                                     |   | (1,850                                             | )          | 54,417 |   | 79,088 |   | (42,097 | ) | (102,285 | ) |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| (Provision) benefit for income  taxes                                                  |   | (1,616                                             | )          | (10,250 | ) | (31,574 | ) | 10,878 |   | 26,745 |   |
| (Loss) income  before extraordinary item                                          |   | (3,466                                             | )          | 44,167 |   | 47,514 |   | (31,219 | ) | (75,540 | ) |
| Extraordinary (loss) gain, net  of tax                                                 |   | (5,569                                             | )          | (1,761 | ) | (385 | ) | 3,710 |   | (1,207 | ) |
| Net (loss) income                                                                      |   | $                                                  | (9,035     | ) | $ | 42,406 |   | $ | 47,129 |   | $ | (27,509 | ) | $ | (76,747 | ) |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| Net (loss) income attributable  to common shareholders                                 |   | $                                                  | (31,207    | ) | $ | 16,896 |   | $ | 19,912 |   | $ | (56,345 | ) | $ | (109,311 | ) |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| **Per common share:**                                                                  |   |                                               |       |   |   |   |   |   |   |   |   |
| Basic (loss) income  before extraordinary item                                    |   | $                                                  | (2.93      | ) | $ | 1.80 |   | $ | 1.46 |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Basic net (loss) income                                                                |   | $                                                  | (3.57      | ) | $ | 1.63 |   | $ | 1.43 |   | $ | (3.10 | ) | $ | (5.89 | ) |
| Weighted average common shares  outstanding                                            |   | 8,765                                              |       | 10,358 |   | 13,969 |   | 18,203 |   | 18,569 |   |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| Net (loss) income attributable  to common  shareholders — assuming  dilution |   | $                                                  | (31,207    | ) | $ | 19,776 |   | $ | 21,588 |   | $ | (56,345 | ) | $ | (109,311 | ) |
|                                                                                   |   |                                               |       |   |   |   |   |   |   |   |   |
| **Per common share**:                                                                  |   |                                               |       |   |   |   |   |   |   |   |   |
| Diluted (loss) income before  extraordinary item                                       |   | $                                                  | (2.93      | ) | $ | 1.27 |   | $ | 1.16 |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Diluted net (loss) income                                                              |   | $                                                  | (3.57      | ) | $ | 1.17 |   | $ | 1.14 |   | $ | (3.10 | ) | $ | (5.89 | ) |
| Weighted average common share  outstanding —Assuming dilution                     |   | 8,765                                              |       | 16,967 |   | 19,012 |   | 18,203 |   | 18,569 |   |

 
|                                |   | **As of December 31,** |
|-------------------------------------|--------|------------------------|
| **Selected Balance Sheet Data:**    |   | **1997**               |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
| Total assets                        |   | $                      | 633,614 |   | $ | 781,974 |   | 730,591 |   | $ | 732,091 |   | $ | 731, 097 |   |
| Total debt                          |   | 392,779                |   | 426,399 |   | 303,874 |   | 311,391 |   | 401,206 |   |
| Redeemable preferred stock          |   | 207,700                |   | 216,351 |   | 210,709 |   | 239,545 |   | 272,109 |   |
| Stockholders’ (deficit) equity |   | (33,257                | ) | (1,470 | ) | 50,084 |   | 7,816 |   | (98,144 | ) |
|                                     |        |                        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

----

 

**Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Certain sections of this Form 10-K, including “Business”and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” contain various “forward–looking statements” within themeaning of Section 21E of the Securities Exchange Act of 1934, which representthe Company’s expectations or beliefs concerning future events.  The “forward–looking statements”include, without limitation, the renewal of the Company’s FCC licenses and theCompany’s ability to meet its future liquidity needs.  The Company cautions that these statements are further qualifiedby important factors that could cause actual results to differ materially fromthose in the “forward–looking statements”.  Such factors include, without limitation, general economicconditions, competition in the markets in which the Company’s stations arelocated, technological change and innovation in the broadcasting industry andproposed legislation.

 

*Introduction*

 

Comparisonsof the Company’s consolidated financial statements between the years endedDecember 31, 2000 and 1999 have been affected by the sale of WEEK–FM,which occurred on July 30, 1999, and the sale of KEYE, which occurred on August31, 1999, the termination of the ABC affiliation agreement at KNTV on July 1,2000, significant increases in news expense at KNTV in preparation for itbecoming the NBC affiliate for the San Francisco-Oakland-San Jose marketeffective January 1, 2002, and investments in syndicated programs at theCompany’s WB affiliates.

 

Comparisons of theCompany’s consolidated financial statements between the years ended December31, 2001 and 2000 have been affected by the termination of the ABC affiliationagreement at KNTV on July 1, 2000, significant increases in news expense atKNTV and investments in syndicated programs at the Company’s WBaffiliates.  The Company anticipatesthat comparisons of the Company’s consolidated financial statements between theyears ended December 31, 2002 and 2001 will be impacted by significantincreases in revenues and expenses at KNTV resulting from its switch to the NBCaffiliate and continued investment in programming at the WB affiliates.

 

The Company’s revenues are derived principallyfrom local and national advertising and, to a lesser extent, from networkcompensation for the broadcast of programming and revenues from studio rentaland commercial production activities. The primary operating expenses involved in owning and operatingtelevision stations are employee salaries, depreciation and amortization,programming and advertising and promotion. Amounts referred to in the followingdiscussion have been rounded to the nearest thousand.

 

The following table sets forth certain operatingdata for the three years ended December 31, 1999, 2000 and 2001:

 
|                               |   | **Year ended December 31,** |       |
|------------------------------------|--------|-----------------------------|------------|
|                               |   | **1999**                    |       | **2000** |   | **2001** |   |
| Operating income (loss)            |   | $                           | 15,054,000 |   | $ | (9,282,000 | ) | $ | (47,271,000 | ) |
| Write-off of film  contract rights |   | —                      |       | 1,716,000 |   | — |   |
| Depreciation and  amortization     |   | 32,122,000                  |       | 32,590,000 |   | 32,812,000 |   |
| Corporate expense                  |   | 8,862,000                   |       | 10,392,000 |   | 9,687,000 |   |
| Non-cash compensation              |   | 935,000                     |       | 1,974,000 |   | 1,473,000 |   |
| Program amortization               |   | 15,245,000                  |       | 22,791,000 |   | 32,742,000 |   |
| Program payments                   |   | (15,429,000                 | )          | (20,565,000 | ) | (24,391,000 | ) |
| Broadcast cash flow                |   | $                           | 56,789,000 |   | $ | 39,616,000 |   | $ | 5,052,000 |   |

 

“Broadcast cash flow” means operating income (loss) plusfilm write-offs, depreciation, amortization, corporate expense, non-cashcompensation and program amortization, less program payments.  The Company has included broadcast cash flowdata because such data is commonly used as a measure of performance forbroadcast companies and is also used by investors to measure a company’sability to service debt.  Broadcast cashflow is not, and

 

20

----

 

should not be used as an indicator or alternative tooperating income, net loss or cash flow as reflected in the consolidatedfinancial statements, is not a measure of financial performance underaccounting principles generally accepted in the United States and should not beconsidered in isolation or as a substitute for measures of performance preparedin accordance with accounting principles generally accepted in the UnitedStates.

 

*Years ended December 31, 2001 and 2000*

 

Net revenue for the yearended December 31, 2001 totaled $113,075,000; a decrease of $26,995,000 or 19percent compared to $140,070,000 for the twelve months ended December 31, 2000.The decrease was primarily due to a weak advertising climate with local andnational advertising down $24,631,000, a decrease in political advertising in anon-election year of $9,246,000 and decreased revenue at KNTV of $4,660,000 asit operated as an independent television station for a full year in 2001.

 

Station operating expenses totaled $116,374,000, anincrease of $13,694,000 or 13 percent compared to $102,680,000 for the twelvemonths ended December 31, 2000.  Theincrease was primarily due to an increase in news expense at KNTV of$2,572,000, increased programming costs of $2,579,000 at the Company’s WBaffiliates, and the accelerated amortization of certain syndicated programstotaling $6,806,000.

 

Corporate expense totaled $9,687,000; a decrease of$705,000 or 7 percent compared to $10,392,000 for the twelve months endedDecember 31, 2000. The decrease was primarily due to a decrease in professionalfees.  Non-cash compensation expensetotaled $1,473,000, a decrease of $501,000 or 25 percent compared to $1,974,000for the twelve months ended December 31, 2000. The decrease was primarily due to a one-time charge to earnings taken in2000 resulting from the rescission of the exercise of certain stock optionsexercised offset in part by increased stock awards granted to certainexecutives.

 

Interest expense totaled$47,482,000; an increase of $17,828,000 or 60 percent compared to $29,654,000for the twelve months ended December 31, 2000. The increase was primarily due to higher levels of outstandingindebtedness and a higher interest rate on the Company’s current CreditAgreement.  Included in interest expensefor 2001 is approximately $4,671,000 of deferred interest on the CreditAgreement payable on December 31, 2003. Interest income totaled $1,559,000; an increase of $881,000 or 130percent compared to the twelve months ended December 31, 2000 primarily due tohigher cash balances, partially offset by lower interest rates.  Non-cash interest expense totaled$7,951,000; an increase of $4,943,000 or 164 percent primarily due to increaseddeferred financing fees related to the current Credit Agreement.

 

During 2001, the Company recognized an extraordinary lossnet of tax of $1,207,000 related to the repayment of all outstanding borrowingsunder the then existing bank credit agreement and the write-off of related deferredfinancing fees.

 

*Years ended December 31, 2000 and 1999*

 

Net revenue for the yearended December 31, 2000 totaled $140,070,000, a decrease of $9,777,000 or 7percent compared to $149,847,000 for the twelve months ended December 31, 1999.The decrease was primarily due to reduced revenue of $10,352,000 resulting fromthe sale of the Austin station in August 1999 and a decline in non-politicallocal and national revenue of $2,060,000 and $4,535,000, respectively, offset,in part, by an increase of $8,092,000 in political advertising revenue.

 

Station operating expenses totaled $102,680,000, anincrease of $9,805,000 or 11 percent compared to $92,874,000 for the twelvemonths ended December 31, 1999.  Theincrease was primarily due to an increase in programming expense of $7,779,000at the WB affiliates, an increase in news expense of $4,024,000 at KNTV and anincrease in general and administrative expenses of $1,352,000 driven byincreases in bad debt reserves.  Theseincreases were offset, in part, by decreased operating expenses of $5,549,000resulting from the sale of the Austin station in August 1999.

 

Programming expenseswere also impacted by the transformation of KNTV. Nielsen Media Researchreassigned KNTV from the Monterey/Salinas, California designated market area(“DMA”), the 118th largest, to the San Francisco-Oakland-San Jose,California DMA, the 5th largest, effective September 1, 2000.  In connection with 

 

21

----

 

this change, KNTV is no longer able tobroadcast certain syndicated programs that are licensed to other stations inthe San Francisco-Oakland-San Jose, California DMA.  Consequently, the Company took a one-time, charge and wrote-offthe book value of these programs totaling $1,716,000.

 

Corporate expense totaled $10,392,000; an increase of$1,531,000 or 17 percent compared to $8,862,000 for the twelve months endedDecember 31, 1999. The increase was primarily due to an increase inprofessional fees, most of which are of a non-recurring nature.

 

Interest expense totaled$29,654,000; a decrease of $7,963,000 or 21 percent compared to $37,617,000 forthe twelve months ended December 31, 1999. The decrease was primarily due to the use of a portion of the net proceedsfrom the sale of the Austin station in August 1999 to reduce outstandingindebtedness.  In addition, during thefirst six months of 2000 the Company used bank borrowings to repurchase$89,338,000 face amount of its subordinated notes at various discounts, furtherreducing its debt outstanding.  Inconnection with these repurchases during 2000, the Company recognized anextraordinary gain after the write-off of related deferred financing fees, netof tax, of $3,710,000.

 

Thegain on the sale of assets of $101,292,000 in 1999 resulted from the sale ofthe Austin station.

 

The Company sustainedsevere damage to certain assets in Duluth, Minnesota as a result of a fire thatoccurred in 1997 and an ice storm that occurred in 1999.  The Company wrote-off the book balances ofthe destroyed assets and received insurance proceeds for replacement assetsduring 1999, resulting in a gain of $4,079,000. Additional insurance proceedswere received in 2000 resulting in a gain of $1,247,000.

 

22

----

 

*Liquidity and Capital Resources*

 

On March 6, 2001, the Company entered into an amendedand restated $205,000,000 Senior Credit Agreement (the “CreditAgreement”).  The Credit Agreementconsists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche B termloan.  The proceeds from the CreditAgreement were used (i) to repay all outstanding borrowings under the Company’sthen existing senior revolving credit facility, (ii) to prepay the firstinstallment under the KNTV NBC affiliation agreement, (iii) to pay certain feesand expenses associated with the Credit Agreement and (iv) for general workingcapital purposes.  The Tranche A andTranche B term loans bear interest annually at the greater of LIBOR plus 5.50%or 12%, which is payable monthly.  Inaddition, the Tranche B term loan accrues simple deferred interest at an annualrate of 6% which is payable when the Credit Agreement matures on December 31,2003.  The Credit Agreement requires theCompany to maintain compliance with certain financial tests, including but notlimited to, minimum net revenue, broadcast cash flow, EBITDA and a maximumratio of senior debt to EBITDA. Other provisions place limitations on paymentsfor capital expenditures and prohibit the incurrence of additional debt, thepurchase of the Company’s common stock, the repurchase of subordinated debt andthe declaration and payment of cash dividends. On October 23, 2001, the Companyamended the Credit Agreement to, among other matters, modify certain financialratios to reflect the current advertising climate.  As a result, the Company was in compliance with its amended debtcovenants as of September 30, 2001 and as of December 31, 2001.  In connection with, and as a condition to,amending those covenants, the Company’s senior lenders required the Company tosell certain Tranche A assets and repay the Tranche A loans in accordance withspecified terms and schedules.  KNTV isnot a Tranche A asset, however, the senior lenders have waived the Tranche Aasset sale covenant through May 2, 2002 to allow the Company to consummate thesale of KNTV.  The Company anticipatesthat the Credit Agreement debt will be repaid in full upon consummation of theKNTV sale.  If the sale of KNTV does notclose prior to May 2, 2002 or if the Company does not repay the Tranche A loansin full following consummation of such sale, the Company may be in defaultunder the Credit Agreement, unless the Company obtains further waivers from itssenior lenders.

 

OnMay 31, 2000 the Company entered into a series of definitive agreements withthe National Broadcasting Company, Inc. (“NBC”).  Pursuant to the these agreements, KNTV became the NBC affiliatein the San Francisco-Oakland-San Jose, California television market for a tenyear term commencing on January 1, 2002 (the “San Francisco Affiliation”).  The Company also extended the affiliationagreements of its three existing NBC affiliates, KSEE, WEEK and KBJR untilDecember 31, 2011.  As part of suchextension, NBC paid the Company a total of $2,430,000 in affiliate compensationin equal semi-annual installments through December 31, 2001, at which time theaffiliation payments terminated.

 

In consideration for the San Francisco Affiliation,the Company was to pay NBC $362,000,000 in nine annual installments, with theinitial payment in the amount of $61,000,000 due January 1, 2002.  On March 6, 2001, the San FranciscoAffiliation was amended to reduce the January 1, 2002 installment to$30,500,000 and defer the remaining $30,500,000 of the original initial paymentuntil January 1, 2005.  The Companyprepaid the January 1, 2002 installment on March 6, 2001 with proceeds from theCredit Agreement, paying $27,778,694, which represented the present value ofthat installment discounted at 12%.

 

OnDecember 14, 2001, the Company entered into a definitive agreement with NBC tosell KNTV.  NBC will pay the Company$230,000,000 in cash plus a working capital adjustment.  In addition, at the closing, NBC will refundthe Company a pro rata portion of the affiliation payment made to NBC in 2001.The consummation of the sale is contingent upon approval by the FCC andsatisfaction of other customary closing conditions and is expected 

 

23

----

 

toclose prior to May 2, 2002 as required by the Credit Agreement.  Paxson Communications Corporation (“Paxson”)has filed an opposition to the Company’s application to transfer KNTV to NBCwith the FCC.  The Company believes thatPaxson’s opposition is without merit and anticipates that the FCC will approvethe transfer prior to May 2, 2002.  TheCompany will use the proceeds from the sale of KNTV (i) to repay outstandingdebt and deferred  interest under theexisting senior credit facility, (ii) to pay taxes and other fees associatedwith the sale and (iii) to the extent there are remaining proceeds, for workingcapital purposes.  The San FranciscoAffiliation will terminate upon the closing of the sale and the Company willnot be required to make any further affiliation payments to NBC (provided thatthe sale of KNTV closes prior to January 1, 2003).  The warrants to purchase the Company’s non-voting common stock,issued to NBC as part of the San Francisco Affiliation Agreements will bereturned to the Company.  The Company’saffiliation agreements for KSEE-TV, WEEK-TV, and KBJR-TV, which involve nopayment obligations, will remain in effect until their expiration on December31, 2011.

 

Asof March 22, 2002, the Company’s cash balance totaled $22,480,000.  The Company anticipates having a cashbalance of approximately $10,000,000 as of April 30, 2002, assuming the sale ofKNTV has not closed by then.  TheCompany has interest payments due on May 15, 2002 and June 1, 2002 ofapproximately $8,000,000 and $1,600,000 respectively, relating to its seniorsubordinated debentures.  If the KNTVsale does not close in a timely fashion or if the Company is unable to obtain anew or amended credit facility to provide liquidity following the sale of KNTV,the Company may not be in a position to make these payments due the seniorsubordinated bondholders.  The Companyis currently in discussions with a senior lender for a new or amended seniorcredit facility to be available upon the closing of the sale of KNTV.

 

Netcash used in operating activities was $56,950,000 during the year endedDecember 31, 2001 compared to $3,584,000 during the year ended December 31,2000 and $31,676,000 during the year ended December 31, 1999.  The change from 2000 to 2001 as primarilythe result of an increase in cash interest payments, the affiliation prepaymentmade to NBC and a decrease in operating cash flow, offset in part by a decreasein net operating assets.

 

Netcash used in investing activities was $3,232,000 during the year ended December31, 2001 compared to $7,710,000 during the year ended December 31, 2000 and netcash provided by investing activities of $161,596,000 during the year endedDecember 31, 1999.  The change from 2000to 2001 was primarily the result of decreased capital expenditures.

 

Netcash provided by financing activities was $80,400,000 during the year endedDecember 31, 2001 compared to $15,049,000 during the year ended December 31,2000 and net cash used in financing activities of $125,228,000 during the yearended December 31, 1999.  The changefrom 2000 to 2001 primarily resulted from an increase in bank borrowings and adecrease in debt repaid , offset in part by an increase in deferred financingfees.

 

Assumingthat the sale of KNTV is consummated during the second quarter of 2002 and thatthe Company is able to obtain a new or amended senior credit facility, theCompany expects to spend approximately $13,000,000 in 2002 and $22,000,000 in2003 in capital expenditures, of which a total of approximately $2,300,000 isassociated with the initial implementation of digital technology pursuant tothe FCC’s relaxed digital television build-out rules.  The Company has requested a six-month extension from the FCC toeffect a portion of such initial implementation because of the Company’scurrent financial situation.  TheCompany anticipates it will need an additional $10,700,000 to effect the fullbuild-out of digital television.  TheCompany believes that borrowings under a new senior credit facility togetherwith internally generated funds from operations, cash on hand and expected netproceeds from the pro rata refund of the NBC affiliation payment made in 2001upon the closing of the sale of KNTV will be sufficient to satisfy theCompany’s cash requirements for its existing operations for the next twelve monthsand for the foreseeable future thereafter. Under the terms of the Certificate of Designations for the Company’s 123/4% Cumulative Exchangeable Preferred Stock, the Company is required to makethe semi-annual dividends on such shares in cash beginning October 1,2002.  The cash payment of dividend isrestricted by the terms of the indentures governing the Company’s seniorsubordinated bonds and is prohibited under the terms of the Credit Agreement.  The Company does not anticipate paying cashdividends on its exchangeable preferred stock in the foreseeable future.

* *

*Recent Accounting Pronouncements*

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 142, Goodwilland Other Intangible Assets (“Statement 142”), effective January 1, 2002.  Under the new rules, goodwill and otherindefinite lived intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests inaccordance with Statement 142.  TheCompany will apply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of 2002.  Application of the non-amortizationprovisions of Statement 142 is expected to result in a decrease in amortizationexpense of approximately $16,900,000 in 2002. The Company will test goodwill for impairment using the two-step processprescribed in Statement 142.  The firststep is a screen for potential impairment, while the second step measures theamount of the impairment, if any.  Basedon steps the Company has taken to prepare for the adoption of Statement 142, itis likely that a portion of goodwill or other indefinite lived intangibleassets will be impaired using the impairment test required by Statement142.  The Company currently evaluatesgoodwill and other indefinite lived intangible assets for impairment bycomparing the entity level unamortized balance of goodwill to projectedundiscounted cash flows, which does not result in an indicated impairment.  An impairment that is required to berecognized when adopting Statement 142 will be reflected as the cumulativeeffect of a change in accounting principle in the first quarter of 2002.  The Company has not yet determined theamount of the potential impairment loss.

 

*Critical Accounting Policies*

 

Our accounting policies are described in Note 1 of theconsolidated financial statements in Item 8. We prepare our consolidated financial statements in conformity withaccounting principles generally accepted in the United States, which require usto make estimates and assumptions that effect the reported amounts of assetsand liabilities and disclosures of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the year.  Actualresults could differ from those estimates. We consider the following policies to be most critical in understandingthe judgements involved in preparing our financial statements and theuncertainties that could affect our results of operations, financial conditionand cash flows.

 

*Goodwill and Intangible Assets*

 

The Company has made acquisitions in the past forwhich a significant portion  of thepurchase price was allocated to goodwill and other identifiable intangibleassets.  Under accounting principlesgenerally accepted in the United States through December 31, 2001, these assetsare being amortized over their estimated useful lives and were testedperiodically to determine if they are recoverable from undiscounted  cash flows over their useful lives.

 

                In accordance withStatement 142, goodwill and other intangible assets deemed to have indefinitelives will no longer be amortized, but instead will be subject to annualimpairment tests.  The Company willapply the new rule on accounting for goodwill and other intangible assetsbeginning in the first quarter of 2002. During 2002, the Company will perform the first of the requiredimpairment tests of goodwill and indefinite-lived assets as of January 1, 2002,and has not yet determined what effect, if any, applying those tests will haveon the Company’s financial position and results of operations.  The annual impairment testing required byStatement 142 will also require us to use our judgement and could require us towrite down the carrying value of our goodwill and other intangible assets infuture periods.  As of December 31,2001, the Company had $620,324,000 in goodwill and other intangible assets withindefinite lives.  We expectamortization expense to decrease by approximately $16,900,000 as a result ofthis pronouncement.

 

*Allowance for Doubtful Accounts*

 

                We must makeestimates of the uncollectibility of our accounts receivable.  We specifically review historical write-offactivity by market, large customer concentrations, customer credit worthiness,and changes in our customer payment terms when evaluating the adequacy of theallowance for doubtful accounts.  Ifcircumstances change, such as higher than expected defaults or an unexpectedmaterial adverse change in an agency’s ability to meet its financial obligationto the Company, the Company’s estimates of the recoverability of amounts duethe Company could be reduced by a material amount.

 

*Impact of Inflation*

 

                We believe thatinflation has not had a material impact on our results of operations for eachof the three years in the period ended December 31, 2001.  However, there can be no assurance thatfuture inflation would not have an adverse impact on our operating results andfinancial condition.

 

*Seasonality*

 

                Seasonal netrevenue fluctuations are common in the television broadcast industry and aredue primarily to fluctuations in advertising expenditures by local and nationaladvertisers.  The Company’s firstcalendar quarter generally produces the lowest net revenue for the year.

 

*Capital and Commercial Commitments*

 

                The followingtable and discussion reflect the Company’s significant contractual obligationsand other commercial commitments as of December 31, 2001:

 

 
|                   |   | **Payment  Due by Period** |        |
|------------------------|--------|----------------------------|-------------|
|                   |   |                       |        | **Less than 1 Year** |   |   |   |   |   | **After 5 years** |   |
| **Capital Commitment** |   | **Total**                  |        |   | **1-3 years** |   | **4-5 years** |   | ** ** |
| Long term debt         |   | $                          | 402,942,000 |   | $ | — |   | $ | 205,000,000 |   | $ | 197,242,000 |   | $ | — |   |
| Operating leases       |   | 5,575,352                  |        | 1,351,678 |   | 2,046,358 |   | 2,042,520 |   | 134,976 |   |
| Program contracts      |   | 98,522,596                 |        | 25,674,890 |   | 46,764,132 |   | 26,083,574 |   | — |   |
|                        |        |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                We anticipate that we will fund such obligations andcommitments with cash flow from operations and borrowings under a new oramended credit facility.

 

**Item7A. Quantitative and Qualitative Disclosures about Market Risk**

 

The Company’s earningsmay be affected by changes in short-term interest rates as a result of itsCredit Agreement.  Under the CreditAgreement, the Company pays interest at the greater of LIBOR plus 5.50% or 12%,

 

24

----

 

currently 12%.  As of March 22, 2002, the six-month LIBOR rate was 2.25%.  The Company has not entered into anyagreements to hedge such risk.  A 2%increase in the LIBOR rate would have no effect on interest expense.  This analysis does not consider the effectsof the reduced level of overall economic activity that could exist in suchenvironment.

 

**Item 8.    Financial Statements and Supplementary Data**

 

**Report of Independent Auditors**

 

The Board of Directors and Stockholders

  Granite BroadcastingCorporation

 

Wehave audited the accompanying consolidated balance sheets of GraniteBroadcasting Corporation as of December 31, 2001 and 2000 and the relatedconsolidated statements of operations, stockholders’ equity (deficit) and cashflows for each of the three years in the period ended December 31, 2001. Ouraudits also included the financial statement schedule listed in the Index atItem 14(a).  These financial statementsand the schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and the schedule based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Granite Broadcasting Corporation at December 31, 2001 and 2000, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

The accompanying financial statements have been preparedassuming that Granite Broadcasting Corporation will continue as a goingconcern.  As more fully described inNote 8, the uncertainty of the timing of the closing of the sale of KNTV andthe ability of its senior lenders to declare a default under the senior creditagreement if the sale is not closed by May 2, 2002 raise substantial doubtabout the Company's ability to continue as a going concern. The financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts and classificiationof liabilities that may result from the outcome of this uncertainty.

 

ERNST & YOUNG LLP

 

New York, New York

February 20, 2002

 

25

----

 

**GRANITE BROADCASTINGCORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                                                                                                                |   | **For the Years Ended December 31,** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                                                                                                |   | **1999**                             |        | **2000** |   | **2001** |   |
| Net revenue                                                                                                                                                         |   | $                                    | 149,846,955 |   | $ | 140,070,247 |   | $ | 113,075,276 |   |
| Station operating expenses                                                                                                                                          |   | 92,874,454                           |        | 102,679,873 |   | 116,373,938 |   |
| Write-off of film contract  rights                                                                                                                                  |   | —                               |        | 1,716,535 |   | — |   |
| Depreciation                                                                                                                                                        |   | 5,454,819                            |        | 5,724,629 |   | 6,076,212 |   |
| Amortization of intangible  assets                                                                                                                                  |   | 26,666,719                           |        | 26,864,596 |   | 26,735,547 |   |
| Corporate expense                                                                                                                                                   |   | 8,861,640                            |        | 10,392,365 |   | 9,686,952 |   |
| Non-cash compensation expense                                                                                                                                       |   | 935,142                              |        | 1,974,292 |   | 1,472,735 |   |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Operating income (loss)                                                                                                                                             |   | 15,054,181                           |        | (9,282,043 | ) | (47,270,108 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Other (income) expenses:                                                                                                                                            |   |                                 |        |   |   |   |   |
| Equity in net loss of investee                                                                                                                                      |   | 253,603                              |        | — |   | — |   |
| Interest expense                                                                                                                                                    |   | 37,616,986                           |        | 29,653,779 |   | 47,481,899 |   |
| Interest income                                                                                                                                                     |   | (1,265,036                           | )           | (678,375 | ) | (1,559,321 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Non-cash interest expense                                                                                                                                           |   | 3,114,890                            |        | 3,007,570 |   | 7,951,079 |   |
| Gain on sale of assets                                                                                                                                              |   | (101,291,854                         | )           | — |   | — |   |
| Gain from insurance claim                                                                                                                                           |   | (4,079,207                           | )           | (1,247,105 | ) | — |   |
| Other                                                                                                                                                               |   | 1,616,072                            |        | 2,079,328 |   | 1,141,058 |   |
| Income (loss) before income  taxes andextraordinary item                                                                                                            |   | 79,088,727                           |        | (42,097,240 | ) | (102,284,823 | ) |
| Provision (benefit) for income  taxes                                                                                                                               |   | 31,574,238                           |        | (10,877,911 | ) | (26,745,010 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Income (loss) before  extraordinary item                                                                                                                            |   | 47,514,489                           |        | (31,219,329 | ) | (75,539,813 | ) |
| Extraordinary (loss) gain, net  of tax benefit of $256,655 and tax expense of $2,473,470 in 1999 and 2000,  respectively and net of tax benefit of $804,720 in 2001 |   | (384,983                             | )           | 3,710,204 |   | (1,207,081 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Net income (loss)                                                                                                                                                   |   | $                                    | 47,129,506  |   | $ | (27,509,125 | ) | $ | (76,746,894 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Net income (loss) attributable  to common shareholders                                                                                                              |   | $                                    | 19,912,092  |   | $ | (56,345,128 | ) | $ | (109,310,870 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Per common share:                                                                                                                                                   |   |                                 |        |   |   |   |   |
| Basic income (loss) before  extraordinary item                                                                                                                      |   | $                                    | 1.46        |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Basic extraordinary (loss) gain                                                                                                                                     |   | (0.03                                | )           | 0.20 |   | (0.07 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Basic net income (loss)                                                                                                                                             |   | $                                    | 1.43        |   | $ | (3.10 | ) | $ | (5.89 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Weighted average common shares  outstanding                                                                                                                         |   | 13,968,611                           |        | 18,203,498 |   | 18,568,811 |   |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Net income (loss) attributable  to common shareholders   —assuming dilution                                                                          |   | $                                    | 21,588,040  |   | $ | (56,345,128 | ) | $ | (109,310,870 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Per common share:                                                                                                                                                   |   |                                 |        |   |   |   |   |
| Diluted income (loss) before  extraordinary item                                                                                                                    |   | $                                    | 1.16        |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Diluted extraordinary (loss)  gain                                                                                                                                  |   | (0.02                                | )           | 0.20 |   | (0.07 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Diluted net income (loss)                                                                                                                                           |   | $                                    | 1.14        |   | $ | (3.10 | ) | $ | (5.89 | ) |
|                                                                                                                                                                |   |                                 |        |   |   |   |   |
| Weighted average common shares  outstanding —assuming dilution                                                                                                 |   | 19,011,795                           |        | 18,203,498 |   | 18,568,811 |   |

 

See accompanying notes.

 

26

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                                                                                                                                                                                      |   | **December 31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
| ASSETS                                                                                                                                                                                                                                                                                                                                                    |   | **2000**         |        | **2001** |   |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                           |   |             |        |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                 |   | $                | 9,209,249   |   | $ | 29,426,856 |   |
| Accounts receivable, less allowance for doubtful accounts ($648,862  in 2000 and $530,273 in 2001)                                                                                                                                                                                                                                                        |   | 28,773,620       |        | 22,411,572 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                      |   | 17,835,745       |        | 16,077,027 |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                      |   | 29,719,328       |        | 6,131,223 |   |
| Net assets held for sale                                                                                                                                                                                                                                                                                                                                  |   | —           |        | 33,201,988 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| TOTAL CURRENT ASSETS                                                                                                                                                                                                                                                                                                                                      |   | 85,537,942       |        | 107,248,666 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| PROPERTY AND EQUIPMENT, NET                                                                                                                                                                                                                                                                                                                               |   | 42,682,736       |        | 33,611,468 |   |
| FILM CONTRACT RIGHTS                                                                                                                                                                                                                                                                                                                                      |   | 8,513,655        |        | 8,377,243 |   |
| OTHER NONCURRENT ASSETS                                                                                                                                                                                                                                                                                                                                   |   | 15,343,241       |        | 43,497,269 |   |
| DEFFERED FINANCING FEES, less  accumulated amortization ($5,772,069 in 2000 and $9,656,214 in 2001)                                                                                                                                                                                                                                                       |   | 5,027,846        |        | 14,887,940 |   |
| INTANGIBLE ASSETS, NET                                                                                                                                                                                                                                                                                                                                    |   | 574,986,006      |        | 523,474,666 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   | $                | 732,091,426 |   | $ | 731,097,252 |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                          |   | $                | 3,744,779   |   | $ | 1,704,626 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                          |   | 2,903,984        |        | 4,255,195 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                 |   | 3,050,888        |        | 3,013,340 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                              |   | 25,504,608       |        | 25,133,014 |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                 |   | 5,085,295        |        | 5,738,440 |   |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                                                                                                                                                                                 |   | 40,289,554       |        | 39,844,615 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| LONG-TERM DEBT                                                                                                                                                                                                                                                                                                                                            |   | 311,390,914      |        | 401,206,439 |   |
| FILM CONTRACT RIGHTS PAYABLE                                                                                                                                                                                                                                                                                                                              |   | 16,582,412       |        | 22,859,716 |   |
| DEFERRED TAX LIABILITYOTHER NONCURRENT LIABILITIES                                                                                                                                                                                                                                                                                                        |   | 96,624,452       |        | 68,868,284 |   |
| OTHER NONCURRENT LIABILITIES                                                                                                                                                                                                                                                                                                                              |   | 19,843,495       |        | 24,353,351 |   |
| REDEEMABLE PREFERRED STOCK                                                                                                                                                                                                                                                                                                                                |   | 239,544,783      |        | 272,108,759 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                                                                                                                                                                                                                                                                                                                     |   |             |        |   |   |
| Common stock: 41,000,000  shares authorized consisting of 1,000,000 shares of Class A Common Stock,  $.01 par value, and 40,000,000 shares of Common Stock  (Nonvoting), $.01 par value; 178,500  shares of Class A Common Stock and  18,447,927 shares of Common Stock (Nonvoting) (18,030,811 shares at December  31, 2000) issued and outstanding |   | 182,093          |        | 186,264 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                |   | 2,295,136        |        | — |   |
| Retained earnings (accumulated  deficit)                                                                                                                                                                                                                                                                                                                  |   | 7,614,114        |        | (96,703,997 | ) |
| Less:                                                                                                                                                                                                                                                                                                                                                     |   |             |        |   |   |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                     |   | (1,091,653       | )           | (1,329,179 | ) |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                   |   | (297,000         | )           | (297,000 | ) |
| Note receivable from officer                                                                                                                                                                                                                                                                                                                              |   | (886,875         | )           | — |   |
| TOTAL STOCKHOLDERS’ EQUITY  (DEFICIT)                                                                                                                                                                                                                                                                                                                |   | 7,815,815        |        | (98,143,912 | ) |
|                                                                                                                                                                                                                                                                                                                                                      |   | $                | 732,091,426 |   | $ | 731,097,252 |   |

 

Seeaccompanying notes.

 

27

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(DEFICIT)**

 

Forthe Years Ended December 31, 1999, 2000 and 2001

 
|                                                                            |   | **Class A  Common Stock** |   | **Common  Stock (Nonvoting)** |   | **Additional  Paid-in Capital** |   | **(Accumulated  Deficit)  Retained Earnings** |       | **Unearned  Compensation** |   | **Note  Receivable  From Officer** |   | **Treasury  Stock** |       | **Total  Stockholders’  Equity (Deficit)** |   |
|---------------------------------------------------------------------------------|--------|---------------------------|--------|-------------------------------|--------|---------------------------------|--------|-----------------------------------------------|------------|----------------------------|--------|------------------------------------|--------|---------------------|------------|-------------------------------------------------|--------|
| Balance as of December 31, 1998                                                 |   | $                         | 1,785  |                          | $      | 116,080                         |   | $                                             | 14,233,125 |                       | $      | (12,006,267                        | )      | $                   | (2,881,008 | )                                               | $      | (886,875 | ) | $ | (47,000 | ) | $ | (1,470,160 | ) |
|                                                                            |   |                      |   |                          |   |                            |   |                                          |       |                       |   |                               |   |                |       |                                            |   |
| Dividends on redeemable preferred stock                                         |   |                      |   |                          |   | (26,717,267                     | )      |                                          |       |                       |   |                               |   |                |       | (26,717,267                                     | )      |
| Accretion  of offering costs related to Cumulative Exchangeable Preferred Stock |   |                      |   |                          |   | (500,148                        | )      |                                          |       |                       |   |                               |   |                |       | (500,148                                        | )      |
| Exercise of stock options                                                       |   |                      |   | 260                           |   | 97,930                          |   |                                          |       |                       |   |                               |   |                |       | 98,190                                          |   |
| Conversion  of convertible preferred stock into Common Stock (Nonvoting)        |   |                      |   | 62,367                        |   | 31,121,033                      |   |                                          |       |                       |   |                               |   |                |       | 31,183,400                                      |   |
| Issuance  of Common Stock (Nonvoting)                                           |   |                      |   | 933                           |   | (933                            | )      |                                          |       |                       |   |                               |   |                |       |                                            |   |
| Repurchase  of Common Stock                                                     |   |                      |   |                          |   |                            |   |                                          |       |                       |   |                               |   | (250,000            | )          | (250,000                                        | )      |
| Grant  of stock award under stock plans                                         |   |                      |   |                          |   | 568                             |   |                                          |       | (568                       | )      |                               |   |                |       |                                            |   |
| Stock  expense related to stock plans                                           |   |                      |   |                          |   | (324,506                        | )      |                                          |       | 935,142                    |   |                               |   |                |       | 610,636                                         |   |
| Net  income                                                                     |   |                      |   |                          |   |                            |   | 47,129,506                                    |       |                       |   |                               |   | —              |       | 47,129,506                                      |   |
| Balance  at December 31, 1999                                                   |   | 1,785                     |   | 179,640                       |   | 17,909,802                      |   | 35,123,239                                    |       | (1,946,434                 | )      | (886,875                           | )      | (297,000            | )          | 50,084,157                                      |   |
| Dividends  on redeemable preferred stock                                        |   |                      |   |                          |   | (28,335,855                     | )      |                                          |       |                       |   |                               |   |                |       | (28,335,855                                     | )      |
| Accretion  of offering costs related to Cumulative Exchangeable Preferred Stock |   |                      |   |                          |   | (500,148                        | )      |                                          |       |                       |   |                               |   |                |       | (500,148                                        | )      |
| Exercise  of stock options                                                      |   |                      |   | 15                            |   | (971,464                        | )      |                                          |       |                       |   |                               |   |                |       | (971,449                                        | )      |
| Issuance  of Common Stock (Nonvoting)                                           |   |                      |   | 653                           |   | (653                            | )      |                                          |       |                       |   |                               |   |                |       |                                            |   |
| Rescission  of stock options exercised                                          |   |                      |   |                          |   | 2,172,852                       |   |                                          |       |                       |   |                               |   |                |       | 2,172,852                                       |   |
| Issuance  of warrants                                                           |   |                      |   |                          |   | 12,149,840                      |   |                                          |       |                       |   |                               |   |                |       | 12,149,840                                      |   |
| Stock  expense related to stock plans                                           |   |                      |   |                          |   | (129,238                        | )      |                                          |       | 854,781                    |   |                               |   |                |       | 725,543                                         |   |
| Net  loss                                                                       |   |                      |   |                          |   |                            |   | (27,509,125                                   | )          |                       |   |                               |   |                |       | (27,509,125                                     | )      |
| Balance  at December 31, 2000                                                   |   | 1,785                     |   | 180,308                       |   | 2,295,136                       |   | 7,614,114                                     |       | (1,091,653                 | )      | (886,875                           | )      | (297,000            | )          | 7,815,815                                       |   |
| Dividends  on redeemable preferred stock                                        |   |                      |   |                          |   | (4,492,611                      | )      | (27,571,217                                   | )          |                       |   |                               |   |                |       | (32,063,828                                     | )      |
| Accretion  of offering costs related to Cumulative Exchangeable Preferred Stock |   |                      |   |                          |   | (500,148                        | )      |                                          |       |                       |   |                               |   |                |       | (500,148                                        | )      |
| Grant  of stock award under stock plans                                         |   |                      |   |                          |   | 573,045                         |   |                                          |       | (573,045                   | )      |                               |   |                |       |                                            |   |
| Issuance  of Common Stock (Nonvoting)                                           |   |                      |   | 4,171                         |   | (4,171                          | )      |                                          |       |                       |   |                               |   |                |       |                                            |   |
| Stock  expense related to stock plans                                           |   |                      |   |                          |   | 63,990                          |   |                                          |       | 1,141,713                  |   |                               |   |                |       | 1,205,703                                       |   |
| Issuance  of warrants                                                           |   |                      |   |                          |   | 2,064,759                       |   |                                          |       |                       |   |                               |   |                |       | 2,064,759                                       |   |
| Discount  on loans to officers                                                  |   |                      |   |                          |   |                            |   |                                          |       | (806,194                   | )      |                               |   |                |       | (806,194                                        | )      |
| Repayment  of Note Receivable from Officer                                      |   |                      |   |                          |   |                            |   |                                          |       |                       |   | 886,875                            |   |                |       | 886,875                                         |   |
| Net  loss                                                                       |   |                      |   |                          |   |                            |   | (76,746,894                                   | )          |                       |   |                               |   |                |       | (76,746,894                                     | )      |
|                                                                            |   |                      |   |                          |   |                            |   |                                          |       |                       |   |                               |   |                |       |                                            |   |
| Balance  at December 31, 2001                                                   |   | $                         | 1,785  |                          | $      | 184,479                         |   | $                                             | —     |                       | $      | (96,703,997                        | )      | $                   | (1,329,179 | )                                               | $      | — |   | $ | (297,000 | ) | $ | (98,143,912 | ) |

 

See accompanying notes.

 

28

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                |   | **For the Years Ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                |   | **1999**                             |       | **2000** |   | **2001** |   |
| Cash  flows from operating activities:                                                              |   |                                 |       |   |   |   |   |
| Net  income (loss)                                                                                  |   | $                                    | 47,129,506 |   | $ | (27,509,125 | ) | $ | (76,746,894 | ) |
| Adjustments  to reconcile net income (loss) to net cash(used in) provided by operating  activities: |   |                                 |       |   |   |   |   |
| Extraordinary  loss (gain)                                                                          |   | 641,638                              |       | (6,183,674 | ) | 2,011,801 |   |
| Amortization  of intangible assets                                                                  |   | 26,666,719                           |       | 26,864,596 |   | 26,735,547 |   |
| Depreciation                                                                                        |   | 5,454,819                            |       | 5,724,629 |   | 6,076,212 |   |
| Non-cash  compensation expense                                                                      |   | 935,142                              |       | 1,974,292 |   | 1,472,735 |   |
| Non-cash  interest expense                                                                          |   | 3,114,890                            |       | 3,007,570 |   | 7,951,079 |   |
| Deferred  tax expense (benefit)                                                                     |   | 5,809,000                            |       | 4,937,000 |   | (26,959,263 | ) |
| Equity  in net loss of investee                                                                     |   | 253,603                              |       | — |   | — |   |
| Gain  on sale of stations                                                                           |   | (101,291,854                         | )          | — |   | — |   |
| Gain  from insurance proceeds over net book value lost                                              |   | (4,079,207                           | )          | (1,247,105 | ) | — |   |
| Change in assets and  liabilities net of effects from acquisitions or dispositions of stations:     |   |                                 |       |   |   |   |   |
| (Increase)  decrease in accounts receivable                                                         |   | (187,117                             | )          | 4,243,724 |   | 4,335,909 |   |
| (Decrease)  increase in accrued liabilities                                                         |   | (3,748,783                           | )          | (2,838,517 | ) | 2,773,245 |   |
| (Decrease)  increase in accounts payable                                                            |   | (910,962                             | )          | 623,904 |   | (1,835,829 | ) |
| NBC affiliation prepayment                                                                          |   | —                               |       | — |   | (27,778,694 | ) |
| WB affiliation payment                                                                              |   | (4,874,778                           | )          | (4,774,439 | ) | (4,523,428 | ) |
| Increase  in film contract rights and other assets                                                  |   | (24,185,421                          | )          | (19,175,687 | ) | 11,644,324 |   |
| Increase  in film contract rights payable and other liabilities                                     |   | 17,596,607                           |       | 10,769,183 |   | 17,892,764 |   |
| Net cash (used in) provided by  operating activities                                                |   | (31,676,198                          | )          | (3,583,649 | ) | (56,950,492 | ) |
| Cash flows from investing  activities:                                                              |   |                                 |       |   |   |   |   |
| Deposit  for station acquisition and other related costs                                            |   | (2,123,116                           | )          | — |   | — |   |
| Proceeds  from sale of stations, net                                                                |   | 171,308,975                          |       | — |   | — |   |
| Insurance  proceeds received                                                                        |   | 8,622,081                            |       | 1,627,572 |   | — |   |
| Investment                                                                                          |   | (133,603                             | )          | (252,869 | ) | — |   |
| Capital  expenditures                                                                               |   | (16,078,762                          | )          | (9,084,673 | ) | (3,231,733 | ) |
| Net cash provided by (used in)   investing activities                                          |   | 161,595,575                          |       | (7,709,970 | ) | (3,231,733 | ) |
| Cash flows from financing  activities:                                                              |   |                                 |       |   |   |   |   |
| Proceeds  from bank loan                                                                            |   | 72,500,000                           |       | 107,000,000 |   | 205,000,000 |   |
| Retirement  of senior subordinated notes                                                            |   | (59,255,000                          | )          | (81,019,763 | ) | — |   |
| Repayment  of bank borrowings                                                                       |   | (136,000,000                         | )          | (10,327,572 | ) | (113,672,428 | ) |
| Payment  of deferred financing fees                                                                 |   | (503,965                             | )          | (600,258 | ) | (10,927,740 | ) |
| Dividends  paid                                                                                     |   | (1,776,629                           | )          | — |   | — |   |
| Purchase  of Common Stock (Nonvoting) for treasury                                                  |   | (250,000                             | )          | — |   | — |   |
| Other  financing activities, net                                                                    |   | 57,367                               |       | (3,081 | ) | — |   |
| Net cash (used in) provided by financing activities                                                 |   | (125,228,227                         | )          | 15,049,326 |   | 80,399,832 |   |
| Net  increase in cash and cash equivalents                                                          |   | 4,691,150                            |       | 3,755,707 |   | 20,217,607 |   |
| Cash  and cash equivalents, beginning of year                                                       |   | 762,392                              |       | 5,453,542 |   | 9,209,249 |   |
| Cash  and cash equivalents, end of year                                                             |   | $                                    | 5,453,542  |   | $ | 9,209,249 |   | $ | 29,426,856 |   |
| Supplemental  information:                                                                          |   |                                 |       |   |   |   |   |
| Cash  paid for interest                                                                             |   | $                                    | 39,031,115 |   | $ | 30,110,599 |   | $ | 41,386,874 |   |
| Cash  paid for income taxes                                                                         |   | 26,800,664                           |       | 297,032 |   | 443,604 |   |
| Non-cash  investing and financing activities:                                                       |   |                                 |       |   |   |   |   |
| Non-cash  capital expenditures                                                                      |   | 600,875                              |       | 175,896 |   | 513,640 |   |
| Stock  dividend                                                                                     |   | 26,717,267                           |       | 28,335,855 |   | 32,063,828 |   |
| Fair  value of warrants issued                                                                      |   | —                               |       | 12,150,000 |   | 2,065,000 |   |

 

See accompanying notes.

 

29

----

 

**GRANITEBROADCASTING CORPORATION**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 —Operations of the Company**

 

The businessoperations of Granite Broadcasting Corporation and its wholly ownedsubsidiaries (the “Company”) consist of nine network affiliated televisionstations (four with NBC, two with ABC, two with the WB Network and one withCBS).  The Company’s stations are locatedin New York, California, Michigan, Indiana, Illinois and Minnesota.

 

**Note 2 — Summaryof Significant Accounting Policies**

 

*Financial statement presentation*

 

The consolidated financial statements include the accounts of GraniteBroadcasting Corporation and its whollyowned subsidiaries.  All significantinter-company accounts and transactions have been eliminated.

 

*Revenue recognition*

 

The Company’s primary source of revenue is the sale of television timeto advertisers. Revenue is recorded when the advertisements are aired.  Other sources of revenue are compensationfrom the networks, studio rental and commercial production activities.  These revenues are recorded when theprograms are aired and the services are performed.

 

*Intangibles*

 

Intangible assets at December 31 are summarized as follows:

 
|                     |   | **2000**     |        | **2001**     |   |
|--------------------------|--------|--------------|-------------|--------------|--------|
| Goodwill                 |   | $            | 222,365,570 |         | $      | 206,560,570 |   |
| Covenant not to compete  |   | 30,000,000   |        | 30,000,000   |   |
| Network affiliations     |   | 129,609,983  |        | 128,741,614  |   |
| Broadcast licenses       |   | 297,336,089  |        | 273,168,965  |   |
|                     |   | 679,311,642  |        | 638,471,149  |   |
| Accumulated amortization |   | (104,325,636 | )           | (114,996,483 | )      |
|                     |   |         |        |         |   |
| Net intangible assets    |   | $            | 574,986,006 |         | $      | 523,474,666 |   |

 

The intangibleassets are characterized as scarce assets with long and productive lives andare being amortized on a straight line basis over forty years, with theexception of the covenant not to compete, which is being amortized over 5 yearsand certain network affiliation agreements which are being amortized betweenseven and ten years.  The Company’speriodically reevaluates the propriety of the carrying amount of intangibleassets as well as the related amortization period to determine whether currentevents and circumstances warrant adjustments to the carrying value and/orrevised estimates of useful lives.  TheCompany currently uses Financial Accounting Standards Board (“FASB”) Statementof Financial Accounting Standards No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of, whereby theevaluation of the carrying amount is based on the Company’s projections of theundiscounted cash flows over the remaining lives of the amortization period ofthe related intangible asset.  To theextent such projections indicate that the undiscounted cash flows are notexpected to be adequate to recover the carrying amounts of intangible assets,such carrying amounts will be written down to their fair market value.

 

30

----

 

In June 2001, theFASB issued Statement of Financial Accounting Standards No. 142, Goodwill andOther Intangible Assets (“Statement 142”), effective January 1, 2002.  Under the new rules, goodwill and otherindefinite lived intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests inaccordance with the statement.  TheCompany will apply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of 2002.  Application of the non-amortizationprovisions of the Statement 142 is expected to result in a decrease inamortization expense of approximately $16,900,000 in 2002.  The Company will test goodwill forimpairment using the two-step process prescribed in Statement 142.  The first step is a screen for potentialimpairment, while the second step measures the amount of the impairment, ifany.  The Company expects to completethe first of the required impairment tests of goodwill and indefinite livedintangible assets in the first quarter of 2002.  Based on steps the Company has taken to prepare for the adoptionof Statement 142, it is likely that a portion of goodwill will be impairedusing the impairment test required by Statement 142.  An impairment that is required to be recognized when adoptingStatement 142 will be reflected as the cumulative effect of a change inaccounting principle in the first quarter of 2002.  The Company has not yet determined the amount of the  potential impairment loss.  The Company plans to complete themeasurement of the impairment loss in the first quarter 2002.

 

*Deferred financing fees*

 

The Company has incurred certain fees in connection with entering into abank credit agreement, the sale of 10-3/8% Notes (as defined), the sale of9-3/8% Notes (as defined) and the sale of 8-7/8% Notes (as defined).  The Company entered into an amended andrestated senior credit agreement in March 2001 and used a portion of theproceeds to repay in full all outstanding borrowings under its then existingbank credit agreement (See Note 8 - Long Term Debt).  The unamortized deferred financing fees related to the thenexisting bank credit agreement of $2,000,000 were written off in the firstquarter of 2001 as an extraordinary loss. The deferred financing fees relatedto the 10-3/8% Notes, the 9-3/8% Notes and the 8-7/8% Notes are being amortizedover ten years. The deferred financing fees related to the current CreditAgreement are being amortized over three years. Amortization of deferredfinancing fees is classified as non-cash interest expense on the consolidatedstatement of operations.

 

*Property and equipment*

 

Property and equipment are recorded at cost and depreciated on astraight-line basis over their estimated useful lives ranging from three to 32years.

 

*Film contract rights*

 

Film contract rights are recorded as assets at gross value when the licenseperiod begins and the films are available for broadcasting.  Film contract rights are amortized on anaccelerated basis over the estimated usage of the films, and are classified ascurrent or noncurrent on that basis. Film contract rights payable are classified as current or noncurrent inaccordance with the payment terms of the various license agreements.  Film contract rights are reflected in theconsolidated balance sheet at the lower of unamortized cost or estimated netrealizable value.

 

During 2000, thedesignated market area (“DMA”) for KNTV was reassigned by Nielsen MediaResearch from the Monterey/Salinas, California DMA to the SanFrancisco-Oakland-San Jose, California DMA effective September 1, 2000.  In connection with this change, KNTV is nolonger able to broadcast certain syndicated programs that are licensed to otherstations in the San Francisco-Oakland-San Jose, California DMA.  Consequently, the Company took a one-timecharge and wrote-off the book value of these programs totaling $1,716,000.

 

31

----

 

At December 31, 2001, the obligation for programming that had not beenrecorded because the program rights were not available for broadcastingaggregated $47,851,000.

 

*Barter transactions*

 

Revenue from barter transactions is recognized when advertisements arebroadcast and merchandise or services received are charged to expense whenreceived or used.  The net effect ofbarter transactions on the Company’s results of operations is not material.

 

*Advertising*

 

The cost of advertising is expensed as incurred.  Advertising expense was $3,273,000,$2,853,000 and $2,028,000 for the years ended December 31, 1999, 2000 and 2001respectively.

 

*Use of estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from those estimates.

 

*Cash and cash equivalents*

 

Cash and cash equivalents include funds invested overnight in Eurodollardeposits.

 

32

----

 

*Netincome (loss) per common share*

 

The followingtable sets forth the computation of basic and diluted earnings per share:

 
|                                                                                                                                                                                                 |   | **Years Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                                                                                 |   | **1999**                     |       | **2000** |   | **2001** |   |
| Net income (loss) before  extraordinary item                                                                                                                                                         |   | $                            | 47,514,489 |   | $ | (31,219,329 | ) | $ | (75,539,813 | ) |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Extraordinary (loss) gain on  early extinguishment of debt, net of tax benefit of $256,655 and tax expense  of $2,473,470 in 1999 and 2000, respectively and net of tax benefit of  $804,720 in 2001 |   | (384,983                     | )          | 3,710,204 |   | (1,207,081 | ) |
| Net income (loss)                                                                                                                                                                                    |   | 47,129,506                   |       | (27,509,125 | ) | (76,746,894 | ) |
| LESS:                                                                                                                                                                                                |   |                         |       |   |   |   |   |
| Preferred stock dividends:                                                                                                                                                                           |   |                         |       |   |   |   |   |
| Convertible preferred                                                                                                                                                                                |   | 1,675,949                    |       | — |   | — |   |
| Exchangeable preferred                                                                                                                                                                               |   | 25,041,318                   |       | 28,335,855 |   | 32,063,828 |   |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Accretion on exchangeable  preferred                                                                                                                                                                 |   | 500,148                      |       | 500,148 |   | 500,148 |   |
| Net income (loss) attributable  to common shareholders                                                                                                                                               |   | 19,912,091                   |       | (56,345,128 | ) | (109,310,870 | ) |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Effect of dilutive securities:                                                                                                                                                                       |   |                         |       |   |   |   |   |
| PLUS:                                                                                                                                                                                                |   |                         |       |   |   |   |   |
| Convertible preferred stock  dividends                                                                                                                                                               |   | 1,675,949                    |       | — |   | — |   |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Net income (loss) attributable  to common shareholders — assuming dilution                                                                                                                      |   | $                            | 21,588,040 |   | $ | (56,345,128 | ) | $ | (109,310,870 | ) |
| Weighted average common shares  outstanding for  basic net income (loss) per share                                                                                                         |   | 13,968,611                   |       | 18,203,498 |   | 18,568,811 |   |
| ADD:                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Effect of dilutive securities:                                                                                                                                                                       |   |                         |       |   |   |   |   |
| Preferred stock conversions                                                                                                                                                                          |   | 4,151,240                    |       |   |   |   |   |
| Stock options                                                                                                                                                                                        |   | 891,944                      |       |   |   |   |   |
| Total potential dilutive common  shares                                                                                                                                                              |   | 5,043,184                    |       | (a | ) | (a | ) |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Adjusted weighted average  common shares outstanding — assuming dilution                                                                                                                        |   | 19,011,795                   |       | 18,203,128 |   | 18,568,811 |   |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Per Common Share:                                                                                                                                                                                    |   |                         |       |   |   |   |   |
| Basic income (loss) before  extraordinary item                                                                                                                                                       |   | $                            | 1.46       |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Basic extraordinary (loss) gain                                                                                                                                                                      |   | (0.03                        | )          | 0.20 |   | (0.07 | ) |
| Basic net income (loss) per  share                                                                                                                                                                   |   | $                            | 1.43       |   | $ | (3.10 | ) | $ | (5.89 | ) |
|                                                                                                                                                                                                 |   |                         |       |   |   |   |   |
| Diluted income (loss) before  extraordinary item                                                                                                                                                     |   | $                            | 1.16       |   | $ | (3.30 | ) | $ | (5.82 | ) |
| Diluted extraordinary (loss)  gain                                                                                                                                                                   |   | (0.02                        | )          | 0.20 |   | (0.07 | ) |
| Diluted net income (loss) per share                                                                                                                                                                  |   | $                            | 1.14       |   | $ | (3.10 | ) | $ | (5.89 | ) |

 

----

(a)                                  Noadjustments were made to the dilutive per share calculation for the years endedDecember 31, 2000 and 2001, as doing so would have been antidilutive.

 

33

----

 

**Note 3 — Asset Disposition**

 

On May 31, 2000, the Company entered into a series of definitiveagreements with the NBC Television Network (“NBC”).  Pursuant to these agreements, KNTV became the NBC affiliate inthe San Francisco–Oakland–San Jose California DMA for a ten–yearterm commencing on January 1, 2002 (the “San Francisco Affiliation”).  The Company also extended the affiliationagreements with KSEE, WEEK and KBJR until December 31, 2011.  As a part of such extension, NBC paid theCompany $2,430,000 in affiliate compensation in equal semi-annual installmentsthrough December 31, 2001, at which time the affiliation payments terminated.

 

In consideration for the San Francisco Affiliation, the Company was topay $362,000,000 in nine annual installments, with the initial payment in theamount of $61,000,000 due January 1, 2002. On March 6, 2001, the San Francisco Affiliation wasamended to reduce the January 1, 2002 installment to $30,500,000 anddefer the remaining $30,500,000 of the original initial payment untilJanuary 1, 2005.  The Companyprepaid the January 1, 2002 installment on March 6, 2001 withproceeds from the Credit Agreement, paying $27,778,694, which represented thepresent value of that installment discounted at 12%.

 

In addition, theCompany granted NBC a warrant to purchase 2,500,000 shares of the Company’sCommon Stock (Nonvoting), par value $0.01 per share (the “Common Stock(Nonvoting)”), at an exercise price of $12.50 per share (the “A Warrant”) and awarrant to purchase 2,000,000 shares of Common Stock (Nonvoting) at an exerciseprice of $15.00 per share (the “B Warrant”). The A Warrant vested in full on December 31, 2000.  The B Warrant vested in full on January 1,2002, since the San Francisco Affiliation was in effect on that date.  Each warrant, once vested, remainsexercisable until December 31, 2011 (or, if earlier, any date prior to January1, 2007 on which the San Francisco Affiliation is terminated) and may beexercised for cash or surrender of a portion of a then exercisableWarrant.  The fair value of the warrantsof $12,150,000 has been recorded as a non-current asset and will be amortizedover the ten-year life of the San Francisco Affiliation.

 

*Asset held for sale*

 

On December 14,2001, the Company entered into a definitive agreement with NBC to sellKNTV.  NBC will pay the Company$230,000,000 in cash plus a working capital adjustment.  In addition, at the closing, NBC will refundthe Company a pro rata portion of the affiliation payment made to NBC in 2001.The consummation of the sale is contingent upon approval by the FCC andsatisfaction of other customary closing conditions and is expected to closeprior 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 NBCwith the FCC.  The Company believes thatPaxson’s opposition is without merit and anticipates that the FCC will approvethe transfer prior to May 2, 2002.  TheCompany will use the proceeds from the sale of KNTV (i) to repay outstandingdebt and deferred  interest under theexisting senior credit facility, (ii) to pay taxes and other fees associatedwith the sale and (iii) to the extent there are remaining proceeds, for workingcapital purposes.  The San FranciscoAffiliation will terminate upon the closing of the sale and the Company willnot be required to make any further affiliation payments to NBC (provided thatthe sale of KNTV closes prior to January 1, 2003).  The A and B Warrants to issued to NBC as part of the SanFrancisco Affiliation will be returned to the Company.  The Company’s affiliation agreements forKSEE-TV, WEEK-TV, and KBJR-TV, which involve no payment obligations, willremain in effect until their expiration on December 31, 2011. The net assets ofKNTV are recorded on the consolidated balance sheet as of December 31, 2001 asassets held for sale.

 

34

----

 

**Note 4 — Property and Equipment**

 

The major classifications ofproperty and equipment are as follows:

 
|                                 |   | **December 31,** |       |
|--------------------------------------|--------|------------------|------------|
|                                 |   | **2000**         |       | **2001** |   |
| Land                                 |   | $                | 1,750,522  |   | $ | 1,546,960 |   |
| Buildings and improvements           |   | 14,969,602       |       | 14,699,158 |   |
| Furniture and fixtures               |   | 8,397,648        |       | 7,802,668 |   |
| Technical equipment and other        |   | 52,655,328       |       | 39,857,966 |   |
|                                 |   | 77,773,100       |       | 63,906,752 |   |
|                                 |   |             |       |   |   |
| Less:  Accumulated depreciation |   | 35,090,364       |       | 30,295,284 |   |
|                                 |   |             |       |   |   |   |   |
| Net property and equipment           |   | $                | 42,682,736 |   | $ | 33,611,468 |   |

 

**Note 5 — Other Accrued Liabilities**

 

Other accrued liabilities aresummarized below:

 
|                      |   | **December 31,** |      |
|---------------------------|--------|------------------|-----------|
|                      |   | **2000**         |      | **2001** |   |
| Compensation and benefits |   | $                | 1,373,761 |   | $ | 1,537,575 |   |
| Taxes payable             |   | 300,873          |      | 69,874 |   |
| Other                     |   | 1,376,254        |      | 1,405,891 |   |
|                      |   |             |      |   |   |
| Total                     |   | $                | 3,050,888 |   | $ | 3,013,340 |   |

 

**Note 6 — Other Current Liabilities**

 

Other current liabilities aresummarized below:

 
|                        |   | **December 31,** |      |
|-----------------------------|--------|------------------|-----------|
|                        |   | **2000**         |      | **2001** |   |
| WB affiliation payment, net |   | $                | 3,905,765 |   | $ | 4,273,691 |   |
| Barter payable              |   | 851,482          |      | 896,385 |   |
| Other                       |   | 328,048          |      | 568,364 |   |
|                        |   |             |      |   |   |
| Total                       |   | $                | 5,085,295 |   | $ | 5,738,440 |   |

 

35

----

 

**Note 7 — Other Current Assets**

 

Other current assets aresummarized below:

 
|                            |   | **December 31,** |       |
|---------------------------------|--------|------------------|------------|
|                            |   | **2000**         |       | **2001** |   |
| Income tax receivable           |   | $                | 19,431,000 |   | — |   |
| Barter and other receivables    |   | 2,972,067        |       | 2,609,253 |   |
| Prepaid film contract rights    |   | 1,136,645        |       | 1,006,703 |   |
| Insurance settlement receivable |   | 2,617,646        |       | 152,575 |   |
| Other                           |   | 3,561,970        |       | 2,362,692 |   |
|                            |   |             |       |   |   |
| Total                           |   | $                | 29,719,328 |   | $ | 6,131,223 |   |
|                                 |        |                  |            |  |  |  |  |

 

**Note 8 — Long-term Debt**

 

The carrying amounts and fairvalues of the Company’s long–term debt are as follows:

 
|                                                         |   | **December 31, 2000** |        | **December 31, 2001** |   |
|--------------------------------------------------------------|--------|-----------------------|-------------|-----------------------|--------|
|                                                         |   | **Carrying Amount**   |        | **Fair Value**        |   | **Carrying Amount** |   | **Fair Value** |   |
| Senior Bank Debt                                             |   | $                     | 113,672,428 |                  | $      | 113,672,428 |   | $ | 203,451,677 |   | $ | 203,451,677 |   |
| 9-3/8% Senior SubordinatedNotes, net of unamortized discount |   | 34,573,475            |        | 21,229,375            |   | 34,591,067 |   | 26,622,199 |   |
| 10-3/8% Senior Subordinated  Notes                           |   | 100,717,000           |        | 59,926,615            |   | 100,717,000 |   | 91,148,885 |   |
| 8-7/8% Senior SubordinatedNotes, net of unamortized discount |   | 62,428,011            |        | 37,405,125            |   | 62,446,695 |   | 49,936,809 |   |
|                                                         |   |                  |        |                  |   |   |   |   |   |
| Total                                                        |   | $                     | 311,390,914 |                  | $      | 231,716,575 |   | $ | 401,206,439 |   | $ | 371,159,570 |   |

 

36

----

 

The fair value of the Company’s Senior SubordinatedNotes is estimated based on quoted market prices.  The carrying amount of the Company’s borrowings under its CreditAgreement approximated fair value.

 

37

----

 

*Senior BankDebt*

 

On March 6, 2001, the Company entered into anamended and restated $205,000,000 Senior Credit Agreement (the “CreditAgreement”).  The Credit Agreementconsists of a $110,000,000 Tranche A term loan and a $95,000,000 Tranche Bloan.  The proceeds from the CreditAgreement were used (i) to repay all outstanding borrowings of approximately$114,000,000 under the Company’s then existing senior revolving creditfacility, (ii) to prepay the first installment under the NBC AffiliationAgreement (see Note 3), (iii) to pay certain fees and expenses associated with theCredit Agreement and (iv) for general working capital purposes.

 

The Tranche A and Tranche B term loans bearinterest which is payable monthly at the greater of LIBOR plus 5.50% or12%.  In addition, the Tranche B termloan accrues simple deferred interest at an annual rate of 6% which is payablewhen the Credit Agreement matures on December 31, 2003.  The Company granted to the Tranche Blenders a warrant to purchase 753,491 shares of Common Stock (Nonvoting), parvalue $.01 per share, at an exercise price of $1.75 per share.  The warrant is fully vested and remainsexercisable until March 6, 2006.  Thefair value, estimated to be $2,065,000 has been recorded as a discount to theamount outstanding under the Credit Agreement and is being amortized over thelife of the Credit Agreement.

 

The Credit Agreement is secured by substantiallyall the assets of the Company, as well as a pledge of all issued andoutstanding shares of capital stock of the Company’s subsidiaries andguaranteed by all the subsidiaries of the Company.  The Credit Agreement requires the Company to maintain compliancewith 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 thepayments for capital expenditures and prohibit incurrence of additional debt,the purchase of the Company’s common stock, the repurchase of subordinatedindebtedness and the declaration and payment of cash dividends.

 

On October 23, 2001, the Company amended theCredit Agreement to, among, other matters, modify certain financial ratios toreflect the current advertising climate. As a result, the Company was in compliance with its amended debt covenantsas of September 30, 2001 and December 31, 2001.  In connection with, and as a condition to, amending thosecovenants, the Company’s senior lenders required the Company to sell certainTranche A assets and repay the Tranche A loans in accordance with specifiedterms and schedules.  KNTV is not aTranche A asset, however, the senior lenders have waived the Tranche A assetsale covenant through May 2, 2002 to allow the Company to consummate the saleof KNTV.  The Company anticipates thatthe Credit Agreement debt will be repaid in full upon consummation of the KNTVsale.  If the sale of KNTV does notclose prior to May 2, 2002 or if the Company does not repay the Tranche A loansin full following consummation of such sale, the Company may be in defaultunder the Credit Agreement, unless the Company obtains further waivers from itssenior lenders.  The Company iscurrently in discussion with a senior lender for a new or amended senior creditagreement to be available upon the closing of the sale of KNTV.

 

*Senior Subordinated Notes*

 

In May 1995, the Company issued $175,000,000 aggregate principal amountof its 10-3/8% Senior Subordinated Notes (the “10-3/8% Notes”) due May 15,2005.  Since then, the Companyrepurchased a total of $74,283,000 face amount of its 10–3/8% Notes atvarious prices.

 

The 10-3/8% Notes are redeemable at any time on orafter May 15, 2000, at the option of the Company, in whole or in part from timeto time, at certain prices declining annually to 100% of the principal amounton or after May 15, 2002, plus accrued interest.  The Company is required to offer to purchase all outstanding10-3/8% Notes at 101% of the principal amount plus accrued interest in theevent of a Change of Control (as defined in the Indenture governing the 10-3/8%Notes).

 

38

----

 

The 10-3/8% Notes are subordinated in right ofpayment to all existing and future Senior Debt (as defined in the Indenturegoverning the 10-3/8% Notes) and rank *pari passu* with all senior subordinateddebt and senior to all subordinated debt of the Company.  The Indenture governing the 10-3/8% Notescontains certain covenants that, among other things, limit the ability of theCompany and its subsidiaries to incur debt, pay cash dividends on or repurchasecapital stock, enter into agreements prohibiting the creation of liens orrestricting the ability of a subsidiary to pay money or transfer assets to theCompany, enter into certain transactions with their affiliates, dispose ofcertain assets and engage in mergers and consolidations.

 

In February 1996, the Company completed anoffering of $110,000,000 principal amount of its 9–3/8% SeniorSubordinated Notes (the “9-3/8% Notes”) due December 1, 2005 at a discount,resulting in net proceeds to the Company of $109,450,000.  Since then, the Company repurchased a totalof $75,340,000 principal amount of its 9–3/8% Notes at various prices.

 

The 9-3/8% Notes are redeemable at any time on orafter December 1, 2000, at the option of the Company, in whole or in part, atcertain prices declining annually to 100% of the principal amount on or afterDecember 1, 2002, plus accrued interest. The Company is required to offer to purchase all outstanding 9-3/8%Notes at 101% of the principal amount plus accrued interest in the event of aChange of Control (as defined in the Indenture governing the 9-3/8% Notes).

 

The 9-3/8% Notes are subordinate in right of payment to all existingand future Senior Debt (as defined in the Indenture governing the 9–3/8%Notes) and rank *pari passu* with all senior subordinated debt and senior toall subordinated debt.  The Indenturegoverning the 9–3/8% Notes contains certain covenants that, among otherthings, limit the ability of the Company and its subsidiaries to incur debt,make certain restricted payments, enter into certain transactions with theiraffiliates, dispose of certain assets, incur liens securing subordinated debtof the Company, engage in mergers and consolidations and restrict the abilityof the subsidiaries of the Company to make distributions and transfers to theCompany.

 

In May 1998, the Company completed an offering of $175,000,000principal 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 theCompany of $174,482,000.  Since then, the Company repurchased a total of$112,435,000 principal amount of its 8–7/8% Notes at various prices.

 

The 8–7/8% Notes are redeemable in the event that on or beforeMay 15, 2001 the Company receives net proceeds from the sale of its CapitalStock (other than Disqualified Stock (each as defined in the Indenturegoverning the 8–7/8% Notes)), in which case the Company may, at itsoption and from time to time, use all or a portion of any such net proceeds toredeem certain amounts of the 8–7/8% Notes with certain limitations.  In addition, the 8–7/8% Notes areredeemable at any time on or after May 15, 2003 at the option of the Company,in whole or in part, at certain prices declining annually to 100% of theprincipal amount on or after May 15, 2006, plus accrued interest.  The Company is required to offer to purchaseall outstanding 8–7/8% Notes at 101% of the principal amount thereof plusaccrued interest in the event of a Change of Control (as defined in theIndenture governing the 8–7/8% Notes).

 

The 8-7/8% Notes are subordinate in right of payment to all existingand future Senior Debt (as defined in the Indenture governing the 8-7/8% Notes)and rank *paripassu* with all senior subordinated debt and senior to allsubordinated debt.  The Indenture governingthe 8-7/8% Notes contains certain covenants that, among other things, limit theability of the Company and its subsidiaries to incur debt, make certainrestricted payments, enter into certain transactions with their affiliates,dispose of certain assets, incur liens securing subordinated debt of theCompany, engage in mergers and consolidations and restrict the ability of thesubsidiaries of the Company to make distributions and transfers to the Company.

 

39

----

 

During 1999, the Company recognized anextraordinary loss of $642,000 related to the repurchases of subordinateddebt.  Such extraordinary losses werethe result of premiums paid and the write-off of related deferred financingfees, offset in part, by gains recognized on that subordinated debt repurchasedat a discount.  During 2000 the Companyrecognized an extraordinary gain of $3,710,000 related to the repurchase ofsubordinated debt.  The extraordinarygain was the result of gains recognized on that subordinated debt repurchasedat a discount, offset in part, by the write-off of related deferred financingfees.  During 2001, the Companyrecognized an extraordinary loss, net of tax, of $1,207,000 related to therepayment of all outstanding borrowings under the then existing bank creditagreement and the write-off of related deferred financing fees.

 

The scheduled principal maturities on all long–termdebt for the five years subsequent to December 31, 2001, are as follows:

 
| 2002                |   | $           | —      |   |
|---------------------|--------|-------------|-------------|--------|
| 2003                |   | 205,000,000 |        |
| 2004                |   | —      |        |
| 2005                |   | 135,377,000 |        |
| 2006                |   | —      |        |
| 2007 and thereafter |   | 62,565,000  |        |
|                |   | $           | 402,942,000 |   |

 

**Note 9 — Commitments**

 

Future minimum lease payments under long-termoperating leases as of December 31, 2001 are as follows:

 
| 2002                |   | $         | 1,351,678 |   |
|---------------------|--------|-----------|-----------|--------|
| 2003                |   | 1,005,359 |      |
| 2004                |   | 1,040,999 |      |
| 2005                |   | 1,066,178 |      |
| 2006                |   | 976,342   |      |
| 2007 and thereafter |   | 134,796   |      |
|                |   | $         | 5,575,352 |   |
|                     |        |           |           |        |  |

 

Rent expense, including escalation charges, wereapproximately $1,559,000, $1,416,000 and $1,412,000 for the years endedDecember 31, 1999, 2000 and 2001, respectively.

 

Future payments under film contract rightsagreements as of December 31, 2001 are as follows:

 
| 2002   |   | $          | 25,674,890 |   |
|--------|--------|------------|------------|--------|
| 2003   |   | 24,487,427 |       |
| 2004   |   | 22,276,705 |       |
| 2005   |   | 21,119,616 |       |
| 2006   |   | 4,963,958  |       |
|   |   | $          | 98,522,596 |   |

 

40

----

 

**Note 10 — Redeemable Preferred Stock**

 

*Series A Preferred Stock*

 

The Company authorized 100,000 shares of itsSeries A Convertible Preferred Stock (“Series A Stock”), par value $.01 pershare, which were issued at an aggregate price of $1,210,000.  All outstanding shares of the Series A Stockwere converted into shares of the Company’s Common Stock (Nonvoting), par value$.01 per share (the “Common Stock (Nonvoting)”) in August 1995.  Prior to conversion, dividends accrued onthe Series A Stock at an annual rate of $.40 per share which accumulated,without interest, if unpaid.  Accruedbut unpaid dividends on the Series A Stock totaled $262,844 at December 31,2000 and 2001.  Accrued dividends aredue and payable on the date on which such dividends may be paid under theCompany’s debt instruments.

 

*12-3/4% Cumulative Exchangeable Preferred Stock*

 

In January 1997, the Company authorized theissuance of 400,000 shares of its 12-3/4% Cumulative Exchangeable PreferredStock (the “12-3/4% Cumulative Exchangeable Preferred Stock”), par value $.01per share. In connection with the Company’s acquisition of WDWB-TV, 150,000shares of the 12-3/4% Cumulative Exchangeable Preferred Stock were issued inJanuary 1997 at a price of $1,000 per share. Holders of the 12–3/4% Cumulative Exchangeable Preferred Stock areentitled to receive dividends at an annual rate of 12-3/4% per share payablesemi-annually on April 1 and October 1 of each year.  The Credit Agreement does not permit the payment of cash dividendson the 12-3/4% Cumulative Exchangeable Preferred Stock.  The Company can pay dividends on or prior toApril 1, 2002 in additional shares of 12–3/4% Cumulative ExchangeablePreferred Stock.  On and after October1, 2002, the Company is required to pay such dividends in cash.  However, the payment of cash dividends onthe 12-3/4% Cumulative Exchangeable Preferred Stock is restricted by the termsof the indentures governing the Company’s senior subordinated notes and isprohibited under the terms of the Credit Agreement.  Dividends on the 12-3/4% Cumulative Exchangeable Preferred Stockare cumulative and accrue without interest, if unpaid.

 

The 12-3/4% Cumulative Exchangeable PreferredStock is entitled to a preference of $1,000 per share initially, plusaccumulated and unpaid dividends in the event of liquidation or winding up ofthe Company ($275,776,849 liquidation value at December 31, 2001).  The Company is required, subject to certainconditions, to redeem all of the 12-3/4% Cumulative Exchangeable PreferredStock outstanding on April 1, 2009, at a redemption price equal to 100% of thethen effective liquidation preference thereof, plus, without duplication,accumulated and unpaid dividends to the date of redemption.

 

Subject to certain conditions, each share of the12-3/4% Cumulative Exchangeable Preferred Stock is exchangeable, in whole or inpart, at the option of the Company, for the Company’s 12-3/4% ExchangeDebentures (the “12-3/4% Exchange Debentures”) on any scheduled dividendpayment date at the rate of $1,000 principal amount of 12-3/4% ExchangeDebentures for each share of 12–3/4% Cumulative Exchangeable PreferredStock outstanding at the time of the exchange.

 

41

----

 

**Note 11 — Stockholders’ Equity (Deficit)**

 

*Stock option plans*

 

In April 1990 the Company adopted a stock optionplan (the “Stock Option Plan”) for officers and certain key employees. TheStock Option Plan terminated on April 1, 2000. At December 31, 2000 and 2001, options granted under the Stock OptionPlan were outstanding for the purchase of 4,629,925 and 4,529,425 shares ofCommon Stock (Nonvoting), respectively.

 

On April 27, 2000, the Company adopted a new stockoption plan (the “2000 Stock Option Plan”) for officers and certain keyemployees.  The number of shares ofCommon Stock (Nonvoting) subject to options available for grant is4,000,000.  Options may be granted underthe 2000 Stock Option Plan at an exercise price (for tax-qualified incentivestock options) of not less than 100% of the fair market value of the CommonStock (Nonvoting) on the date the option is granted, or 110% of such fairmarket value for option recipients who hold 10% or more of the Company’s votingstock.  The exercise price fornon-qualified stock options may be less than, equal to or greater than the fairmarket value of the Common Stock (Nonvoting) on the date the option is granted.At December 31, 2000 and 2001, options granted under the 2000 Stock Option Planwere outstanding for the purchase of 624,500 and 649,500 shares of Common Stock(Nonvoting) respectively.

 

During 2000, certain officers of the Companyexercised stock options.  The provisionsof the Stock Option Plan allow an option-holder to pay the exercise price andapplicable federal and state withholding taxes using previously owned shares asthe method of payment.  Consequently,the Company would have had to remit approximately $1,000,000 in withholdingtaxes on the income generated from exercise. Due to concerns about the impact this payment would have had on theCompany’s cash position at that time, the board of directors approved arescission of those options exercises. As a result, the Company recorded aone-time non-cash charge to earnings of $1,192,000, representing the lost tax deductionthe Company would have received had the option exercises not been rescinded.

 

On July 24, 2001, the Company repriced theexercise prices of options to purchase an aggregate of 802,975 shares of CommonStock (Nonvoting) from prices ranging from $11.125 - $12.438 to $7.563.

 

On March 1, 1994, the Company adopted a DirectorStock Option Plan (the “Director Option Plan”) providing for the grant, fromtime to time, of nonqualified stock options to non-employee directors of theCompany to purchase an aggregate of 300,000 shares of Common Stock(Nonvoting).  On July 27, 1999, theDirector Option Plan was amended to increase the shares of Common Stock(Nonvoting) subject to options available for grant to 1,000,000. As of December31, 2000 and 2001, options granted under the Director Option Plan wereoutstanding for the purchase of 861,360 and 809,060 shares of Common Stock(Nonvoting), respectively. The options granted under the Director Option Planserve as compensation for attendance at regularly scheduled meetings and forservice on certain committees of the Board of Directors.

 

The Company has adopted the disclosure–onlyprovisions of Statement of Financial Accounting Standards No. 123 “Accountingfor Stock–Based Compensation” (“SFAS 123”).  Accordingly, no compensation expense has been recognized for thestock option plans.  For purposes ofSFAS 123 pro forma disclosures, the estimated fair value of the options isamortized to expense over the options’ vesting period; therefore, the impact onpro forma net income (loss) in 1999, 2000 and 2001 may not be representative ofthe impact in future years.  TheCompany’s pro forma information for years ended December 31, follows:

 
|                                    |   | **1999** |       | **2000** |   | **2001**    |   |
|-----------------------------------------|--------|----------|------------|----------|--------|-------------|--------|
| Pro forma net income (loss)             |   | $        | 45,661,497 |     | $      | (30,022,799 | )      | $ | (78,860,420 | ) |
| Pro forma net income (loss) per  share: |   |     |       |     |   |        |   |
| Basic                                   |   | $        | 1.32       |     | $      | (3.23       | )      | $ | (6.00 | ) |
| Diluted                                 |   | $        | 1.06       |     | $      | (3.23       | )      | $ | (6.00 | ) |

 

42

----

 

The fair value for each option grant was estimatedat the date of grant using the Black Scholes option pricing model with thefollowing assumptions for the various grants made during 1999, 2000 and 2001:risk–free interest rate of 5.93% in 1999, 4.80% in 2000 and 4.08% in2001; no dividend yield; expected volatility of 45% in 1999, 81% in 2000 and86% in 2001; and expected lives of four years in 1999 and 2000 and five yearsin 2001.

 

The Black Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable.  In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility.   The Company’s employee stock options havecharacteristics significantly different from those of traded options andchanges in the subjective input assumptions can materially affect the fairvalue estimate.

 
|                                                            |   | **1999**    |   | **2000**                                     |   | **2001**    |      |
|-----------------------------------------------------------------|--------|-------------|--------|----------------------------------------------|--------|-------------|-----------|
|                                                            |   | **Options** |   | **Weighted  Average****Exercise price** |   | **Options** |      | **Weighted  Average****Exercise   price** |   | **Options** |   | **Weighted  Average****Exercise   price** |   |
| Outstanding at beginning of  year                               |   | 2,053,225   |   | $                                            | 8.51   |        | 5,479,310 |   | $ | 8.10 |   | 6,115,785 |   | $ | 7.51 |   |
| Granted                                                         |   | 3,637,385   |   | 7.78                                         |   | 720,375     |      | 2.97 |   | 25,000 |   | 1.50 |   |
| Exercised                                                       |   | (31,800     | )      | 4.63                                         |   | (1,400      | )         | 6.64 |   | — |   | — |   |
| Forfeited                                                       |   | (179,500    | )      | 6.95                                         |   | (82,500     | )         | 7.05 |   | (182,800 | ) | 9.23 |   |
| Outstanding at end of year                                      |   | 5,479,310   |   | 8.10                                         |   | 6,115,785   |      | 7.51 |   | 5,957,985 |   | 6.98 |   |
| Exercisable at end of year                                      |   | 1,779,810   |   | 7.90                                         |   | 2,600,710   |      | 7.74 |   | 3,221,910 |   | 6.68 |   |
| Weighted-average fair value of  options granted during the year |   | $           | 2.87   |                                         |   |        | $         | 1.84 |   |   |   | $ | 1.01 |   |   |   |
|                                                                 |        |             |        |                                              |        |             |           |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                            |           | **Options Outstanding** |      | **Options Exercisable**                            |             |
|---------------------------------|----------------|-------------------------|-----------|----------------------------------------------------|------------------|
| **Range of****Exercise Prices** |           | **at 12/31/01**         |      | **Weighted-Average Remaining****Contractual Life** |             | **Weighted-Average****Exercise Price** |   | **Number****Outstandingat 12/31/01** |   | **Weighted-Average****Exercise Price** |   |
| $                               | 1.05 - $2.00   |                    | 564,500   |                                               | 8.96 years       |   | $ | 1.50 |   | 64,400 |   | $ | 1.50 |   |
| $                               | 3.00 - $5.50   |                    | 445,225   |                                               | 2.44 years       |   | 3.81 |   | 442,725 |   | 3.80 |   |
| $                               | 6.13 - $6.88   |                    | 1,665,200 |                                               | 7.11  years |   | 6.48 |   | 1,111,600 |   | 6.46 |   |
| $                               | 7.00 - $9.75   |                    | 2,023,260 |                                               | 6.52 years       |   | 7.61 |   | 1,514,735 |   | 7.61 |   |
| $                               | 10.00 - $12.44 |                    | 1,259,800 |                                               | 6.83 years       |   | 10.20 |   | 88,450 |   | 11.81 |   |
|                                 |                |                         |           |                                                    |                  |  |  |  |  |  |  |  |  |  |

 

43

----

 

*Management Stock Plan*

 

In April 1993, the Company adopted a ManagementStock Plan providing for the grant from time to time of awards denominated inshares of Common Stock (Nonvoting) (the “Bonus Shares”) to salaried executiveemployees of the Company.  On February15, 2001, the Company increased the reserve of shares of Common Stock(Nonvoting) available for grant under the Management Stock Plan to 1,500,000from 1,000,000.  Shares generally vestover a five-year period. As of December 31, 2001, the Company has allocated atotal of 1,069,812 Bonus Shares pursuant to the Management Stock Plan, 920,762of which had vested through December 31, 2001 For the years ended December 31, 2000 and 2001, 58,875 and 293,500shares, respectively, were granted pursuant to the Management Stock Plan.  The weighted-average grant-date fair valueof those shares is $6.54 and $2.49, respectively.

 

*Non-Employee Directors’ Stock Plan*

 

In April 1997, the Company adopted a Non-EmployeeDirectors’ Stock Plan (the “Director Stock Plan”), providing an annual grant ofthe Company’s Common Stock (Nonvoting) to each eligible non-employee directorof a number of shares equal to $20,000 divided by the fair market value of theCommon Stock (Nonvoting) on the date of grant. On December 31, 2000, the Company increased the reserve of shares ofCommon Stock (Nonvoting) for grant under the Director Stock Plan from 100,000shares to 400,000 shares.  Sharesgranted vest immediately.  For the yearsended December 31, 2000 and 2001, 15,800 and 160,000 shares, respectively, weregranted pursuant to the Director Stock Plan with weighted-average grant datefair values of $10.13 and $1.00 respectively.

 

*Employee Stock Purchase Plan*

 

On February 28, 1995, the Company adopted theGranite Broadcasting Corporation Employee Stock Purchase Plan (the “StockPurchase Plan”) for the purpose of enabling its employees to acquire ownershipof Common Stock (Nonvoting) at a discount, thereby providing an additionalincentive to promote the growth and profitability of the Company.  The Stock Purchase Plan enables employees ofthe Company to purchase up to an aggregate of 1,000,000 shares of Common Stock(Nonvoting) at 85% of the then current market price through application ofregularly made payroll deductions.

 

The total number of common shares outstanding atDecember 31, 2001 assuming the exercise of all outstanding stock options andwarrants is as follows:

 
| Class  A Common Stock    |   | 178,500    |   |
|--------------------------|--------|------------|--------|
| Common Stock (Nonvoting) |   | 18,447,927 |   |
| Stock options            |   | 5,957,985  |   |
| Warrants                 |   | 5,253,491  |   |
|                     |   |       |   |
|                     |   | 29,837,903 |   |

** **

**Note 12 — Income Taxes**

 

The Company records income taxes using a liabilityapproach for financial accounting and reporting which results in therecognition and measurement of deferred tax assets based on the likelihood ofrealization of tax benefits in future years.

 

44

----

 

The provision (benefit) for income taxes for theyears ended December 31 consists of the following:

 
|                                  |   | **1999**   |       | **2000**    |   | **2001**    |   |
|---------------------------------------|--------|------------|------------|-------------|--------|-------------|--------|
| Current taxes:                        |   |       |       |        |   |        |   |
| Federal                               |   | $          | 23,397,000 |        | $      | (18,616,000 | )      | $ | — |   |
| State                                 |   | 2,111,000  |       | 2,801,000   |   | 214,000     |   |
|                                  |   | 25,508,000 |       | (15,815,000 | )      | 214,000     |   |
|                                  |   |       |       |        |   |        |   |
| Deferred taxes:                       |   |       |       |        |   |        |   |
| Federal                               |   | 4,876,000  |       | 6,971,000   |   | (25,210,000 | )      |
| State                                 |   | 933,000    |       | (2,034,000  | )      | (1,749,000  | )      |
|                                  |   | 5,809,000  |       | 4,937,000   |   | (26,959,000 | )      |
| Provision (benefit) for income  taxes |   | $          | 31,317,000 |        | $      | (10,878,000 | )      | $ | (26,745,000 | ) |

 

45

----

 

Deferred income taxes reflect the tax effects oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income tax purposes.Components of the Company’s deferred tax asset and liability as of December 31are as follows: 

 
|                              |   | **December 31,** |        |
|-----------------------------------|--------|------------------|-------------|
|                              |   | **2000**         |        | **2001** |   |
| Deferred tax liability:           |   |             |        |   |   |
| Depreciation and amortizaton      |   | $                | 104,645,823 |   | $ | 106,447,474 |   |
| Interest on NBC obligation        |   | 3,669,672        |        | 9,274,452 |   |
| Total deferred tax liability      |   | 108,315,495      |        | 115,721,926 |   |
|                              |   |             |        |   |   |
| Deferred tax assets:              |   |             |        |   |   |
| Net operating loss carry  forward |   | 9,211,527        |        | 49,964,109 |   |
| Other                             |   | 581,416          |        | 3,761,406 |   |
| Alternative minimum tax credit    |   | 1,898,100        |        | 1,898,100 |   |
| Valuation allowance               |   | —           |        | (8,769,973 | ) |
| Total deferred tax assets         |   | 11,691,043       |        | 46,853,642 |   |
| Net deferred tax liability        |   | $                | 96,624,452  |   | $ | 68,868,284 |   |

 

The difference between the U.S. federal statutorytax rate and the Company’s effective tax rate for the years ended December 31is as follows:

 
|                                        |   | **1999** |   | **2000** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| U.S. statutory rate                         |   | 35.0     | %      | 35.0     | %      | 35.0     | %      |
| Nondeductible  amortization                 |   | 1.8      |   | (3.3     | )      | (1.3     | )      |
| State and local taxes                       |   | 2.6      |   | (3.3     | )      | 1.0      |   |
| (Decrease) increase in  valuation allowance |   | 0.5      |   | (2.5     | )      | (8.6     | )      |
|                                        |   |     |   |     |   |     |   |
| Effective tax  rate                         |   | 39.9     | %      | 25.9     | %      | 26.1     | %      |

 

At December 31, 2001, the Company had a netoperating loss carry forward for federal tax purposes of approximately$131,000,000 of which $113,000,000 will expire in 2021.  The remaining $18,000,000 relates to WKBW,which may be subject to limitation under the Separate Return Limitation Rulesof the Internal Revenue Code, and expire in 2002 through 2013. As of January 1,1999, the operations of WKBW were included in the Company’s federalconsolidated tax return.

 

**Note 13 — Defined Contribution Plan**

 

The Company has a trusteed profit sharing andsavings plan (the “Plan”) covering substantially all of its employees.  Contributions by the Company to the Plan arebased on a percentage of the amount of employee contributions to the Plan andare made at the discretion of the Board of Directors.  Company contributions, which are funded monthly, amounted to$811,390, $778,378 and $847,494 for the years ended December 31, 1999, 2000 and2001, respectively.

 

46

----

 

**Note 14 — Related Party**

 

Between 1995 and 1998, the Company loaned anofficer $2,911,000 in four separate transactions.  On January 1, 2001, the Company loaned this officer an additional$375,000. On February 15, 2001, the Company agreed to consolidate thefive loans into one promissory note in the amount of $3,286,000.  The new promissory note matures on January25, 2006 or, if earlier, 30 days after the officer’s termination of employment.The new promissory note does not bear interest, but interest at an annual rateof 6.75 percent will be imputed as additional compensation to the officer.  The new promissory note allows for the loanto be forgiven in one-third increments if the Company’s Common Stock(Nonvoting) trades for ten consecutive trading days at $15, $20, and $25,respectively, or if the per share consideration received by the Company’scommon stockholders in a Change of Control (as defined in the Indenturesgoverning the Company’s senior subordinated notes) equals at least $15.00,$20.00 or $25.00, respectively.  The oldloans provided for interest at various rates ranging from 7.50% to 9% payableannually on April 30th of each year. The old loans had various maturity dates ranging from April 2001 toDecember 2004.  In addition, on February15, 2001 the Company forgave $232,247 of interest accrued during the year–endedDecember 31, 2000.  TheCompany took a charge for this amount in 2001.

 

In 1995, the Company loaned another officer$221,200. On February 15, 2001, the Company agreed to cancel thisnote and issue a new promissory note in the same amount. The new promissorynote matures on January 25, 2006 or, if earlier, 30 days after the officer’stermination of employment. The new promissory note does not bear interest, butinterest at an annual rate of 6.75 percent will be imputed as additionalcompensation to the officer. The new promissory note allows for the loan to beforgiven in one-third increments if the Company’s Common Stock (Nonvoting)trades for ten consecutive trading days at $15, $20, and $25, respectively, orif the per share consideration received by the Company’s common stockholders ina Change of Control (as defined in the Indentures governing the Company’ssenior subordinated notes) equals at least $15.00, $20.00 or $25.00,respectively.  The old note provided forinterest at 9% payable annually on April 30th of each year and was to mature onDecember 29, 2004.   In addition, onFebruary 15, 2001 the Company forgave $19,908 of interest accrued during theyear–ended December 31, 2000. The Company took a charge for this amount in 2001.

 

**Note 15—PriceRange of Common Stock (Nonvoting) and Cumulative Convertible ExchangeablePreferred Stock (unaudited)**

 

The Company’s Common Stock (Nonvoting) is tradedin the over-the-counter market and is quoted on the NASDAQ Small Cap Marketunder the symbol “GBTVK”.  The followingtable sets forth the closing market price ranges per share of Common Stock(Nonvoting) during 2000 and 2001, as reported by NASDAQ:

 

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| 2000           |   |     |   |    |   |
| First Quarter  |   | $        | 12 3/4 |    | $      | 5 3/16 |   |
| Second Quarter |   | 7 3/ 8   |   | 5 3/8   |   |
| Third Quarter  |   | 7 1/16   |   | 4 1/2   |   |
| Fourth Quarter |   | 4 5/8    |   | 7/8     |   |
|           |   |     |   |    |   |
| 2001           |   |     |   |    |   |
| First Quarter  |   | 3 9/16   |   | 1 5/16  |   |
| Second Quarter |   | 3 3/20   |   | 1 3/8   |   |
| Third Quarter  |   | 3        |   | 1 9/32  |   |
| Fourth Quarter |   | 2 35/64  |   | 1 1/64  |   |
|                |        |          |        |         |        |  |  |

 

As of March 22, 2002 the closing price per sharefor the Company’s Common Stock (Nonvoting), as reported by NASDAQ was $2.10 pershare.

 

47

----

 

**Note 16 — Quarterly Results of Operations (unaudited)**

 

The following is a summary of the quarterlyresults of operations for the years ended December 31, 2000 and 2001:

 
|                            |   | **March 31,  2000** |       | **June 30,  2000** |   | **September 30,  2000** |   | **December 31,  2000** |       |
|---------------------------------|--------|---------------------|------------|--------------------|--------|-------------------------|--------|------------------------|------------|
| Net revenue                     |   | $                   | 33,339,280 |               | $      | 37,575,779              |   | $                      | 32,238,416 |   | $ | 36,916,772 |   |
| Loss before extraordinary  item |   | (8,811,291          | )          | (4,351,993         | )      | (10,839,214             | )      | (7,216,831             | )          |
| Net loss                        |   | (7,027,823          | )          | (2,425,257         | )      | (10,839,214             | )      | (7,216,831             | )          |
| Per common share:               |   |                |       |               |   |                    |   |                   |       |
| Loss before  extraordinary item |   |                |       |               |   |                    |   |                   |       |
| Basic                           |   | $                   | (0.85      | )                  | $      | (0.62                   | )      | $                      | (0.98      | ) | $ | (0.82 | ) |
| Diluted                         |   | (0.85               | )          | (0.62              | )      | (0.98                   | )      | (0.82                  | )          |
| Net loss                        |   |                |       |               |   |                    |   |                   |       |
| Basic                           |   | (0.75               | )          | (0.52              | )      | (0.98                   | )      | (0.82                  | )          |
| Diluted                         |   | (0.75               | )          | (0.52              | )      | (0.98                   | )      | (0.82                  | )          |

 
|                            |   | **March 31,  2001** |       | **June 30,  2001** |   | **September 30,  2001** |   | **December 31,  2001** |       |
|---------------------------------|--------|---------------------|------------|--------------------|--------|-------------------------|--------|------------------------|------------|
| Net revenue                     |   | $                   | 26,848,304 |               | $      | 30,506,207              |   | $                      | 25,502,449 |   | $ | 30,218,316 |   |
| Loss before  extraordinary item |   | (13,834,353         | )          | (12,186,672        | )      | (16,880,017             | )      | (32,638,771            | )          |
| Net loss                        |   | (15,041,434         | )          | (12,186,672        | )      | (16,880,017             | )      | (32,638,771            | )          |
| Per common share:               |   |                |       |               |   |                    |   |                   |       |
| Loss beforeextraordinary  item  |   |                |       |               |   |                    |   |                   |       |
| Basic                           |   | $                   | (1.17      | )                  | $      | (1.09                   | )      | $                      | (1.34      | ) | $ | (2.22 | ) |
| Diluted                         |   | (1.17               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |
| Net loss                        |   |                |       |               |   |                    |   |                   |       |
| Basic                           |   | (1.23               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |
| Diluted                         |   | (1.23               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |

 

48

----

 

**SCHEDULE II**

**GRANITEBROADCASTING CORPORATION**

**VALUATION ANDQUALIFYING ACCOUNTS**

 
| **Allowance for Doubtful Accounts**   |   | **Balance at  beginning  of year** |          | **Amount charged  to costs  and expenses** |   | **Amount  written off(1)** |   | **Balance  at end  of year** |          |
|---------------------------------------|--------|------------------------------------|---------------|--------------------------------------------|--------|----------------------------|--------|------------------------------|---------------|
| For the year ended December 31,  1999 |   | $                                  |  424,290 |                                       | $      |  492,648              |   | $                            |  486,578 |   | $ |  430,360 |   |
|                                  |   |                               |          |                                       |   |                       |   |                         |          |
| For the year ended December 31,  2000 |   | 430,360                            |          | 1,453,709                                  |   | 1,235,207                  |   | 648,862                      |          |
|                                  |   |                               |          |                                       |   |                       |   |                         |          |
| For the year ended December 31, 2001  |   | 648,862                            |          | 541,646                                    |   | 660,235                    |   | 530,273                      |          |
|                                       |        |                                    |               |                                            |        |                            |        |                              |               |  |  |  |  |

 

----

(1)           Netof recoveries.

 

49

----

 

**Item 9.    Changes andDisagreements with Accountants on Accounting****and Financial Disclosure**

 

None.

 

50

----

 

**PART III**

 

**Item 10.  Directors and Executive Officers of theRegistrant**

 

The following table sets forth information concerning theexecutive officers and directors of the Company as of March 5, 2002:

 
| **Name**                           |   | **Age** |   | **Position**                                                 |
|------------------------------------|--------|---------|--------|--------------------------------------------------------------|
| W.  Don Cornwell(1)                |   | 54      |   | Chairman  of the Board, Chief Executive Officer and Director |
| Stuart  J. Beck(1)                 |   | 55      |   | President,  Secretary and Director                           |
| Robert  E. Selwyn, Jr.             |   | 58      |   | Chief  Operating Officer and Director                        |
| Lawrence  I. Wills                 |   | 41      |   | Senior  Vice President—Chief Administrative Officer     |
| Ellen  McClain                     |   | 37      |   | Senior  Vice President—Chief Financial Officer          |
| James  L. Greenwald(2)             |   | 74      |   | Director                                                     |
| Martin  F. Beck                    |   | 84      |   | Director                                                     |
| Edward  Dugger, III                |   | 52      |   | Director                                                     |
| Thomas  R. Settle(1)(3)(4)         |   | 61      |   | Director                                                     |
| Charles  J. Hamilton, Jr.(2)(3)(4) |   | 54      |   | Director                                                     |
| M. Fred Brown(2)                   |   | 55      |   | Director                                                     |
| Jon  E. Barfield(3)                |   | 50      |   | Director                                                     |
| Veronica Pollard(3)                |   | 56      |   | Director                                                     |

 

----

(1)   Member of the Stock OptionCommittee.

(2)   Member of the AuditCommittee.

(3)   Member of the CompensationCommittee.

(4)   Member of the ManagementStock Plan Committee.

 

Mr.Cornwell is a founder of the Company and has been Chairman of the Board ofDirectors and Chief Executive Officer of the Company since February 1988.  Mr. Cornwell served as President of theCompany, which office then included the duties of chief executive officer,until September 1991 when he was elected to the newly created office of ChiefExecutive Officer.  Prior to foundingthe Company, Mr. Cornwell served as a Vice President in the Investment BankingDivision of Goldman, Sachs & Co. (“Goldman Sachs”) from May 1976 to July1988.  In addition, Mr. Cornwell was theChief Operating Officer of the Corporate Finance Department of Goldman Sachsfrom January 1980 to August 1987. Mr. Cornwell is a director of Avon Products,Inc., Hershey Trust Company, the Milton S. Hershey School, Pfizer, Inc. and CVSCorporation.  Mr. Cornwell received aBachelor of Arts degree from Occidental College in 1969 and a Masters degree inBusiness Administration from Harvard Business School in 1971.

 

Mr.Stuart Beck is a founder of the Company and has been a member of the Board ofDirectors and Secretary of the Company since February 1988 and President of theCompany since September 1991.  Prior tofounding the Company, Mr. Beck was an attorney in private practice of law inNew York, New York and Washington, DC. Mr. Beck is a member of the Board of The American Women in Radio andTelevision Society and of the Board of The Advertising Council.  Mr. Beck received a Bachelor of Arts degreefrom Harvard College in 1968 and a Juris Doctor degree from Yale Law School in1971.  Mr. Beck is the son of Martin F.Beck.

 

Mr.Selwyn has been Chief Operating Officer of the Company since September 19, 1996and a member of the Board of Directors since May 11, 1998.  Prior to joining the Company, Mr. Selwyn wasemployed by New World Communications, Inc. from May 1993 to June 1996 servingas Chairman and Chief Executive Officer of the New World Television StationGroup.  Mr. Selwyn received a bachelorof science degree from the University of Tennessee in 1968.  From 1990 until 1993, Mr. Selwyn was thePresident of Broadcasting for SCI Television, Inc.

 

51

----

 

Mr.Wills has been Senior Vice President—Chief Administrative Officer sinceFebruary 2001.  In addition, Mr. Willsserved as Vice President—Finance and Controller of the Company from 1990 to2001.  Prior to joining the Company, Mr.Wills was employed by Ernst & Young LLP from 1982 to 1990 in variouscapacities, the most recent of which was as senior audit manager responsiblefor managing and supervising audit engagements.  Mr. Wills is a director of Junior Achievement of New York,Inc.  Mr. Wills received a bachelor’sdegree in Business Administration from Iona College in 1982.

 

Ms.McClain has been Senior Vice President—Chief Financial Officer since February2001.  In addition, Ms. McClain servedas Vice President—Corporate Development and Treasurer of the Company from 1994to 2001.  Prior to joining Granite, Ms.McClain attended Harvard Business School, where she received a Masters degreein Business Administration in June 1993. From 1990 to 1991, Ms. McClain was an Assistant Vice President withCanadian Imperial Bank of Commerce, where she served as a lender in the Bank’sMedia Group and from 1986 to 1990 was employed by Bank of New England, N.A. invarious capacities including as a lender in the Communications Group.  Ms. McClain is a director of the NationalAssociation of Black Owned Broadcasters. Ms. McClain received a Bachelor of Arts Degree in Economics from BrownUniversity in 1986.

 

Mr.Greenwald has been a member of the Board of Directors of the Company sinceDecember 1988. Mr. Greenwald was the Chairman and Chief Executive Officer ofKatz Communications, Inc. from May 1975 to August 1994 and has been ChairmanEmeritus since August 1994.  Mr.Greenwald has served as President of the Station Representatives Associationand the International Radio and Television Society and Vice President of theBroadcast Pioneers.  Mr. Greenwald is adirector of Paxson Communications Corp. and Source Media Inc.  Mr. Greenwald received a Bachelor of Artsdegree from Columbia University in 1949 and an Honorary Doctorate Degree inCommercial Science from St. Johns University in 1980.

 

Mr.Martin Beck has been a member of the Board of Directors of the Company sinceDecember 1988. Mr. Beck has served as Chairman of Beck-Ross Communications,Inc., a New York-based group owner of FM radio stations, from June 1966 untilApril 1995, at which time he retired. Mr. Beck has served as President of the New York State BroadcastersAssociation, the Long Island Broadcasters Association and the NationalAssociation of Broadcasters Radio Board. Mr. Beck received a Bachelor of Artsdegree from Cornell University in 1938. Mr. Beck is the father of Stuart J. Beck.

 

Mr.Dugger has been a member of the Board of Directors of the Company sinceDecember 1988.  Mr. Dugger has beenPresident and Chief Executive Officer of UNC Ventures, Inc., a Boston-basedventure capital firm, since January 1978, and its investment management company,UNC Partners, Inc., since June 1990. Mr. Dugger is a former director of the Federal Reserve Bank ofBoston.  Mr. Dugger received a Bachelorof Arts degree from Harvard College in 1971 and a Masters degree in PublicAdministration and Urban Planning from Princeton University in 1973.

 

Mr.Hamilton has been a member of the Board of Directors of the Company since July1992.  Mr. Hamilton was a partner in theNew York law firm of Battle Fowler LLP from 1983 to 2000.  On June 8, 2000 Battle Fowler LLP mergedwith the law firm Paul, Hastings, Janofsky & Walker LLP, where he is apartner.  Mr. Hamilton received aBachelor of Arts degree from Harvard College in 1969, a Juris Doctor degreefrom Harvard Law School in 1975 and a Masters degree in City Planning (MCP)from the Massachusetts Institute of Technology in 1975.  Mr. Hamilton is a member of the Board ofDirectors of the Environmental Defense Fund and Phoenix House Foundation,Inc.  Mr. Hamilton is a member ofChairman of the Board of Directors of the Higher Education Extension Service.

 

Mr.Settle has been a member of the Board of Directors of the Company since July1992.  Mr. Settle founded and iscurrently a director of The Winchester Group, Inc., an investment advisoryfirm, since 1990. Mr. Settle was the chief investment officer at BernhardManagement Corporation from 1985 to 1989. He was a Managing Director of Furman Selz Capital Management from 1979until 1985.  Mr. Settle received aBachelor of 

 

52

----

 

ArtsDegree from Muskingum College in 1963 and a Masters degree in BusinessAdministration from Wharton Graduate School in 1965.

 

Mr.Brown has been a member of the Board of Directors since April 1999.  Mr. Brown founded and has been President ofAerodyne Capital, Inc., a California company specializing in the trading andleasing of commercial jet aircraft and high–bypass jet engines and JetAirCapital, Inc., a California company specializing in trading aircraft spareparts since 1993.  Prior to founding Aerodyneand JetAir, Mr. Brown was Senior Vice President and Managing Director ofMarketing for Blenhiem Aviation from 1989-1993.  Mr. Brown is a director of San Francisco Jazz Organization.  Mr. Brown received a Bachelor of Arts degreefrom Middlebury College in 1969.  Hereceived a Juris Doctor degree and a Masters degree in Business Administrationfrom the University of California at Berkeley in 1973.

 

Mr.Barfield has been a member of the Board of Directors since April 1999.  Mr. Barfield has been Chairman and ChiefExecutive Officer of The Bartech Group, a contract employment and staffingservices firm specializing in the recruitment and placement of engineering,I.T. and administrative professionals, since 1995.  In addition, Mr. Barfield served as President of The BartechGroup from 1981 to 1995.  Prior tojoining The Bartech Group, Mr. Barfield practiced corporate and securities lawwith the Chicago based law firm of Sidley & Austin from 1977 to 1981.  Mr. Barfield is a director of the NationalCity Corporation, BMC Software, Inc., Tecumseh Products Company, PantellosGroup Limited Partnership, Inc., Blue Cross Blue Shield of Michigan and theCommunity Foundation for Southeastern Michigan.  He is also a Trustee Emeritus of Princeton University and a Trusteeof Henry Ford Museum, Greenfield Village and Kettering University.  Mr. Barfield received a Bachelor of Artsdegree from Princeton University in 1974 and received a Juris Doctor degreefrom Harvard Law School in 1977.

 

Ms.Pollard has been a member of the Board of Directors since January 2000.  Ms. Pollard is Group Vice President,Corporate Communications, Toyota Motor North America, Inc.  She had been Vice President-External Affairsfor Toyota Motor North America (formerly Toyota Motor Corporate Services ofNorth America, Inc.) since joining Toyota in 1998.  Prior to joining Toyota Motor Corporate Services of NorthAmerica, Inc., Ms. Pollard was Vice President-Corporate Public Relations forABC, Inc. from 1994 to 1998.  Ms.Pollard is a trustee of the Museum of African Art in New York and a member ofthe Individual Investor Advisory Committee of the New York Stock Exchange.  Ms. Pollard attended the University ofWisconsin for two years, received a Bachelor’s degree from Boston University in1966, and a Master’s degree from Columbia University, Teachers College, in1968.

 

Allmembers of the Board of Directors hold office until the next annual meeting ofshareholders of the Company or until their successors are duly elected andqualified.  All officers are electedannually and serve at the discretion of the Board of Directors.

 

Directorsare separately reimbursed by the Company for their travel expenses incurred inattending Board or committee meetings and receive securities under each of theCompany’s Non-Employee Directors Stock Plan and Director Option Plan (each asdefined herein and collectively referred to as the “Director Plans”).

* *

*Section 16(a) Beneficial Ownership Reporting Compliance*

 

Each director and officer of the Company who is subjectto Section 16 of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is required to report to the Securities and Exchange Commission, by aspecified date, his or her beneficial ownership of, or certain transactions in, the Company’s securities.  Except as set forth below, based solely upona review of such reports, the Company believes that all filing requirementsunder Section 16 were complied with on a timely basis.

 

Forfiscal year 2001, Mr. Stuart Beck did not report, on a timely basis, one transactionon one Form 4, and Messrs. Hamilton and Greenwald did not report, on a timelybasis, five transactions on Form 5.  Inaddition, Messrs. Cornwell and Stuart Beck did not report, on a timely basis,two transactions on Form 5 for fiscal year 1998 and one transaction on Form 5for fiscal year 1997.  All of thereports referred to above have been filed.

 

53

----

 

**Item 11.  Executive Compensation**

 

Thefollowing table sets forth the cash compensation paid by the Company to itsChief Executive Officer and each of its most highly compensated executiveofficers whose total cash compensation exceeded $100,000 for each of the threeyears in the period ended December 31, 2001:

Summary Compensation Table

 
|                              |       | **Annual Compensation** |       | **Long-Term CompensationAwards** |       |               |   |
|-----------------------------------|------------|-------------------------|------------|----------------------------------|------------|--------------------|--------|
|                              |       |                    |       |                             | ** ** |
| **Name and   Principal Position** |       | **Year**                |       | **Salary ($)**                   |       | **Bonus  ($) (1)** |   | **Restricted Stock   Awards** |   | **Securities Underlying Options/  SARs (#)** |   | **All Other Compensation  ($) (2)** | ** ** |
|                              |       | ** **              | ** ** |                             | ** ** | ** **         |
|                              |       |                    | ** ** | ** **                       | ** ** | ** **         |
|                              | ** ** |                    |       | ** **                       |       |               |
| W. Don Cornwell                   |       | 2001                    |       | $                                | 600,000    |               | $      | 420,000 |   | $ | 210,000 | (3) | — |   | $ | 5,250 |   |
| Chief Executive                   |       | 2000                    |       | 600,000                          |       | 469,600            |   | — |   | — |   | 5,250 |   |
| Officer                           |       | 1999                    |       | 550,000                          |       | 585,950            |   | — |   | 1,160,000 |   | 5,000 |   |
|                              |       |                    |       |                             |       |               |   |   |   |   |   |   |   |
| Stuart J. Beck                    |       | 2001                    |       | $                                | 600,000    |               | $      | 302,000 |   | $ | 288,750 | (4) | — |   | $ | 14,850 |   |
| President                         |       | 2000                    |       | 600,000                          |       | 336,000            |   | — |   | — |   | 14,850 |   |
|                              |       | 1999                    |       | 550,000                          |       | 419,760            |   | — |   | 962,000 |   | 13,800 |   |
|                              |       |                    |       |                             |       |               |   |   |   |   |   |   |   |
| Robert E. Selwyn, Jr.             |       | 2001                    |       | $                                | 386,250    |               | $      | 57,938 |   | $ | 54,375 | (5) | — |   | $ | 14,850 |   |
| Chief Operating                   |       | 2000                    |       | 375,000                          |       | 46,875             |   | — |   | 50,000 |   | 14,850 |   |
| Officer                           |       | 1999                    |       | 371,600                          |       | 90,500             |   | — |   | 150,000 |   | 14,600 |   |
|                              |       |                    |       |                             |       |               |   |   |   |   |   |   |   |
| Lawrence I. Wills                 |       | 2001                    |       | $                                | 200,000    |               | $      | 100,000 |   | — |   | — |   | $ | 17,250 |   |
| Senior Vice President -           |       | 2000                    |       | 177,000                          |       | 100,000            |   | — |   | 121,250 |   | 5,250 |   |
| Chief Administrative Officer      |       | 1999                    |       | 140,500                          |       | 85,125             |   |   |   | 50,000 |   | 5,000 |   |
|                              |       |                    |       |                             |       |               |   |   |   |   |   |   |   |
| Ellen McClain                     |       | 2001                    |       | $                                | 200,000    |               | $      | 100,000 |   | — |   | — |   | $ | 17,250 |   |
| Senior Vice President -           |       | 2000                    |       | 177,000                          |       | 100,000            |   | — |   | 125,000 |   | 4,050 |   |
| Chief Financial Officer           |       | 1999                    |       | 140,500                          |       | 85,125             |   |   |   | 50,000 |   | 4,063 |   |

 

----

(1)Represents bonuses for service rendered in 1999, 2000 and 2001 that were paidin the following year.

 

(2) The amountsshown in this column consists of a matching Company contribution under theCompany’s Employees’ Profit Sharing and Savings (401(k)) Plan and an annualperquisite allowance for Messrs. Beck and Selwyn of $9,600 each in 2000 and2001 and $8,800 and $9,600, respectively in 1999 and $12,000 each for Mr. Willsand Ms. McClain in 2001.

 

(3) Representsthe market value on the date of award of 80,000 Bonus Shares awarded under theCompany’s Management Stock Plan on January 26, 2001 for services renderedduring the year ended December 31, 2000.

 

(4) Representsthe market value on the date of award of 110,000 Bonus Shares awarded under theCompany’s Management Stock Plan on January 26, 2001 for services renderedduring the year ended December 31, 2000.

 

54

----

 

(5)Representsthe market value on the date of award of 30,000 Bonus Shares awarded under theCompany’s Management Stock Plan on January 26, 2001 for services renderedduring the year ended December 31, 2000.

 

*Employment Agreements and CompensationArrangements*

 

Mr. Cornwell and Mr. Stuart Beck each have an employmentagreement with the Company.  Theagreements provide for a two-year employment term, which is automaticallyrenewed for subsequent two-year terms unless advance notice of nonrenewal is given(the current term under such agreements, which were renewed in 2001, expiresSeptember 19, 2003).  The base salarydetermined by the Compensation Committee of the Board of Directors was $550,000for 1999 and $600,000 for 2000 and 2001. The base salary for 2002 is $600,000 each for Messrs. Cornwell andBeck.  During 2001, the CompensationCommittee adopted specific guidelines for awarding salary increases and cashbonuses to Mr. Cornwell and Mr. Beck. Salary increases and cash bonuses are earned if certain quantitative andqualitative performance targets are achieved. For the year ended December 31, 2001, the quantitative targets were notachieved and most of the qualitative targets were met.  This resulted in no salary increases for2002 and cash bonuses for 2001 of $420,000 and $302,000 awarded to Mr. Cornwelland Mr. Beck, respectively.  Theagreements stipulate that Mr. Cornwell and Mr. Beck will devote their full timeand efforts to the Company and will not engage in any business activities outsidethe scope of their employment with the Company unless approved by a majority ofthe Company’s independent directors. Under the agreements, Mr. Cornwell and Mr.Beck are permitted to exchange any or all of their shares of Voting CommonStock for shares of Common Stock (Nonvoting), provided that such exchange doesnot jeopardize the Company’s status as a minority-controlled entity under FCCregulations and that, after such exchange is effected, there will continue tobe shares of voting stock of the Company outstanding.  In addition to the compensation set forth in the employmentagreements, Mr. Cornwell and Mr. Beck are eligible to receive incentive bonuspayments under the Company’s incentive bonus plan and stock options undercertain of the Company’s stock option plans. ( See “—Stock Option Plan” and“—Management Stock Plan.”)

 

Mr. Selwyn has an employment agreement with theCompany.  The current employment termwas extended to January 31, 2003.  Theannual base salary determined by the Compensation Committee of the Board ofDirectors was $371,600 for 1999, $375,000 for 2000 and 386,250 for 2001.   The agreement stipulates that Mr. Selwynwill devote his full time and effort to the Company and will not engage in anybusiness activities outside of the scope of his employment with the Companyother than permitted hereunder.  Inaddition to his base salary, Mr. Selwyn is eligible to receive shares of theCompany’s Common Stock (Nonvoting) under the Management Stock Plan, has beengranted options to purchase shares of Common Stock (Nonvoting) under theCompany’s stock option plans and is eligible to participate in the Company’sEmployee Stock Purchase Plan.  Mr.Selwyn's base salary for 2002 is $396,250. (See “—Employee Stock Purchase Plan,” “—Stock Option Plan” and“—Management Stock Plan.”)

 

Underan employment arrangement with the Company, Mr. Wills is eligible to receive anannual cash bonus based upon the Company’s financial performance during thatyear, such bonus to be determined by Messrs. Cornwell and Beck.  Mr. Wills’ 2001 base salary was fixed at$200,000 and his base salary for 2002 is $206,000.

 

Underan employment arrangement with the Company, Ms. McClain is eligible to receivean annual cash bonus based upon the Company’s financial performance during thatyear, such bonus to be determined by Messrs. Cornwell and Beck.  Ms. McClain’s 2001 base salary was fixed at$200,000 and her base salary for 2002 is $206,000.

 

*401(k) ProfitSharing and Savings Plan*

 

EffectiveJanuary 1990, the Company adopted the Granite Broadcasting CorporationEmployees’ Profit Sharing and Savings (401(k)) Plan (the “401(k) Plan”) for thepurpose of providing retirement benefits for substantially all of itsemployees.  Both the employee and theCompany make contributions to the 401(k) Plan. The Company matches 50% of that part of an employee’s deferredcompensation which does not exceed 5% of such employee’s salary.  Company-matched contributions vest at a rateof 20% for each year of an employee’s service to the Company.

 

A contribution to the 401(k) Plan of $847,000 wascharged to expense for 2001.

 

55

----

 

*Employee StockPurchase Plan*

 

OnFebruary 28, 1995, the Company adopted the Granite Broadcasting CorporationEmployee Stock Purchase Plan (the “Stock Purchase Plan”) for the purpose ofenabling its employees to acquire ownership of Common Stock (Nonvoting) at adiscount, thereby providing an additional incentive to promote the growth andprofitability of the Company.  The StockPurchase Plan enables employees of the Company to purchase up to an aggregateof 1,000,000 shares of Common Stock (Nonvoting) at 85% of the then currentmarket price through application of regularly made payroll deductions.  The Stock Purchase Plan is administered by aCommittee consisting of not less than two directors who are ineligible toparticipate in the Stock Purchase Plan. The members of the Committee are currently Mr. Cornwell and Mr. StuartJ. Beck.  At the discretion of theCommittee, purchases under the Stock Purchase Plan may be effected throughissuance of authorized but previously unissued shares, treasury shares orthrough open market purchases.  TheCommittee has engaged a brokerage company to administer the day-to-dayfunctions of the Stock Purchase Plan. Purchases under the Stock Purchase Plan commenced on June 1, 1995.

* *

*Stock OptionPlan*

 

InApril 1990, the Company adopted a Stock Option Plan (the “Stock Option Plan”)providing for the grant, from time to time, of Options to key employees andofficers of the Company or its affiliates to purchase shares of Common Stock(Nonvoting).  The Stock Option Planterminated on April 1, 2000. As of March 22, 2002, options granted underthe Stock Option Plan were outstanding for the purchase of 4,529,425 shares ofCommon Stock (Nonvoting).

 

OnApril 27, 2000, the Company adopted a new stock option plan (the “2000 StockOption Plan”) for officers and certain key employees of the Company and itsaffiliates (collectively, the “Participating Persons”).  The 2000 Stock Option Plan provides for thegrant of (i) Options intended to qualify as Incentive Stock Options (“ISOs”) asdefined in Section 422 of the Code and (ii) Options which do not qualify asISOs (“NQSOs”) to employees, officers, directors and consultants of the Companyor its affiliates to purchase an aggregate of 4,000,000 shares of Common Stock(Nonvoting).  No Participating Personmay be granted ISOs which, when first exercisable in any calendar year (combinedwith ISOs under all incentive stock option plans of the Company and itsaffiliates) will permit such person to purchase stock of the Company having anaggregate fair market value (determined as of the time the ISO was granted) ofmore than $100,000. As of March 22, 2002, options granted under the 2000Stock Option Plan were outstanding for the purchase of 987,500 shares of CommonStock (Nonvoting).

 

The2000 Stock Option Plan is administered by the Stock Option Committee whichconsists of not less than three members of the Board of Directors appointed bythe Board, and the Company’s Compensation Committee, which consists ofnot less than two members all of whom are non-employee directors (collectively,the “Committee”).  The members of theStock Option Committee are Mr. Cornwell, Mr. Stuart Beck and Mr. Settle.  The members of the Compensation Committeeare Mr. Hamilton, Mr. Barfield, Ms. Pollard and Mr. Settle.  The Stock Option Committee is onlyauthorized to grant Options to persons who are not then “covered employees”within the meaning of Section 162(m) of the Internal Revenue Code or who arenot then officers of the Company or holders of 10% or more of the Voting CommonStock.  The Compensation Committee isauthorized to make determinations with respect to all other persons.  Subjectto the provisions of the 2000 Stock Option Plan, the committee is empowered to,among other things, grant Options under the 2000 Stock Option Plan; determinewhich employees may be granted Options under the 2000 Stock Option Plan, thetype of Option granted (ISO or NQSO), the number of shares subject to eachOption, the time or times at which Options may be granted and exercised and theexercise price thereof; construe and interpret the 2000 Stock Option Plan;determine the terms of any option agreement pursuant to which Options aregranted (an “Option Agreement”), and amend any Option Agreement with theconsent of the recipient of Options (the “Optionee”).  The Board of Directors may amend or terminate the 2000 StockOption Plan at any time, except that approval of the holders of a majority ofthe outstanding Voting Common Stock of the Company is required for amendmentswhich decrease the minimum option price for ISOs, extend the term of the 2000Stock Option Plan beyond 10 years or the maximum term of the Options grantedbeyond 10 years, withdraw the administration of the 2000 Stock Option Plan fromthe Committee, change the class of eligible employees, officers or directors orincrease the aggregate number of shares which may be issued pursuant to theprovisions of the 2000 Stock Option Plan. Notwithstanding the foregoing, the Board of Directors may, without theneed for shareholder approval, amend the 2000 Stock Option Plan in any respectto qualify ISOs as Incentive Stock Options under Section 422 of the Code.

 

56

----

 

Theexercise price per share for all ISOs may not be less than 100% of the fairmarket value of a share of Common Stock (Nonvoting) on the date on which theOption is granted (or 110% of the fair market value on the date of grant of anISO if the Optionee owns more than 10% of the total combined voting power ofall classes of voting stock of the Company or any of its affiliates (a “10%Holder”)).  The exercise price per sharefor NQSOs may be less than, equal to or greater than the fair market value of ashare of Common Stock (Nonvoting) on the date such NQSO is granted.  Options are not assignable or transferableother than by will or the laws of descent and distribution.

 

TheCommittee may provide, at or subsequent to the date of grant of any Option,that in the event the Optionee pays the exercise price for the Option bytendering shares of Common Stock (Nonvoting) previously owned by the Optionee,the Optionee will automatically be granted a “reload option” for the number ofshares of Common Stock (Nonvoting) used to pay the exercise price plus thenumber of shares withheld to pay for taxes associated with the Option exercise(a “Reload Option”).  The Reload Optionhas an exercise price equal to the fair market value of the Common Stock(Nonvoting) on the date of grant of the Reload Option and remains exercisablefor the remainder of the term of the Option to which it relates.

 

Unlesssooner terminated by the Board of Directors, the 2000 Stock Option Plan willterminate on April 27, 2010, 10 years after its effective date.  Unless otherwise specifically provided in anOptionee’s Option Agreement, each Option granted under the 2000 Stock OptionPlan expires no later than 10 years after the date such Option is granted (5years for ISO’s granted to 10% Holders). Options may be exercised only during the period that the originalOptionee has a relationship with the Company which confers eligibility to begranted Options and (i) for a period of 30 days after termination of suchrelationship, (ii) for a period of 3 months after retirement by the Optioneewith the consent of the Company, or (iii) for a period of 12 months after thedeath or disability of the Optionee.

 

*ManagementStock Plan*

 

InApril 1993, the Company adopted a Management Stock Plan (the “Management StockPlan”) providing for the grant from time to time of awards denominated inshares of Common Stock (Nonvoting) (the “Bonus Shares”) to all salariedexecutive employees of the Company.  Thepurpose of the Management Stock Plan is to keep senior executives in the employof the Company and to compensate such executives for their contributions to thegrowth and profits of the Company and its subsidiaries.  On February 15, 2001, the Company increasedthe reserve of shares of Common Stock (Nonvoting) for grant under theManagement Stock Plan to 1,500,000 from 1,000,000.  All salaried executive employees (including officers anddirectors, except for persons serving as directors only) are eligible toreceive a grant under the Management Stock Plan.  The Management Stock Plan is administered by a committeeappointed by the Board of Directors which consists of not less than two membersof the Board of Directors (the “Management Stock Plan Committee”).  Pursuant to Board resolution, the members ofthe Compensation Committee constitute the members of the Management Stock PlanCommittee.  The Management Stock PlanCommittee, from time to time, selects eligible employees to receive adiscretionary bonus of Bonus Shares based upon such employee’s position,responsibilities, contributions and value to the Company and such other factorsas the Management Stock Plan Committee deems appropriate.  The Management Stock Plan Committee hasdiscretion to determine the date on which the Bonus Shares allocated to anemployee will be issued to such employee. The Management Stock Plan Committee may, in its sole discretion,determine what part of an award of Bonus Shares is paid in cash and what partof an award is paid in the form of Common Stock (Nonvoting).  Any cash payment will be made to suchemployee as of the date the corresponding Bonus Shares would otherwise beissued to such employee and shall be in an amount equal to the fair marketvalue of such Bonus Shares on that date.

 

Asof March 22, 2002, the Company has allocated a total of 1,069,812 Bonus Sharespursuant to the Management Stock Plan, 920,762 of which had vested throughMarch 22, 2002.

 

*Director StockOption Plan*

 

On March 1, 1994, the Company adopted a Director StockOption Plan (the “Director Option Plan”) providing for the grant, from time totime, of Options to non-employee directors of the Company (“DirectorParticipants”) to purchase Common Stock (Nonvoting).  On July 27, 1999, the Company increased the number of shares ofCommon Stock (Nonvoting) allocated for grant under the Director Option Plan to1,000,000 from 300,000. As of March 22, 

 

57

----

 

2002, Options granted under the Director Option Plan wereoutstanding for the purchase of 809,060 shares of Common Stock (Nonvoting).

 

TheDirector Option Plan provides for the grant of NQSOs to Director Participants.On February 25, 1997, all non–employee directors automaticallyreceived an option to purchase 18,000 shares of Common Stock (Nonvoting) ascompensation for attendance at regular quarterly meetings during the three-yearperiod beginning on such date in lieu of cash compensation. On April 27,1999, the Director Option Plan was amended to provide that all DirectorParticipants automatically receive on April 27, 1999 (and on each five yearanniversary thereafter) an option to purchase 62,500 shares of Common Stock(Nonvoting) as compensation for attendance at regular quarterly meetings duringthe five year period beginning on February 25, 2000 (or each five yearanniversary thereof, as the case may be) in lieu of cash compensation.  Non–employeedirectors elected or appointed during the course of a three-year or five yearoption period receive Options, in lieu of a cash compensation, for theremaining portion of such period.  Inaddition, under the Director Option Plan, non–employee directors receiveAutomatic Committee Awards for certain committees of the Board of Directors onwhich they serve.

 

Between February 25, 1997and April 26, 1999, Options to purchase 1,500 shares of Common Stock(Nonvoting) became exercisable on the date of attendance in person of aDirector Participant at each regular quarterly meeting of the Board ofDirectors. Options to purchase 500 shares of Common Stock (Nonvoting) becameexercisable if such Director Participant attended the meeting by telephonicmeans. Since April 27, 1999, Options to purchase 3,125 shares of Common Stock(Nonvoting) become exercisable on the date of attendance, in person or bytelephonic means, of a Director Participant at each regular quarterly meetingsof the Board of Directors. Between February 25, 1997 and February 24, 2000,Options to purchase 1,500 shares of Common Stock (Nonvoting) became exercisableon the date of attendance in person at each regularly scheduled meeting of theAudit Committee and the Compensation Committee of any Director Participant whois a member of such committees. Since February 25, 2000, Options to purchase625 shares of Common Stock (Nonvoting) (875 in the case of Committee chairs)become exercisable upon the date of attendance, in person or by telephonicmeans, at each regular meeting of the Audit Committee and the CompensationCommittee of any Director Participant who is a member of such committees. Theexercise price per share of all Options is the fair market value on the date ofgrant.

 

TheBoard of Directors may provide, at or subsequent to the date of grant of anyOption, that in the event the Director Participant pays the exercise price forthe Option by tendering shares of Common Stock (Nonvoting) previously owned bythe Director Participant, the Director Participant will automatically begranted a “reload option” for the number of shares of Common Stock (Nonvoting)used to pay the exercise price plus the number of shares withheld to pay fortaxes associated with the Option exercise (a “Reload Option”).  The Reload Option has an exercise priceequal to the fair market value of the Common Stock (Nonvoting) on the date ofgrant of the Reload Option and remains exercisable for the remainder of theterm of the Option to which it relates.

 

Unless otherwisespecifically provided in a Director Participant’s Option Agreement and exceptin the case of Reload Options as described above, each Option granted under theDirector Option Plan expires no later than 10 years after the date the Optionis granted.  Options may be exercisedonly during the period that the original optionee is a non-employee directorand (i) for a period of 6 months after the death or disability of the DirectorParticipant or (ii) for a period of 2 years after termination of the DirectorParticipant’s directorship for any other reason.

 

*Non–EmployeeDirectors Stock Plan*

 

OnApril 29, 1997, the Company adopted a Non-Employee Directors Stock Plan (the“Non-Employee Directors Stock Plan”) for the purpose of providing a means toattract and retain highly qualified persons to serve as non-employee directorsof the Company and to enable such persons to acquire or increase a proprietaryinterest in the Company. The Non-Employee Directors Stock Plan provides that onJanuary 1st of each calendar year (beginning in 1999) during the term of theNon-Employee Directors Stock Plan, non–employee directors of the Company(“Directors Stock Plan Participants”) shall receive a number of shares ofCommon Stock (Nonvoting) equal to $20,000 divided by the fair market value pershare on the date of grant.  If a personfirst becomes a non-employee director after January 1st of any calendar year,such a person receives a prorated grant based on the number of regular boardmeetings scheduled from the date of his or her commencement of service as adirector until December 31 of that year. On December 31, 2000, the Company increased the number of shares ofCommon Stock (Nonvoting) available for issuance under the 

 

58

----

 

Non-EmployeeDirectors Stock Plan to 400,000 from 100,000. Each Directors Stock Plan Participant may elect to defer the payment ofshares of Common Stock (Nonvoting) by filing an irrevocable written electionwith the Secretary of the Company.

 

TheNon-Employee Directors Stock Plan, unless earlier terminated by action of theBoard of Directors, will terminate at such time as no shares remain availablefor issuance under the Non–Employee Directors Stock Plan and the Companyand the Directors Stock Plan Participants have no further rights or obligationsunder the Non–Employee Directors Stock Plan.

 

Asof March 22, 2002, 310,071 shares had been granted under the Non–EmployeeDirectors Stock Plan.

 

Therewere no new options granted to the executive officers of the Company during2001.

 

The following table sets forth, as of December 31, 2001,the number of options and the value of unexercised options held by theCompany’s executive officers who held options as of that date, and the optionsexercised and the consideration received therefore by such persons duringfiscal 2001.

Aggregated Option/SAR Exercises

In Last Fiscal Year And

FY-End Option/SAR Values

 
| **Name**              |       | **Shares   Acquired on Exercise (#)** |            | **Value Realized ($)** |              | **Number of   Securities Underlying  Unexercised Options  at December 31, 2001** |            | **Value of Unexercised  in-the-Money Options  at December 31, 2001  ($)** | ** **        |
|-----------------------|------------|---------------------------------------|-----------------|------------------------|-------------------|----------------------------------------------------------------------------------|-----------------|---------------------------------------------------------------------------|-------------------|
|                  |       |                                  | **Exercisable** |                   | **Unexercisable** |                                                                             | **Exercisable** |                                                                      | **Unexercisable** | ** ** |
|                  | ** ** |                                  | ** **      | ** **             | ** **        | ** **                                                                       |
|                  |       |                                  | ** **      | ** **             | ** **        | ** **                                                                       |
| W. Don Cornwell       |       | —                                |            | —                 |              | 986, 400                                                                         |            | 896,600                                                                   |              | — |   | — |   |
|                  |       |                                  |            |                   |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Stuart J. Beck        |       | —                                |            | —                 |              | 973,900                                                                          |            | 746,600                                                                   |              | — |   | — |   |
|                  |       |                                  |            |                   |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Robert E. Selwyn, Jr. |       | —                                |            | —                 |              | 250,000                                                                          |            | 100,000                                                                   |              | — |   | 28,000 |   |
|                  |       |                                  |            |                   |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Lawrence I. Wills     |       | —                                |            | —                 |              | 54,800                                                                           |            | 120,200                                                                   |              | 6,860 |   | 55,440 |   |
|                  |       |                                  |            |                   |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Ellen McClain         |       | —                                |            | —                 |              | 51,800                                                                           |            | 123,200                                                                   |              | 7,280 |   | 57,120 |   |

 

59

----

 

***Report on Repricing of Options***

 

OnMay 2, 2001, the compensation committee determined that because the outstandingoptions held by certain executive officers and directors were exercisable atprices that were significantly above prevailing market prices for the Company’sCommon Stock (Nonvoting), they no longer provided an adequate level ofincentive.  Accordingly, thecompensation committee proposed to the Company’s Board of Directors therepricing of the exercise prices of options to purchase an aggregate of 802,975shares of Common Stock (Nonvoting) to $7.563 per share.  On July 24, 2001, the Company’s Board ofDirectors approved the compensation committee’s option repricing proposal.

 

The following table provides information related to therepricing of each option held by the executive officers of the Company duringthe last ten completed fiscal years.

 
| **Name**              |   | **Date** |   | **Number of  Securities  Underlying  Options  Repriced or  Amended** |   | **Market Price  of Stock at  Time of  Repricing or  Amendment** |   | **Exercise Price  at Time of  Repricing or  Amendment** |   | **New Exercise  Price** |   | **Length of  Original  Option Term  Remaining at  Date of  Repricing or  Amendment** |   |
|-----------------------|--------|----------|--------|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|---------------------------------------------------------|--------|-------------------------|--------|--------------------------------------------------------------------------------------|--------|
| W. Don Cornwell       |   | 7/24/01  |   | 123,600                                                              |   | $                                                               | 2.90   |                                                    | $      | 11.125                  |   | $                                                                                    | 7.563  |   | 82 months |   |
|                  |   | 7/24/01  |   | 122,000                                                              |   | $                                                               | 2.90   |                                                    | $      | 11.25                   |   | $                                                                                    | 7.563  |   | 58 months |   |
|                  |   |     |   |                                                                 |   |                                                            |   |                                                    |   |                    |   |                                                                                 |   |
| Stuart J. Beck        |   | 7/24/01  |   | 108,600                                                              |   | $                                                               | 2.90   |                                                    | $      | 11.125                  |   | $                                                                                    | 7.563  |   | 82 months |   |
|                  |   | 7/24/01  |   | 91,000                                                               |   | $                                                               | 2.90   |                                                    | $      | 11.25                   |   | $                                                                                    | 7.563  |   | 58 months |   |
|                  |   |     |   |                                                                 |   |                                                            |   |                                                    |   |                    |   |                                                                                 |   |
| Robert E. Selwyn, Jr. |   | 7/24/01  |   | 110,000                                                              |   | $                                                               | 2.90   |                                                    | $      | 12.438                  |   | $                                                                                    | 7.563  |   | 64 months |   |

 

By the compensation committee of the Board of Directors

 

Thomas R. Settle

Jon E. Barfield

Charles J. Hamilton, Jr.

Veronica Pollard

 

*CompensationCommittee Interlocks and Insider Participation*

 

During2001, Thomas R. Settle, Charles J. Hamilton, Jr., Veronica Pollard and Jon E.Barfield served as members of the Compensation Committee of the Board ofDirectors of the Company.

 

60

----

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management**

 

Thefollowing table sets forth certain information, as of March 1, 2002, regardingbeneficial ownership of the (i) the Company’s Voting Common Stock by eachshareholder who is known by the Company to own beneficially more than 5% of theoutstanding Voting Common Stock, each director, each executive officer and alldirectors and officers as a group, and (ii) beneficial ownership of theCompany’s Common Stock (Nonvoting) (assuming exercise of all options for thepurchase of Common Stock (Nonvoting), which exercise is at the option of theholder within sixty (60) days) by each director, each executive officer and alldirectors and officers as a group.  TheCompany also has 236,184 shares of its 12.75% Cumulative Exchangeable PreferredStock outstanding, none of which are owned by any officers or directors of theCompany.  Except as set forth in thefootnotes to the table, each shareholder listed below has informed the Companythat such shareholder has (i) sole voting and investment power with respect tosuch shareholder’s shares of stock, except to the extent that authority isshared by spouses under applicable law and (ii) record and beneficial ownershipwith respect to such shareholder’s shares of stock.

 
|                                      |   | **Voting Common Stock**       |       | **Common Stock (Nonvoting)**  |       |
|-------------------------------------------|--------|-------------------------------|------------|-------------------------------|------------|
|                                      |   | **Shares Beneficially Owned** | ** ** | **Shares Beneficially Owned** | ** ** |
|                                      |   | **Number**                    |       | **Percent**                   | ** ** | **Number** | ** ** | **Percent (1)** | ** ** |
| W. Don Cornwell                           |   | 98,250                        |       | 55.0                          | %          | 1,613,200 | (2) | 8.2 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Stuart J. Beck                            |   | 80,250                        |       | 45.0                          | %          | 1,457,462 | (3) | 7.4 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Robert E. Selwyn, Jr.                     |   |                          |       |                          |       | 366,324 | (4) | 1.9 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Lawrence I. Wills                         |   |                          |       |                          |       | 55,472 | (5) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Ellen McClain                             |   |                          |       |                          |       | 88,789 | (6) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Martin F. Beck                            |   |                          |       |                          |       | 283,117 | (7) | 1.5 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| James L. Greenwald                        |   |                          |       |                          |       | 191,732 | (8) | 1.0 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Edward Dugger III                         |   |                          |       |                          |       | 87,078 | (9) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Thomas R. Settle                          |   |                          |       |                          |       | 234,500 | (10) | 1.3 | % |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Charles J. Hamilton, Jr.                  |   |                          |       |                          |       | 139,703 | (11) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| M. Fred Brown                             |   |                          |       |                          |       | 88,492 | (12) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Jon E. Barfield                           |   |                          |       |                          |       | 74,917 | (13) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| Veronica Pollard                          |   |                          |       |                          |       | 63,934 | (14) | * |   |
|                                      |   |                          |       |                          |       |   |   |   |   |
| All directors and officers as a group(13) |   | 178,500                       |       | 100.0                         | %          | 4,762,266 |   | 22.0 | % |

 

61

----

 

----

*              Less than 1%.

 

(1)                                  Percentage figures assume the exercise of optionsfor the purchase of Common Stock (Nonvoting) held by such shareholder, whichconversion or exercise is at the option of the holder within sixty days.

 

(2)                                  Includes 1,143,000 shares issuable upon exerciseof options granted to Mr. Cornwell under the Stock Option Plan which areexercisable at the option of the holder within sixty days and a total of 26,800shares held by Mr. Cornwell’s immediate family.  Mr. Cornwell disclaims beneficial ownership with respect tosuch 26,800 shares.  The business addressof Mr. Cornwell is Granite Broadcasting Corporation, 767 Third Avenue,34th Floor, New York, New York, 10017.

 

(3)                                  Includes 1,106,800 shares issuable upon exerciseof options granted to Stuart J. Beck under the Stock Option Plan which areexercisable at the option of the holder within sixty (60) days and a total of8,000 shares held in trust for Mr. Beck’s children.  Mr. Beck disclaims beneficial ownership with respect to such8,000 shares.  The business address ofMr. Stuart Beck is Granite Broadcasting Corporation, 767 Third Avenue,34th Floor, New York, New York, 10017.

 

(4)                                  Includes 250,000 shares issuable upon exercise ofoptions granted to Mr. Selwyn under the Stock Option Plan which are exercisableat the option of the holder within sixty days.

 

(5)                                  Includes 56,350 shares issuable upon the exerciseof options granted to Mr. Wills under the Stock Option Plan which areexercisable at the option of the holder within sixty days.

 

(6)                                  Includes 53,100 shares issuable upon exercise ofoptions granted to Ms. McClain under the Stock Option Plan which areexercisable at the option of the holder within 60 days.

 

(7)                                  Includes 8,250 shares held by Mr. Beck’swife, 29,264 shares held by the Martin F. Beck Family Foundation and 56,100shares issuable upon exercise of options granted under the Directors’ StockOption Plan which are exercisable at the option of the holder within sixtydays.  Mr. Beck disclaimsbeneficial ownership with respect to shares held by his spouse and by theMartin F. Beck Family Foundation.

 

(8)                                  Includes 81,775 shares issuable upon exercise ofoptions granted to Mr. Greenwald under the Directors’ Stock Option Plan whichare exercisable at the option of the holder within sixty days.

 

(9)                                  Includes 47,875 shares issuable upon exercise ofOptions granted to Mr. Dugger under the Directors’ Stock Option Plan which areexercisable at the option of the holder within sixty days.

 

(10)                            Includes 3,000 shares held by Mr. Settle’s wife as custodian forhis children and 81,735 shares issuable upon exercise of options granted to Mr.Settle under the Directors’ Stock Option Plan which are exercisable at theoption of the holder within sixty days. Mr. Settle disclaims beneficial ownership with respect to theshares held by his spouse.

 

(11)                            Includes 2,800 shares held by Mr. Hamilton’s wife as custodian for theirminor children under the UGMA and 92,450 shares issuable upon exercise ofoptions granted to Mr. Hamilton under the Directors’ Stock Option Plan, whichare exercisable at the option of the holder within sixty days.  Mr. Hamilton disclaims beneficial ownershipwith respect to the shares held by his spouse.

 

(12)                            Includes 200 shares held by Mr. Brown’schildren and 44,625 issuable upon exercise of options granted to Mr. Brownunder the Directors’ Stock Option Plan which are exercisable at the option ofthe holder within sixty days.

 

(13)                            Includes41,250 shares issuable upon exercise of options granted to Mr. Barfield underthe Directors’ Stock Option Plan which are exercisable at the option of theholder within sixty days.

 

62

----

 

(14)                            Includes31,250 shares issuable upon exercise of options granted to Ms. Pollard underthe Directors’ Stock Option Plan which are exercisable at the option of theholder within sixty days.

 

63

----

 

**Item 13.  Certain Relationships and RelatedTransactions**

 

Between 1995 and 1998, the Company loaned Mr. Cornwell,Chief Executive Officer and Chairman of the Board of Directors, $2,911,000 infour separate transactions to pay the exercise price on stock options exercisesand certain personal income taxes.  OnJanuary 1, 2001, the Company loaned Mr. Cornwell an additional $375,000. OnFebruary 15, 2001, the Company agreed to consolidate the five loansinto one loan in the amount of $3,286,000. The new promissory note matures onJanuary 25, 2006 or, if earlier, 30 days after the officer’s termination ofemployment. The new promissory note does not bear interest, but interest at anannual rate of 6.75 percent will be imputed as additional compensation to theofficer.  The new promissory note allowsfor the loan to be forgiven in one-third increments if the Company’s CommonStock (Nonvoting) trades for ten consecutive trading days at $15, $20, and $25,respectively, or if the per share consideration received by the Company’scommon stockholders in a Change of Control (as defined in the Indenturesgoverning the Company’s senior subordinated notes) equals at least $15.00,$20.00 or $25.00, respectively.  Inaddition, on February 15, 2001 the Company forgave $232,247 of interest accruedon Mr. Conrwell’s loans during the year ended December 31, 2000.

 

In 1995, the Companyloaned Mr. Stuart Beck, President and a member of the Board of Directors,$221,200 to pay for certain personal taxes. OnFebruary 15, 2001, the Company agreed to cancel this loan and issue anew loan in the same amount. The new promissory note matures on January 25,2006 or, if earlier, 30 days after the officer’s termination of employment. Thenew promissory note does not bear interest, but interest at an annual rate of6.75 percent will be imputed as additional compensation to the officer.  The new promissory note allows for the loanto be forgiven in one-third increments if the Company’s Common Stock(Nonvoting) trades for ten consecutive trading days at $15, $20, and $25,respectively, or if the per share consideration received by the Company’scommon stockholders in a Change of Control (as defined in the Indenturesgoverning the Company’s senior subordinated notes) equals at least $15.00,$20.00 or $25.00, respectively. In addition, on February 15, 2001 the Companyforgave $19,908 of interest accrued on Mr. Beck’s loan during the year–endedDecember 31, 2000.

 

64

----

 

**PART IV**

 

**Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K**

 

(a)1  Financial Statements

 
|  GRANITE  BROADCASTING CORPORATION

  Report of Independent Auditors

  Consolidated Statements of Operations for  the Years

    Ended December 31, 1999, 2000 and 2001

  Consolidated Balance Sheets as of December 31, 2000 and 2001

  Consolidated Statements of Stockholders’  Equity (Deficit)

    For the Years Ended December 31, 1999,  2000 and 2001

  Consolidated Statements of Cash Flows for  the Years

    Ended December 31, 1999, 2000 and 2001

  Notes to Consolidated Financial Statements

  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(a)2  Financial Statement Schedule

 
| Schedule II — Valuation and Qualifying Accounts                                                                                                                                                                                                                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                      |
| Schedule  I — Condensed Financial Information, Schedule III — Real Estate and  Accumulated Depreciation, Schedule IV — Mortgage Loans on Real Estate and  Schedule V — Supplemental Information Concerning Property - Casualty  Insurance Operations have  been  omitted because they are not applicable to the Company.

  |

 

(a)3  Exhibits

 
| 3.1d/  |   | Third Amended and Restated Certificate of Incorporation  of the Company, as amended.                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                        |
| 3.2r/  |   | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                        |
| 3.3g/  |   | Certificate of Designations of the Powers, Preferences  and Relative, Participating, Optional and Other Special Rights of the  Company’s 123⁄4%, Cumulative Exchangeable Preferred Stock and Qualifications,  Limitations and Restrictions Thereof. |
|   |   |                                                                                                                                                                                                                                                        |
| 4.37b/ |   | Indenture, dated as of May 19, 1995, between Granite  Broadcasting Corporation and United States Trust Company of New York for the  Company’s $175,000,000 Principal Amount 10-3/8% Senior Subordinated Notes due  May 15, 2005.                       |
|   |   |                                                                                                                                                                                                                                                        |
| 4.38c/ |   | Form of 10-3/8% Senior Subordinated Note due  May 15, 2005.                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                        |
| 4.41f/ |   | Indenture, dated as of February 22, 1996, between  Granite Broadcasting Corporation and The Bank of New York relating to the  Company’s $110,000,000 Principal Amount 9–3/8% Series A Senior  Subordinated Notes due December 1, 2005.            |
|   |   |                                                                                                                                                                                                                                                        |
| 4.42f/ |   | Form of 9-3/8% Series A Senior Subordinated Note due  December 1, 2005.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                        |
| 4.44g/ |   | Indenture,  dated as of January 31, 1997, between Granite Broadcasting Corporation and  The Bank of New York for the Company’s 123⁄4% Series A Exchange Debentures and  123⁄4% Exchange Debentures due April 1, 2009.                            |
|   |   |                                                                                                                                                                                                                                                        |
| 4.45g/ |   | Form of 123⁄4% Exchange Debenture due April 1, 2009  (included in the Indenture filed as Exhibit 4.44).                                                                                                                                             |

 

65

----

 
|    |   |                                                                                                                                                                                                                                                                                                                              |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.49l/  |   | Indenture dated as of May 11, 1998, between the Company  and The Bank of New York, as Trustee, relating to the Company’s 8-7/8% Senior  Subordinated Notes due May 15, 2008 (including form of note).                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.51p/  |   | Series A Warrant to purchase 2,500,000 shares of Common  Stock of Granite Broadcasting Corporation issued May 31, 2000 to National  Broadcasting Company, Inc.                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.52p/  |   | Series B Warrant to purchase 2,000,000 shares of Common  Stock of Granite Broadcasting Corporation issued May 31, 2000 to National  Broadcasting Company, Inc.                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.53p/  |   | Registration Rights Agreement, dated May 31, 2000  between Granite Broadcasting Corporation and National Broadcasting Company,  Inc.                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.54q/  |   | Credit Agreement dated as of March 6, 2001, among  Granite Broadcasting Corporation, as Borrower, the Lenders party thereto,  Goldman Sachs Credit Partners L.P., as Administrative Agent, Tranche B  Collateral Agent, Sole Lead Arranger and Sole Bookrunner, and Foothill  Capital Corporation, as Tranche A Collateral Agent. |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.55q/  |   | Warrant to purchase 753,491 shares of Common Stock  (Nonvoting) of Granite Broadcasting Corporation issued March 6, 2001 to  Goldman Sachs & Co.                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.1n/  |   | Granite  Broadcasting Corporation Stock Option Plan, as amended through October 26,  1999.                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.12f/ |   | Network Affiliation Agreement (WPTA-TV).                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.13a/ |   | Employment Agreement dated as of September 20, 1991  between Granite Broadcasting Corporation and W. Don Cornwell.                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.14a/ |   | Employment Agreement dated as of September 20, 1991  between Granite Broadcasting Corporation and Stuart J. Beck.                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.15l/ |   | Granite Broadcasting Corporation Management Stock Plan,  as amended through April 28, 1998.                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.19n/ |   | Granite Broadcasting Corporation Directors’ Stock  Option Plan, as amended through October 26, 1999.                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.20b/ |   | Network Affiliation Agreement (WTVH-TV).                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.25d/ |   | Granite Broadcasting Corporation Employee Stock  Purchase Plan, dated February 28, 1995.                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.28e/ |   | Network Affiliation Agreement (WKBW).                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.30g/ |   | Employment Agreement dated as of September 19, 1996  between Granite Broadcasting Corporation and Robert E. Selwyn, Jr.                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.31r/ |   | Non–Employee Directors Stock Plan of Granite  Broadcasting Corporation, as amended through December 31, 2000.                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.32h/ |   | Stock Purchase Agreement, dated as of October 3, 1997,  by and among Granite Broadcasting Corporation, Pacific FM Incorporated, James  J. Gabbert and Michael P. Lincoln.                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.34i/ |   | First Amendment to Purchase and Sale Agreement, dated  as of July 20, 1998 among Granite Broadcasting Corporation, Pacific FM  Incorporated, James J. Gabbert and Michael P. Lincoln.                                                                                                                                             |

 

66

----

 
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.36j/  |   | Stock Purchase Agreement, dated as of June 26, 1998,  between Granite Broadcasting Corporation and The Michael Lincoln Charitable  Remainder Unitrust.                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.37k/  |   | Stock Purchase Agreement, dated as of June 26, 1998,  between Granite Broadcasting Corporation and The James J. Gabbert Charitable  Remainder Unitrust.                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10. 38m/ |   | Extension Letter, dated February 28, 1999 between  Granite Broadcasting Corporation and Robert E. Selwyn, Jr. extending the term  of Mr. Selwyn’s Employment Agreement to January 31, 2003.                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.46o/  |   | The Granite Broadcasting Corporation 2000 Stock Option  Plan, dated as of April 25, 2000.                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.47p/  |   | Network Affiliation Agreement, dated as of May 31, 2000  among Granite Broadcasting Corporation, the Parties set forth on Schedule I  thereto, and NBC Television Network (KNTV(TV), KSEE, KBJR and WEEK-TV).                                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.48p/  |   | Supplemental Agreement, dated as of May 31, 2000,  between Granite Broadcasting Corporation and National Broadcasting Company,  Inc.                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.50q/  |   | Amended and Restated Network Affiliation Agreement,  dated as of March 6, 2001 among Granite Broadcasting Corporation, the Parties  set forth on Schedule I thereto, and NBC Television Network (KNTV(TV)).                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.51q/  |   | Amended and Restated Network Affiliation Agreement,  dated as of March 6, 2001 among Granite Broadcasting Corporation, the Parties  set forth on Schedule I thereto, and NBC Television Network (KSEE, KBJR-TV  and WEEK-TV).                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.52s/  |   | First Amendment, dated as of October 5, 2001, to the  Credit Agreement, dated as of March  6, 2001, by and among Granite Broadcasting Corporation, the Lenders party  thereto, Goldman Sachs Credit Partners L.P., as agent for the Lenders, as  sole lead arranger and book runner and as Tranche B Collateral Agent, and  Foothill Capital Corporation, as Tranche A Collateral Agent. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.53t/  |   | Stock Purchase Agreement, dated as of December 14,  2001, by and among National Broadcasting Company, Inc., Granite Broadcasting Corporation, KNTV Television,  Inc. and KNTV License, Inc.                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 21.      |   | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| 23.      |   | Consent of Independent Auditors (Ernst & Young LLP).                                                                                                                                                                                                                                                                                                                                 |

 

----

 

a/                             Incorporatedby reference to the similarly numbered exhibits to the Company’s RegistrationStatement No. 33-43770 filed on November 5, 1991.

 

b/                            Incorporatedby reference to the similarly numbered exhibits to the Company’s RegistrationStatement No. 33-94862 filed on July 21, 1995.

 

c/                             Incorporatedby reference to the similarly numbered exhibits to Amendment No. 2 toRegistration Statement No. 33-94862 filed on October 6, 1995.

 

67

----

 

d/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,1994, filed on March 29, 1995.

 

e/                                                                                      Incorporated by reference to the similarly numbered exhibit to theCompany’s Current Report on Form 8-K filed on July 14, 1995.

 

f/                                                                                        Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10–K for the fiscal year ended December31, 1995, filed on March 28, 1996.

 

g/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10–K for the fiscal year ended December31, 1996, filed on March 21, 1997.

 

h/                                                                                     Incorporated by reference to Exhibit Number 1 to the Company’s CurrentReport on Form 8–K, filed on October 17, 1997.

 

i/                                                                                         Incorporated by reference to Exhibit Number 2.5 to the Company’s CurrentReport on Form 8–K, filed on August 13, 1998.

 

j/                                                                                         Incorporated by reference to Exhibit Number 2.3 to the Company’s CurrentReport on Form 8-K, filed on July 1, 1998.

 

k/                                                                                      Incorporated by reference to Exhibit Number 2.4 to the Company’s CurrentReport on Form 8–K, filed on July 1, 1998.

 

l/                                                                                         Incorporated by reference to the similarly numbered exhibit to theCompany’s Registration Statement No. 333-56327 filed on June 8, 1998.

 

m/                                                                                   Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,1998, filed on March 31, 1999.

 

n/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,1999, filed on March 30, 2000.

 

o/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,filed on May 15, 2000.

 

p/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,filed on August 14, 2000.

 

q/                                                                                     Incorporated by reference to the similarly numbered exhibit to theCompany’s Current Report on Form 8-K, filed on March 9, 2001.

 

r/                                                                                        Incorporated by reference to the similarly numbered exhibit to theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2000, filed on March 30, 2001.

 

s/                                                                                      Incorporated by reference to the similarly numbered exhibit to theCompany’s Current Report on Form 8-K, filed on October 24, 2001.

 

t/                                                                                        Incorporated by reference to the similarly numbered exhibit to theCompany’s Current Report on Form 8-K, filed on December 19, 2001.

 

(b)  Reports on Form 8-K.

 

68

----

 

Current Report on Form8-K filed October 24, 2001, disclosing that the Company entered into a FirstAmendment to its senior credit agreement, effective October 23, 2001. 

 

Current Report on Form 8-K filed December 19, 2001,disclosing that the Company and certain of its subsidiaries entered into adefinitive agreement with National Broadcasting Company, Inc. (“NBC”), wherebyNBC will acquire from the Company the San Francisco-Oakland-San Jose,California market-based KNTV television station.

 

69

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, in the City of NewYork, State of New York, on the 29h day of March, 2002.

 
|   |   |   |   |   |   | GRANITE  BROADCASTING CORPORATION    |
|--------|--------|--------|--------|--------|--------|--------------------------------------|
|   |   |   |   |   |   |                                 |
|   |   |   |   |   |   | By:                                  | /s/ W. DON CORNWELL |   |
|   |   |   |   |   |   | W. Don Cornwell                      |
|   |   |   |   |   |   | Chief Executive Officer and Chairman |
|   |   |   |   |   |   | of  the Board of Directors           |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant in thecapacities and on the dates indicated:

 
| **Signature**                 |   | **Title**                                                             |   | **Date**        |
|-------------------------------|--------|-----------------------------------------------------------------------|--------|-----------------|
| /s/  W. DON CORNWELL          |   | Chief Executive Officer                                               |   | March  29, 2002 |
| (W.  Don Cornwell)            |   | (Principal Executive Officer) and Chairman of the Board  of Directors |   |            |
|                          |   |                                                                  |   |            |
| /s/  STUART J. BECK           |   | President and Secretaryand Director                                   |   | March  29, 2002 |
| (Stuart  J. Beck)             |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  LAWRENCE I. WILLS        |   | Senior Vice President — Chief Administrative                     |   | March  29, 2002 |
| (Lawrence  I. Wills)          |   | Officer (Principal Accounting Officer)                                |   |            |
|                          |   |                                                                  |   |            |
| /s/  ELLEN MCCLAIN            |   | Senior Vice President — Chief Financial                          |   | March  29, 2002 |
| (Lawrence  I. Wills)          |   | Officer (Principal Financial Officer)                                 |   |            |
|                          |   |                                                                  |   |            |
| /s/  ROBERT E. SELWYN, JR.    |   | Chief Operating Officer and Director                                  |   | March  29, 2002 |
| (Robert  E. Selwyn, Jr.)      |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  MARTIN F. BECK           |   | Director                                                              |   | March  29, 2002 |
| (Martin  F. Beck)             |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  JAMES L. GREENWALD       |   | Director                                                              |   | March  29, 2002 |
| (James  L. Greenwald)         |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  EDWARD DUGGER III        |   | Director                                                              |   | March  29, 2002 |
| (Edward  Dugger III)          |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  THOMAS R. SETTLE         |   | Director                                                              |   | March  29, 2002 |
| (Thomas  R. Settle)           |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  CHARLES J. HAMILTON, JR. |   | Director                                                              |   | March  29, 2002 |
| (Charles  J. Hamilton, Jr.)   |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  M. FRED BROWN            |   | Director                                                              |   | March  29, 2002 |
| (M.  Fred Brown)              |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  JON E. BARFIELD          |   | Director                                                              |   | March  29, 2002 |
| (Jon  E. Barfield)            |   |                                                                  |   |            |
|                          |   |                                                                  |   |            |
| /s/  VERONICA E. POLLARD      |   | Director                                                              |   | March  29, 2002 |
| (Veronica  E. Pollard)        |   |                                                                  |   |            |

 

70

----