**UNITEDSTATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13OR 15(D) OF****THE SECURITIES EXCHANGE ACT OF 1934**

 

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F**or the fiscal year ended December 31, 2003**

 

**Commissionfile number 0-19728**

 

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

 

Securities Registered Pursuant to Section12(b) of the Act:**None**

 

Securities Registered Pursuant to Section12(g) of the Act:**CommonStock (Nonvoting), $.01 par value per share**

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   ý   No   o

 

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

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the act). Yes   o   No   ý

 

As of March 5,2004, 19,202,274 shares of Granite Broadcasting Corporation Common Stock(Nonvoting) were outstanding.  Theaggregate market value (based upon the last reported sale price on the NasdaqSmall Cap Market on June 30,2003) of the shares of Common Stock (Nonvoting)held by non-affiliates was approximately $52,003,500 (For purposes ofcalculating the preceding amounts only, all directors and executive officers ofthe registrant are assumed to be affiliates.) As of March 5, 2004, 178,500 shares of Granite Broadcasting CorporationClass A Voting Common Stock were outstanding, all of which were held byaffiliates.

 

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**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**GRANITE BROADCASTINGCORPORATION**

 

**Form 10-K**

 

**Table of Contents**

 

 
| PART I     |                                                                                                               |   |
|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                               |   |
| Item 1.    | Business                                                                                                           |   |
| Item 2.    | Properties                                                                                                         |   |
| Item 3.    | Legal  Proceedings                                                                                                 |   |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                                               |   |
|       |                                                                                                               |   |
| PART II    |                                                                                                               |   |
|       |                                                                                                               |   |
| Item 5.    | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |   |
| Item 6.    | Selected Financial Data                                                                                            |   |
| Item 7.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operation                         |   |
| Item 7A.   | Quantitative and Qualitative Disclosures  About Market Risk                                                        |   |
| Item 8.    | Financial Statements and Supplementary Data                                                                        |   |
| Item 9.    | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures                             |   |
| Item 9A.   | Controls and Procedures                                                                                            |   |
|       |                                                                                                               |   |
| PART III   |                                                                                                               |   |
|       |                                                                                                               |   |
| Item 10.   | Directors and Executive Officers of the  Registrant                                                                |   |
| Item 11.   | Executive Compensation                                                                                             |   |
| Item 12.   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    |   |
| Item 13.   | Certain Relationships and Related  Transactions                                                                    |   |
| Item 14.   | Principal Accountant Fees and Services                                                                             |   |
|       |                                                                                                               |   |
| PART IV    |                                                                                                               |   |
|       |                                                                                                               |   |
| Item 15.   | Exhibits, Financial Statement Schedule and  Reports on Form 8-K                                                    |   |
|       |                                                                                                               |   |
| SIGNATURES |                                                                                                               |   |

 

Granite BroadcastingCorporation is a Delaware corporation. Unless the context otherwise requires,“we,” “us” and “our” refer to Granite Broadcasting Corporation, together withits direct and indirect subsidiaries. Our principal executive offices are located at 767 Third Avenue, 34thFloor, New York, NY 10017, and our telephone number at that address is (212)826-2530. Our web site is located at http://www.granitetv.com. The informationon our web site is not part of this report.

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.These are statements that relate to future periods and include statementsregarding our anticipated performance.

 

Generally, thewords anticipates, believes, expects, intends, estimates, projects, plans andsimilar expressions identify forward-looking statements. These forward-lookingstatements involve known and unknown risks, uncertainties and other importantfactors that could cause our actual results, performance or achievements orindustry results to differ materially from any future results, performance orachievements expressed or implied by these forward-looking statements. Theserisks, uncertainties and other important factors are disclosed under ‘‘Riskfactors’’ and elsewhere in this report, including, without limitation, inconjunction with the forward-looking statements included in this report.

 

Although webelieve that these statements are based upon reasonable assumptions, we cangive no assurance that our goals will be achieved. Given these uncertainties,prospective investors are cautioned not to place undue reliance on theseforward-looking statements. These forward-looking statements are made as of thedate of this report. We assume no obligation to update or revise them orprovide reasons why actual results may differ. Important factors that couldcause our actual results to differ materially from our expectations include,without limitation:

 

•                                        inability to implement our strategy, or,having implemented it, failure to realize anticipated cost savings or revenueopportunities available through implementation of our strategy;

 

•                                        inability to effect dispositions oracquisitions of television stations, which are an important part of ourstrategy;

 

•                                        the effects of governmental regulation ofbroadcasting, including adverse changes in, or interpretations of, theexceptions to the Federal Communications Commission’s duopoly rule which couldrestrict, or eliminate, our ability to enter into duopoly-type operatingarrangements and implement our operating strategy;

 

•                                        pricing fluctuations in national andlocal advertising;

 

•                                        volatility or increases in programmingcosts;

 

•                                        restrictions on our operations due to,and the effect of, our significant leverage and limited sources of liquidity;

 

•                                        the impact of changes in national andregional economies;

 

•                                        delay in any economic recovery or therecovery not being as robust as might otherwise have been anticipated;

 

•                                        our ability to service our outstandingdebt;

 

•                                        successful integration of acquiredtelevision stations (including achievement of synergies and cost reductions);

 

•                                        competition in the markets in which ourstations are located;

 

•                                        loss of network affiliations or changesin the terms of network affiliation agreements upon renewal; and

 

•                                        technological change and innovation inthe broadcasting industry.

 

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**PART I**

 

**Item 1.    Business**

 

We are atelevision broadcasting company, focused on developing and operating a group oftelevision broadcast stations in the United States.  We presently own six middle-market stations affiliated witheither ABC, NBC or CBS, our Big Three Affiliates, and two stations operating intop ten markets affiliated with the Warner Brothers Television Network, our WBAffiliates. All of the Big Three Affiliates are leading providers of localnews, weather and sports in their respective markets. We own all but one of ourtelevision stations through separate wholly owned subsidiaries.

 

# **Wemake available free of charge, on or through the SEC Filings section of our website *(http://www.granitetv.com/)*,our annual reports on Form 10-K, quarterly reports on Form 10-Q and currentreports on Form 8-K and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the SEC.**

 

The following table sets forth general information for each of ourlicensed television stations:

 
| **TV  Station** |   | **Market  Area**                       |   | **DMA  Rank(1)** |   | **Network  Affiliation** |   | **Households(2)** |   | **Channel/  Frequency** |   | **Other  Commercial  Stations  in DMA** |   |
|-----------------|--------|----------------------------------------|--------|------------------|--------|--------------------------|--------|-------------------|--------|-------------------------|--------|-----------------------------------------|--------|
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| KBWB-TV         |   | San Francisco - Oakland - San Jose, CA |   | 5                |   | WB                       |   | 2,436,220         |   | 20/UHF                  |   | 18                                      |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| WDWB-TV         |   | Detroit, MI                            |   | 10               |   | WB                       |   | 1,899,910         |   | 20/UHF                  |   | 7                                       |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| WKBW-TV         |   | Buffalo, NY                            |   | 44               |   | ABC                      |   | 639,190           |   | 7/VHF                   |   | 8                                       |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| KSEE-TV         |   | Fresno- Visalia, CA                    |   | 57               |   | NBC                      |   | 519,330           |   | 24/UHF                  |   | 11                                      |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| WTVH-TV         |   | Syracuse, NY                           |   | 80               |   | CBS                      |   | 375,880           |   | 5/VHF                   |   | 5                                       |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| WPTA-TV         |   | Fort Wayne, IN                         |   | 104              |   | ABC                      |   | 264,140           |   | 21/UHF                  |   | 4                                       |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| WEEK-TV         |   | Peoria - Bloomington, IL               |   | 117              |   | NBC                      |   | 236,810           |   | 25/UHF                  |   | 4                                       |   |
|            |   |                                   |   |             |   |                     |   |              |   |                    |   |                                    |   |
| KBJR-TV         |   | Duluth, MN  - Superior, WI        |   | 136              |   | NBC                      |   | 172,250           |   | 6/VHF                   |   | 5                                       |   |

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(1)                                  “DMArank” refers to the size of the television market or Designated Market Area(“DMA”) as defined by the A.C. Nielsen Company (“Nielsen”).  All DMA rank data is derived from theNielsen Media Research web site’s 2002-2003 DMA’s.

 

(2)           Represents the number of televisionhouseholds in the DMA as estimated by Nielsen.

 

 

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**Recent Developments**

 

On December 22, 2003, we completed a $405,000,000 offering of our 93/4% Senior Secured Notes, or the Notes, due December 1, 2010, at a discount,resulting in proceeds to us of $400,067,100. Interest on the Notes is payable on December 1 and June 1 of each year,beginning on June 1, 2004.  The Notesare secured by substantially all of our assets.  We used the net proceeds from the offering in part to (i) repayall outstanding borrowings (plus accrued interest) under our senior creditagreement,  (ii) redeem at par, plusaccrued interest, all of our 9 3/8% and 10 3/8% senior subordinated notes dueMay and December 2005, respectively, and (iii) to repurchase at par (plusaccrued interest) all of our 8 7/8% senior subordinated notes due May2008.  The remaining proceeds will beused for general working capital purposes.

 

Restatement ofFinancial Results.  On March 2, 2004, weannounced that we had adopted a new policy for recognizing the useful lives ofour network affiliation agreements and that such intangibles will be amortizedover a period of 25 years.  Previously,these assets were accounted for as having an indefinite life.  As a result of this decision, we restatedour earnings for the full year ended December 31, 2002 and for the first threequarters of 2003, and recorded additional amortization expense of $2,979,000 onthese intangible assets in 2002 and $745,000 for each of the first threequarters of 2003.

 

**Operating Strategy**

 

We seek toincrease net revenue through the following strategies:

 

*Strategically realign station group.*Weactively seek strategic asset acquisitions and dispositions in order toincrease net revenue.  Ideally, thesetransactions will result in operating more than one television station in amarket or geographic region, thereby enabling us to realize substantial near termcost savings and longer term revenue enhancements.  To further this strategy, we are considering selling certainstations, including the WB stations which we believe have significant assetvalue due to their locations in the fifth and tenth largest DMAs.

 

*Emphasize local news, weather and sports. *Our televisionstations provide high quality, locally produced news, weather and sportsprogramming on the Big Three affiliated stations, with five of the Big Threeaffiliated stations ranked as the number 1 or number 2 news providers in theirrespective markets.  The station’sstrong local news differentiates us from other media alternatives and helps toattract a loyal audience, which is appealing to advertisers.  In addition, the cost of producing localnews is generally lower than the cost of syndicated programming and incrementallocal news programming can be added with relatively small increases inoperating costs.

 

*Grow local revenues.  *The stationsemploy highly skilled and experienced sales managers, with an average of 25years of television advertising sales experience, who seek to increase localadvertising revenue through creative and unique sales propositions that appealto the needs of local advertisers.  Thecommissioned sales teams consist of between 8 and 12 account executives perstation who utilize a sophisticated inventory management system, conductresearch and introduce special projects, all designed to develop new localbusiness.

 

* Manage costs. *Weemphasize strict control of station operating expenses through a detailedannual budgeting and monthly forecasting process.  In developing the selection of syndicated programs, we evaluate aprogram’s cost and projected profitability and

 

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its potential relative to other programming alternatives.  We also maintain tight control over staffinglevels and capital expenditures. Through the normal course of maintaining and updating the stations’technical operations and infrastructure, certain processes will be automated inorder to reduce long term operating costs.

 

***The Stations and Markets***

* *

The stationsoperate in geographically diverse markets, which minimizes the impact ofregional economic downturns.  Twostations are located in the west region (KBWB—San Francisco, California andKSEE—Fresno, California), four stations are located in the mid-west region(WDWB— Detroit, Michigan, WEEK—Peoria, Illinois, WPTA—Fort Wayne, Indiana andKBJR—Duluth, Minnesota) and two stations are located in the northeast region(WKBW—Buffalo, New York and WTVH— Syracuse, New York). Three of the eightstations are affiliated with NBC, two are affiliated with ABC, one isaffiliated with CBS and two are affiliated with the WB Network.

 

The followingis a description of each of our television stations:

 

# ***KBWB, San Francisco-Oakland-SanJose, California***

# ** **

KBWB commencedbroadcasting in 1968 and is a WB affiliate. We acquired KBWB from Pacific FM,Incorporated in July 1998.  SanFrancisco-Oakland-San Jose is the fifth largest DMA in the country, comprisingten counties and approximately 2.4 million television households, according toNielsen.

 

KBWB is a WBNetwork affiliate that attracts teens, young adults and families.  KBWB’s prime time line up includes popularWB programs such as *Gilmore Girls, Smallville, Angel, Everwood, 7thHeaven, Charmed* and *Reba*. The station’s syndicated programming includes talk shows such as *JerrySpringer and Maury Povich*and situation comedies such as *Dharma andGregg,**King of the Hill,**The Drew Carey Show* and *HomeImprovement.*

 

The San Francisco-Oakland-SanJose DMA is one of the most ethnically diverse DMAs in the country and almosthalf of its population is under 35 years of age, the young demographic targetedin part by the WB Network.  The Bay Areahas the fourth highest Effective Buying Income, or EBI, with an averagehousehold EBI of $69,900, according to estimates provided by the BIA Investingin Television 2002 Market Report (the “BIA Report”).  Studies show Bay Area residents have the third-highestdiscretionary income in the United States. The Bay Area economy is centered on apparel, banking and finance,biosciences, engineering and architecture, high technology, telecommunications,tourism, and wineries.  Leadingemployers in the area include Safeway Supermarkets, Hewlett-Packard, SeagateTechnology, The Gap, Intel, Chevron Texaco Corp., Oracle and Levi-Strauss.  The Bay Area is also home to severaluniversities, including the University of California Berkeley, San FranciscoState University, San Jose State University, and Stanford University.

 

# ***WDWB, Detroit,Michigan***

# ** **

WDWB commencedbroadcasting in 1968 and is a WB affiliate. We acquired WDWB from WXON-TV, Incorporated in January 1997.

 

Detroit is thetenth largest DMA in the country, comprising nine counties and approximately1.9 million television households.

 

WDWB is a WBNetwork affiliate that attracts teens, young adults and families.  WDWB’s prime time line up includes popularWB programs such as *Gilmore Girls, Smallville, Angel, Everwood, 7thHeaven, Charmed* and *Reba*. The station’s syndicated programming includes relationship shows such as*BlindDate, Street Smarts* and *5th Wheel*, and situation comedies such as *FreshPrince, The Hughleys,**Living Single*, *Will and Grace,**HomeImprovement,* and *Cheers*.

 

The DetroitDMA is an ethnically diverse DMA and almost half of its population is under 35years of age, the young demographic that is targeted in part by the WBNetwork.  Detroit ranks tenth in totalEBI, with an average Detroit household EBI of $55,300, according to estimatesprovided in the BIA Report.  Detroitalso ranks third among the top ten DMAs in percentage of Households UsingTelevision, or HUT.  Well known as thehome of the three major U.S. automobile manufacturers (General Motors, Ford andDaimler Chrysler), Detroit is also home to their advertising agencies (LCIMedia, MindShare, and Pentamark/BBDO). The Detroit economy has increasingly diversified and headquarters manymajor companies, as well as 64 hospitals, two world-renowned medical researchcenters and over 35 institutions of higher education.  A large number of influential advertising agencies serve these

 

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institutions, including TN Media, Initiative Media and Young &Rubicam and, as a leading voice in the Detroit market, WDWB has a high degreeof visibility with all of them.

 

# ***WKBW, Buffalo,New York***

# ** **

WKBW commencedbroadcasting in 1958 and is an ABC Network affiliate.  We acquired WKBW from Queen City Broadcasting, Incorporated inJune 1995.

 

Buffalo is the44th largest DMA in the country, comprising ten counties and approximately639,000 television households.

 

WKBW has astrong news organization and broadcasts 6.5 hours of locally producedprogramming per weekday.  The station’smorning show, “AM Buffalo” is the only locally produced program of its kind inthe market and has been airing at 10 am for 25 years.  In September 2002, the station launched the market’s firstlocally produced information and entertainment program at 4:00 p.m. called *Western NewYork Live*, which is often the second most watched program in itstime period. The station’s syndicated programming includes shows such as *Live withRegis and Kelly,**Wheel of Fortune* and *Jeopardy*.  WKBW consistently achieves prime timeratings that are higher than the ABC prime time national average.

 

The Buffalo economy is centered on manufacturing, government, healthservices and financial services.  Theaverage household effective buying income, or EBI, in the DMA was $39,300,according to estimates provided in the BIA Financial Network, Inc.’s *Investing inTelevision 2003*, 3rd Edition, or the BIA Report.  Leading employers in the area includeGeneral Motors, Ford Motor Company, American Axle and Manufacturing, M&TBank, HSBC Bank, Roswell Park Cancer Institute, Buffalo General Hospital, TopsMarkets and Verizon.

 

# ***KSEE,Fresno-Visalia, California***

# ** **

KSEE commencedbroadcasting in 1953 and is an NBC affiliate. We acquired KSEE from Meredith Corporation in December 1993.

 

Fresno-Visaliais the 57th largest DMA in the country, comprising six counties andapproximately 519,000 television households.

 

KSEE is a fastgrowing station in this market, recently overtaking the long-time news leaderKSFN for the number one newscast at 11:00 p.m. KSEE broadcasts 5 hours of localnews per weekday, including the market’s first locally produced 4:00 p.m.newscast, launched in September 2002. The station’s syndicated programming includes shows such as *Dr. Phil,**Extra*and *AccessHollywood*.

 

Althoughfarming continues to be the single most important part of the Fresno areaeconomy, the area now attracts a variety of service-based industries andmanufacturing and industrial operations. No single employer or industry dominates the local economy.  The average household EBI in the DMA was $37,300,according to estimates provided in the BIA Report.  The Fresno-Visalia DMA is also the home of several universities,including California State University- Fresno.

 

*WTVH, Syracuse, NewYork*

 

WTVH commencedbroadcasting in 1948 and is a CBS affiliate. We acquired WTVH from Meredith Corporation in December 1993.

 

Syracuse isthe 80th largest DMA in the country, comprising seven counties andapproximately 376,000 television households. The station’s prime time programming generally ranks second in theadults 25-54 ratings category.

 

WTVHbroadcasts 3.5 hours of locally produced programming per weekday. In January2003, WTVH launched the market’s first locally produced information andentertainment program at 5:00 p.m. called *Central New York Live*.  The station’s syndicated programmingincludes shows such as *Martha Stewart Living,**Wheel ofFortune* and *Jeopardy* .

 

The Syracuse economy is centered on manufacturing, education andgovernment.  The average household EBIin the DMA was $40,400, according to estimates provided in the BIA Report.  Leading employers located in the areainclude SUNY Health Science Center, Syracuse University, New Process Gear,Wegmans, St. Joseph’s Hospital Health Center, Carrier Corporation, P&C

 

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Food Markets, Niagara Mohawk and Lockheed-Martin.  The Syracuse DMA is also the home of severaluniversities, including Syracuse University, Cornell University and ColgateUniversity.

 

*WPTA, Fort Wayne,Indiana*

 

WPTA commencedbroadcasting in 1957 and is an ABC affiliate. We acquired WPTA from Pulitzer Broadcasting Company in December 1989.

 

Fort Wayne isthe 104th largest DMA in the country, comprising twelve counties andapproximately 264,000 television households. The station’s newscasts rank number 1 in the adults 25-54 ratingscategory.

 

WPTA has beenthe long-time news leader in the market, broadcasting 4 hours of local news perweekday.   The station’s syndicatedprogramming includes shows such as *Martha Stewart Living*, *Oprah*and *EverybodyLoves Raymond*.

 

The Fort Wayne economy is centered on manufacturing, healthcare,communications, insurance, financial services and aerospace.  The average household EBI in the DMA was$44,700, according to estimates provided in the BIA Report.  Leading employers located in the areainclude Lincoln National Life Insurance, General Electric, General Motors,Sirva/North American Van Lines, Verizon, Dana, Uniroyal Goodrich and ITT.  Fort Wayne is also the home of severaluniversities, including the joint campus of Indiana University and PurdueUniversity at Fort Wayne.  Two majorhospital systems, Lutheran Health and Parkview Health, make Fort Wayne aregional medical center that serves four states.

 

*WEEK,Peoria-Bloomington, Illinois*

 

WEEK commencedbroadcasting in 1953 and is an NBC affiliate. We acquired WEEK from EagleBroadcasting Corporation in October 1988.

 

Peoria-Bloomington is the 117th largest DMA in thecountry, comprising ten counties and approximately 237,000 televisionhouseholds.  The station’s newscasts andprime time programming rank number 1 in the adults 25-54 ratings category.

 

WEEK is theperennial market news leader, broadcasting 4.5 hours of local news per weekdayand ranking number one in every newscast and in every key time period.  For four of the last five years, theIllinois Broadcaster’s Association has named WEEK Station of the Year. Thestation’s syndicated programming includes shows such as *Martha Stewart Living*, *Dr. Phil,**Oprah,*and *Seinfeld*.

 

The Peoriaeconomy is centered on heavy equipment manufacturing and agriculture but hasachieved diversification with the growth of service-based industries such asconventions, healthcare and telecommunications.  Prominent corporations located in Peoria include Caterpillar,Central Illinois Light Company, Commonwealth Edison Company, Komatsu MiningSystems, and IBM. In addition, the United States Department of Agriculture’ssecond largest research facility is located in Peoria, and the area has becomea major regional healthcare center.

 

The economy of Bloomington is focused on insurance, education,agriculture and manufacturing. Leading employers located in Bloomington includeState Farm Insurance Company, Country Companies Insurance Company andDiamond-Star Motors Corporation (a subsidiary of Mitsubishi).  The Peoria-Bloomington area is also the homeof numerous institutions of higher education including Bradley University,Illinois Central College, Illinois Wesleyan University, Illinois StateUniversity, Eureka College and the University of Illinois College ofMedicine.  The average household EBI inthe DMA was $46,100, according to estimates provided in the BIA Report.

 

*KBJR, Duluth,Minnesota-Superior, Wisconsin*

 

KBJR commencedbroadcasting in 1954 and is an NBC affiliate. We acquired KBJR from RJR Communications, Incorporated in October 1988.

 

Duluth,MN-Superior, WI is the 136th largest DMA in the country, comprising twelvecounties and approximately 172,000 television households.  The station’s newscasts and prime timeprogramming generally rank number 1 in the adults 25-54 ratings category.

 

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KBJR is astrong competitor in the market, broadcasting 3.5 hours of local news perweekday.  The station’s syndicatedprogramming includes shows such as *Martha Stewart Living*, *Dr. Phil,Jeopardy* and *Wheel of Fortune*.  We also own Channel 11 License, Inc., thelicensee of television station KRII, Channel 11, Chisholm, Minnesota, asatellite station that transmits the signal of KBJR into the northern sectionof the DMA. Although KRII predominantly rebroadcasts the KBJR signal, KRIIbroadcasts unique news and weather content, as well as certain commercials,separately to this region. KBJR also airs United Paramount Networks, or UPN,programming over its DTV signal that is carried by virtually all cableoperators in the DMA.

 

The area’s primary industries include mining, fishing, food products,paper, medical, shipping, tourism and timber. The average household EBI in the DMA was $36,900, according to estimatesprovided in the BIA Report. Duluth is one of the major ports in the UnitedStates out of which iron ore, coal, limestone, cement, grain, paper andchemicals are shipped. Duluth is also a regional banking, retail, medical andcultural center with leading employers including St. Mary’s/Duluth Clinic, St.Luke’s Hospital, Uniprise (United HealthCare), Allete (Minnesota Power),DM&IR (Duluth Mesabi and Iron Range Railway Co.), Cirrus Design, Grandma’sRestaurants, Minnesota Air National Guard and the United States Postal ServiceRemote Encoding Center.  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.

 

**Employees**

 

As of March 5, 2004, we employed 714 persons, of whom 263 arerepresented by three unions pursuant to agreements expiring in 2004, 2005, 2007and 2008.  We believe our relations withour employees are good.

 

**Network Affiliation**

** **

The nature of a television station’s revenues, expenses and operationsis largely dependent on whether or not a station is affiliated with one of themajor networks.  Affiliates of the majornetworks, which include NBC, ABC, CBS and Fox, receive a significant portion oftheir programming each day from the network. These major networks provide programming, and in some cases, cashpayments, to their affiliated stations in exchange for a significant portion ofthe affiliates’ advertising inventory during the network providedprograms.  These networks then sell thisadvertising time and retain the revenue. Affiliates of WB and UPN, receive prime time programming from thenetwork pursuant to agreed upon arrangements.

 

In contrast,fully independent stations purchase or produce all of their programming,resulting in higher programming costs, but allowing independent stations toretain entire advertising inventory and revenue. However, barter andcash-plus-barter arrangements are becoming increasingly popular.  Under these 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 fromthe independent stations.

 

We haveentered into affiliation agreements with networks for each of ourstations.  KSEE, WEEK, and KBJR areaffiliated with NBC, WPTA and WKBW are affiliated with ABC, WTVH is affiliatedwith CBS, and KBWB and WDWB stations are affiliated with WB.

 

Theaffiliation agreements with the major networks provide the stations with theright to broadcast all programs transmitted by the traditional network withwhich it is affiliated. In exchange, the network has the right to sell asignificant amount of the advertising time during these broadcasts.  In addition, the CBS and ABC stations, forevery hour that those stations elect to broadcast traditional networkprogramming, the network pays the station a fee, specified in each affiliationagreement, which varies with the time of day. The NBC stations currently do not receive network compensation.  Typically, prime time programming generatesthe highest hourly rates. Rates are subject to increase or decrease by thenetwork during the term of each affiliation agreement, with provisions foradvance notice to, and right of termination by, the station in the event of areduction in rates.

 

Under theaffiliation agreements with the WB network, KBWB and WDWB each pays anaffiliation fee for the programming each station receives pursuant to itsaffiliation agreement.

 

 

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The network affiliation agreements expire on the following dates:

 

| **Station** |   | **Network  affiliation** |   | **Affiliation  agreement  expiration date** |
|-------------|--------|--------------------------|--------|---------------------------------------------|
| WDWB        |   | WB                       |   | May 31, 2004                                |
| WKBW        |   | ABC                      |   | June 30, 2005                               |
| WPTA        |   | ABC                      |   | July 3, 2005                                |
| WTVH        |   | CBS                      |   | December 31, 2005                           |
| KBWB        |   | WB                       |   | January 9, 2008                             |
| KSEE        |   | NBC                      |   | December 31, 2011                           |
| WEEK        |   | NBC                      |   | December 31, 2011                           |
| KBJR        |   | NBC                      |   | December 31, 2011                           |

 

Under each of the affiliation agreements, the networks may terminatethe agreement upon advance written notice under the circumstances specified inthe agreements.  Under our ownership,none of our stations has received a termination notice from its respectivenetwork.  We have no reason to believethat the network affiliation agreements will not be renewed when they expire.

 

**Industry Overview**

 

Commercialtelevision broadcasting began in the United States on a regular basis in the1940s.  Currently, there are a limitednumber of channels available for broadcasting in any one geographic area andthe license to operate a broadcast station is granted by the FCC.  Television stations can be distinguished bythe frequency on which they broadcast. Television stations which broadcast over the very high frequency, orVHF, band of the spectrum generally have some competitive advantage overtelevision stations that broadcast over the ultra-high frequency, or UHF, bandof the spectrum because VHF stations usually have better signal coverage andoperate at a lower transmission cost. In television markets in which all localstations are UHF stations, such as Fort Wayne, Indiana, Peoria-Bloomington,Illinois and Fresno- Visalia, California, there is no competitive disadvantageto broadcasting over a UHF band.

 

Televisionstation revenues are primarily derived from local, regional and nationaladvertising and, to a lesser extent, from network compensation and revenuesfrom studio rental and commercial production activities.  Advertising rates are based upon a program’spopularity among the viewers an advertiser wishes to attract, the number ofadvertisers competing for the available time, the size and demographic make-upof the market served by the station, and the availability of alternativeadvertising media in the market area. Because broadcast television stations relyon advertising revenues, declines in advertising budgets, particularly inrecessionary periods, adversely affect the broadcast industry, and as a resultmay contribute to a decrease in the value of broadcast properties.

 

**Competition**

** **

The financialsuccess of our television stations is dependent on audience ratings andadvertising revenues within each station’s geographic market.  The stations compete for revenues with othertelevision stations in their respective markets, as well as with otheradvertising media, such as newspapers, radio, magazines, outdoor advertising,transit advertising, yellow page directories, the Internet, direct mail andlocal cable systems.  Some competitorsare part of larger companies with substantially greater financial resourcesthan us.

 

Competition inthe broadcasting industry occurs primarily in individual markets. Generally, atelevision broadcasting station in one market does not compete with stations inother market areas.  Our televisionstations are located in highly competitive markets.

 

A televisionstation’s ability to successfully compete in a given market depends uponseveral factors, including:

 

•                  managementexperience;

 

•                  signalcoverage;

 

•                  localprogram acceptance;

 

•                  networkaffiliation;

 

•                  audiencecharacteristics;

 

•                  assignedfrequency; and

 

•                  strengthof local competition.

 

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Thebroadcasting industry is continuously faced with technological change andinnovation, the possible rise in popularity of competing entertainment andcommunications media, and changes in labor conditions, any of which could havean adverse effect on our operations and results.  For example, digital video recorders, which permit consumers todigitally record television programming and then play back that programming,often without commercial advertisement, are increasing in popularity and couldhave an adverse effect on the our ability to generate advertising revenue.

 

Alternateprogramming, entertainment and video distribution systems can increasecompetition for a broadcasting station by bringing distant broadcasting signalsinto its market which are not otherwise available to the station’s audience andalso by serving as distribution systems for non-broadcast programming.  Programming is now being distributed tocable television systems by both terrestrial microwave systems and bysatellite.  Our stations also competewith home entertainment systems, including video cassette recorders and playbacksystems, video discs and television game devices, the Internet, multi-pointdistribution systems, multi-channel multi-point distribution systems, videoprogramming services available through the Internet and other video deliverysystems.

 

Our televisionstations also face competition from direct broadcast satellite services whichtransmit programming directly to homes equipped with special receiving antennasand from video signals delivered over telephone lines. Satellites may be usednot only to distribute non-broadcast programming and distant broadcastingsignals but also to deliver local broadcast programming which otherwise may notbe available to a station’s audience. Our stations may also face competition from wireless cable systems,including multi-channel distribution services, or MDS.  Two four-channel MDS licenses have beengranted in most television markets.  MDSoperations can provide commercial programming on a paid basis.  A similar service also can be offered usingthe instructional television fixed service, or ITFS.  The FCC allows the educational entities that hold ITFS licensesto lease their excess capacity for commercial purposes.  The multi-channel capacity of ITFS could becombined with either an existing single channel MDS or a newer multi-channelmulti-point distribution service to increase the number of available channelsoffered by an individual operator.

 

In addition,video compression techniques, now in use with direct broadcast satellites andin development for cable, are expected to permit a greater number of channelsto be carried within existing bandwidth. These compression techniques, as wellas other technological developments, are applicable to all video deliverysystems, including over-the-air broadcasting and other non-broadcast commercialapplications, and have the potential to provide vastly expanded programming tohighly targeted audiences. Reduction in the cost of creating additional channelcapacity could lower barriers to entry for new channels and encourage thedevelopment of increasingly specialized niche programming.  This ability to reach very narrowly definedaudiences may alter the competitive dynamics for advertising expenditures.

 

We are unableto predict the effect that these or other technological changes will have onour business or ability of the stations to compete in their markets.  Commercial television broadcasting may facefuture competition from interactive video and data services that providetwo-way interaction with commercial video programming, along with informationand data services that may be delivered by commercial television stations,cable television, direct broadcast satellites, multi-point distributionsystems, multi-channel multi-point distribution systems or other video deliverysystems.   In addition, actions by theFCC, Congress and the courts all suggest an increased future involvement in theprovision of video services by telephone companies.  The Telecommunications Act of 1996 lifted the prohibition on theprovision of cable television services by telephone companies in their owntelephone areas subject to regulatory safeguards and permits telephonecompanies to own cable systems under certain circumstances.  We cannot predict the impact of any futurerelaxation or elimination of the existing limitations on the ownership of cablesystems by telephone companies on the stations.  The elimination or further relaxation of the restriction,however, could increase the competition the stations face from otherdistributors of video programming.

 

**FCCRegulation of Television Broadcasting**

 

Televisionbroadcasting is subject to the jurisdiction of the FCC under the CommunicationsAct of 1934, as amended.  TheCommunications Act prohibits the operation of television broadcasting stationsexcept under a license issued by the FCC and empowers the FCC to issue, revokeand modify broadcasting licenses, determine the locations of stations, regulatethe equipment used by stations, adopt regulations to carry out the provisionsof the Communications Act and impose penalties for violation of such regulations.  The Telecommunications Act of 1996 wasenacted on February 8, 1996 and amends major provisions of the CommunicationsAct.

 

*LicenseIssuance and Renewal*

 

Televisionbroadcasting licenses are typically granted and renewed for a period of eightyears, but may be renewed for a

 

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shorter periodupon a finding by the FCC that the “public interest, convenience and necessity”would be served by a license for a shorter period. When a station applies forrenewal of its television license, parties in interest as well as members ofthe public may apprise the FCC of the service the station has provided duringthe preceding license term and urge the grant or denial of the renewalapplication.  A competing applicationfor authority to operate a station and replace the incumbent licensee may notbe filed against a renewal application and considered by the FCC in decidingwhether to grant a renewal application.

 

The FCC grantsa renewal application upon a finding that the licensee:

 

•                has served thepublic interest, convenience, and necessity;

 

•                has committed noserious violations of the Communications Act or the FCC’s rules; and

 

•                has committed noother violations of the Communications Act or the FCC’s rules which wouldconstitute a pattern of abuse.

 

If the FCCcannot make this finding, it may deny a renewal application, and accept otherapplications to operate the station of the former licensee.  In the vast majority of cases, the FCCrenews broadcast licenses even when petitions to deny are filed againstbroadcast license renewal applications. All of our existing licenses are in effect and are subject to renewalduring 2005, 2006 and 2007.  The mainstation licenses for our television stations expire on the following dates:

 

| **Station** |   | **License  expiration date** |   |
|-------------|--------|------------------------------|--------|
| WPTA        |   | August 1, 2005               |   |
| WDWB        |   | October 1, 2005              |   |
| WEEK        |   | December 1, 2005             |   |
| KBJR        |   | December 1, 2005             |   |
| KRII (1)    |   | April 1, 2006                |   |
| KSEE        |   | December 1, 2006             |   |
| KBWB        |   | December 1, 2006             |   |
| WTVH        |   | June 1, 2007                 |   |
| WKBW        |   | June 1, 2007                 |   |

 

----

(1)                                  KRII, Channel 11, Chisholm, Minnesota, isa satellite station that transmits the signal of KBJR into the northern sectionof the DMA.   Although KRIIpredominantly rebroadcasts the KBJR signal, KRII broadcasts unique news andweather content, as well as certain commercials, separately to this region.KBJR also airs UPN programming over its DTV signal that is carried by virtuallyall cable operators in the DMA.

 

Although therecan be no assurances that our licenses will be renewed, we are not aware of anyfacts or circumstances that would prevent us from having our licenses renewed.

 

*OwnershipRestrictions*

 

TheCommunications Act also prohibits the assignment of a license or the transferof control of a licensee without prior approval of the FCC.  In its review process, the FCC considersfinancial and legal qualifications of the prospective assignee or transfereeand also determines whether the proposed transaction complies with ruleslimiting the common ownership of certain attributable interests in broadcast,cable, and newspaper media on a local and national level.  The FCC’s restrictions on multiple ownershipcould limit the acquisitions and investments that we make or the investmentsother parties make in us.  However, noneof our officers, directors or holders of voting common stock currently hasattributable or non-attributable interests that violate the FCC’s ownershiprules currently in effect. As discussed below, the FCC released a comprehensivemedia ownership order on July 2, 2003 in which it revised many of its mediaownership rules following completion of a biennial review proceeding commencedin September 2002. This review was conducted pursuant to Section 202(h) of theTelecommunications Act of 1996, which required the FCC to conduct reviews ofits media ownership rules every two years. On January 22, 2004, President Bush signed into law the ConsolidatedAppropriations Act of 2004, which, among other things, amended Section 202(h)of the Telecommunications Act of 1996 to provide that the FCC need only conductits regular reviews of its media ownership rules on a quadrennial, rather thanbiennial, basis.

 

Theserevisions of the media ownership rules have not gone into effect because of astay issued on September 3, 2003 by the United States Court of Appeals for theThird Circuit.  The stay remains ineffect during the Third Circuit’s review of the media ownership order.  Oral arguments in the case were held onFebruary 11, 2004.  Several parties alsohave petitioned the FCC for

 

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reconsideration of its biennial review media ownership order. Thisproceeding remains pending. We are unable to predict the eventual outcome oreffect of the Third Circuit’s review or the FCC’s review on reconsideration.  In addition, there are numerous proposalscurrently before Congress to set aside or modify some or all of the rulechanges set forth in the media ownership order.  We are unable to predict whether any of these proposals will beenacted or the potential effect such changes would have on our business.

 

*Attribution*

 

Ownership oftelevision licensees is attributed to officers, directors and shareholders whoown 5% or more of the outstanding voting stock of a licensee, except thatcertain institutional investors who exert little or no control or influenceover a licensee may own up to 20% of a licensee’s outstanding voting stockbefore attribution results.  Under theFCC’s “equity-debt plus” rule, a party’s interest will be deemed attributableif the party owns equity, including all stockholdings, whether voting ornon-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 same market.  Incontrast, debt instruments, non-voting stock and certain limited partnershipinterests, provided the licensee certifies that the limited partners are notmaterially involved in the media-related activities of the partnership, willnot result in attribution.

 

# **InDecember 2000, the FCC revised its rules to eliminate the single majorityshareholder exception from the broadcast attribution rules.  Under that exception, the interest of aminority voting shareholder would not be attributable if one person or entityheld more than 50% of the combined voting power of the common stock companyholding or controlling a broadcast license. Any minority voting stock interest in a company with a single majorityshareholder was grandfathered as non-attributable if the interest was acquiredbefore December 14, 2000. The FCC’s decision eliminating the single majorityshareholder exception as it applies to cable system ownership was appealed tothe United States Court of Appeals for the District of Columbia Circuit, and inMarch 2001, the court reversed the FCC’s decision and remanded the case to theFCC.  In December 2001, the FCCsuspended its repeal of the single majority shareholder exception for broadcastattribution rules, effectively reinstating the exception, until it could act onthe court remand.  As a result, thesingle majority shareholder exception from the broadcast attribution rulescurrently is in effect.  The mediaownership order did not address the majority shareholder exception.**

# ** **

In addition,for purposes of its national and local multiple ownership rules, the FCCattributes local marketing agreements in which the broker provides more than15% of the brokered station’s weekly program time.  This means that, if an entity owns one television station in amarket and has a qualifying local marketing agreement with another station inthe same market, this arrangement must comply with all of the FCC’s ownershiprules including the television duopoly rule. Local marketing agreements enteredinto prior to November 5, 1996 are grandfathered until the FCC’s 2004 biennialreview when their status will be reviewed on a case by case basis.  Local marketing agreements entered into onor after November 5, 1996 were grandfathered temporarily until August 2001only.  We do not operate any stationspursuant to a local marketing agreement.

 

In its recentmedia ownership order, the FCC concluded that a radio joint advertising salesagreement in which a same-market radio station was the broker for more than 15percent of the brokered radio station’s weekly advertising time wouldconstitute an attributable interest for the broker in the brokered radiostation.  As a result, the FCC wouldcount the brokered radio station towards the broker’s permissible ownershiptotals under the revised radio ownership rules.  The FCC did not attribute same-market joint sales agreements fortelevision stations in its media ownership order. However, the FCC did indicatethat it would initiate a proceeding to seek comment on whether to attributesame-market television joint sales agreements. We are not currently a party to any joint sales agreement but may seekto enter into such agreements as part of its acquisition strategy.  We cannot predict whether the FCC willdecide to attribute television joint sales agreements.

 

*NationalOwnership Rules*

 

Prior to the2002 biennial review, FCC rules provided that no individual or entity couldhave an attributable interest in television stations that reach more than 35%of the national television viewing audience. For purposes of this calculation, stations in the UHF band, which coverschannels 14—69, receive a “UHF discount” and are attributed with only 50% ofthe households attributed to stations in the VHF band, which covers channels2—13. In the media ownership order, the FCC raised the national ownership capfrom 35% to 45% and maintained the UHF discount.  The national ownership cap was subject to a pending appeal beforethe Third Circuit and, as a result, was stayed pending that review.   However, the appropriations act of 2004amended Section 202(c) of the Telecommunications Act of 1996 by increasing thenational ownership cap to 39 percent. This legislation further provided thatthe national ownership cap would not be subject to the same quadrennial reviewprocess as the Commission’s other media ownership rules. Although some parties,including the FCC, have argued that the legislation moots the nationalownership cap 

 

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issue, the Third Circuit hasnot yet made that determination. The UHF discount also is subject to the ThirdCircuit review. On February 19, 2004, the FCC released a public notice seekingadditional comment on the UHF discount, as part of its ongoing reconsiderationof the media ownership order, in light of the legislation discussed above.  We are unable to predict the result of theThird Circuit appeal or the FCC’s reconsideration proceeding.

 

*TelevisionDuopoly Rule*

 

Prior to the2002 biennial review, the FCC’s television duopoly rule permitted parties toown up to two television stations in the same designated market area as long asat least eight independently owned and operating full-power televisionstations, or “voices,” would remain in the market post-acquisition, and atleast one of the two stations was not among the top four ranked stations in thedesignated market area based on specified audience share measures.  Under the duopoly rule, once a companyacquires a television station duopoly, the joint owner is not required todivest either station if the number of voices within the market subsequently fallsbelow eight, or if either of the two jointly-owned stations later is rankedamong the top four stations in the market; however, the multiple televisionstation owner can sell the television combination to a third party only if thejoint ownership is in compliance with the duopoly rule at the time of the saleto the third party.

 

The FCCrevised the duopoly rule in the media ownership order.  Pursuant to the revised duopoly rule, asingle entity may own an attributable interest in two television stations inthe same designated market area provided that one of the stations is not amongthe top-four rated stations in the market based on audience share.  A station’s rank is determined by using thestation’s most recent all-day audience share, as measured by Nielsen, at thetime the transfer or assignment application is filed with the FCC.  In addition, the media ownership orderprovides that an entity may own an attributable interest in three televisionstations in the same designated market area if the proposed acquisition doesnot involve one of the top-four rated stations and there are at least 18independent television station voices in the designated market area.  Under the revised duopoly rule, the multipletelevision station owner can sell the television combination to a third partyonly if the joint ownership is in compliance with the revised duopoly rule atthe time of the sale to the third party. Both commercial and non-commercialbroadcast television stations are counted to determine the number of televisionstations that are in a designated market area.

 

Under itsprevious rules, the FCC could grant a waiver of the television duopoly rule ifone of the two television stations was a failed or failing station, if theproposed transaction would result in the construction of an unbuilt televisionstation or if compelling public interest factors were present, provided that awaiver applicant demonstrated that no reasonable out-of-market buyer wasavailable.  The FCC generally retainedthis waiver standard in the media ownership order but removed its requirementthat an applicant demonstrate the absence of an out-of-market buyer.  In addition, the FCC provided for acase-by-case review of other waiver requests in markets with 11 or fewerstations, in recognition that consolidation in markets of this size could leadto significant public interest benefits in some circumstances.  The FCC also imposed two limitations onwaivers once they are granted.  First,at the end of the merged stations’ license terms, the combined stations’ ownermust provide a specific factual showing of the public interest benefitsprovided from the merger and must certify that the public interest benefitspromised by the merger are being fulfilled. Second, a combination owner may notassign or transfer a station combination involving a station acquired pursuantto a waiver unless the assignee or transferee demonstrates that the proposedtransaction complies with the waiver standard at the time of the acquisition.

 

Prior to the2002 biennial review, satellite stations authorized to rebroadcast theprogramming of a parent station located in the same designated market area wereexempt from the duopoly rule.  The FCCretained this satellite exemption in the media ownership order.  As a result, our common ownership of KBJRand KRII is fully consistent with the television duopoly rule under theprevious or modified rules.

 

The FCC’smedia ownership order is subject to an appeal before the Third Circuit.Pursuant to a stay issued September 3, 2003, the FCC’s previous duopoly ruleand waiver standard remain in effect while this appeal is pending.  We cannot predict the eventual outcome orthe effect of the Third Circuit’s review of the media ownership order.

 

*Cross-OwnershipRules*

 

The FCC’srules previously prohibited the holder of an attributable interest in atelevision station from also holding an attributable interest in a cabletelevision system serving a community located within the coverage area of thattelevision station. On February 26, 2003, the FCC released an order repealing thebroadcast/cable cross-ownership rule, pursuant to a 2002 United States Court ofAppeals for the District of Columbia Circuit decision vacating the FCC’sprevious broadcast/ cable cross-ownership rule.

 

Prior to the2002 biennial review, the FCC’s broadcast/newspaper cross-ownership rulefurther prohibited the common

 

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ownership of abroadcast television station and a daily newspaper in the same localmarket.  The FCC’s radio/televisioncross-ownership rule also restricted the common ownership of television andradio stations in the same market. Under the previous rules, one entity could own up to two televisionstations and six radio stations in the same market provided that:

 

•                  20 independentmedia voices, including certain newspapers and a single cable system, wouldremain in the relevant market following consummation of the proposedtransaction, and

 

•                  the proposedcombination would be consistent with the television duopoly and local radioownership rules.

 

If fewer than20 but more than 9 independent media voices would remain in a market followinga proposed transaction, and the proposed combination was otherwise consistentwith the FCC’s rules, a single entity could hold attributable interests in upto two television stations and up to four radio stations.  If neither of these “independent mediavoice” tests was met, a party generally could have an attributable interest inno more than one television station and one radio station in a market.

 

The FCCrevised its cross-ownership rules in the media ownership order.  The new cross-media ownership rules, whichlimit the number and type of media outlets a single entity may own in a localmarket, replace both the prior broadcast/newspaper cross-ownership rule and theprior radio/television cross-ownership rule. The new cross-media ownership rules permit cross-media combinationsaccording to the number of television stations within a market.  In markets with nine or more televisionstations, there are no cross-media ownership limits.  In markets with between four and eight television stations, oneof the following combinations is permitted:

 

•                  a dailynewspaper, one television station, and up to half of the radio station limitfor that market;

 

•                  a daily newspaperand up to the radio station limit for that market; or

 

•                  two televisionstations and up to the radio station limit for that market.

 

In marketswith three or fewer television stations, no cross-ownership among television,radio, and newspapers is permitted; however, an entity may obtain a waiver ofthis ban by showing that the television station and the cross-owned media donot serve the same area.  In addition,the new rule defines the local market according to the number of televisionstations within the area, not independent voices.

 

The FCC’s newcross-ownership rules are subject to the appeal currently before the ThirdCircuit.  Pursuant to a stay issuedSeptember 3, 2003, the FCC’s previous cross-ownership rules remain in effectwhile this appeal is pending.  We cannotpredict the eventual outcome or effect of the Third Circuit’s review of themedia ownership order.

 

*AntitrustReview*

 

The Departmentof Justice and the Federal Trade Commission have the authority to determinethat a transaction presents antitrust concerns.  These agencies have increased their scrutiny of the televisionand radio industries, and have indicated their intention to review mattersrelated to the concentration of ownership within markets, including localmarketing agreements, even when the ownership or local market agreement inquestion is permitted under the regulations of the FCC.  In March 2002, the Department of Justice andFederal Trade Commission reached an agreement through which the Department ofJustice would assume primary control over all merger reviews in the media andentertainment industries, however, the Senate Commerce committee has stated anintention to formally review this decision to assign media mergers to theDepartment of Justice.  There can be no assurance that future policy andrulemaking activities of the Antitrust Agencies will not impact our operations.

 

*AlienOwnership*

 

Foreigngovernments, representatives of foreign governments, non-citizens,representatives of non-citizens, and corporations or partnerships organizedunder the laws of a foreign nation are barred from holding broadcastlicenses.  Non-citizens, however, mayown up to 20% of the capital stock of a licensee and up to 25% of the capitalstock of a United States corporation that, in turn, owns a controlling interestin a licensee.  A broadcast license maynot be granted to or held by any corporation that is controlled, directly orindirectly, by any other corporation of which more than one-fourth of thecapital stock is owned or voted by non-citizens or their representatives, byforeign governments or their representatives, or by non-U.S. corporations, ifthe FCC finds that the public interest will be served by the refusal orrevocation of such license. Non-citizens may serve as officers and directors of a broadcast licensee

 

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and any corporation controlling, directly or indirectly, suchlicensee.  As a result, we arerestricted by the Communications Act from having more than one-fourth of ourcapital stock owned by non-citizens, foreign governments or foreigncorporations, but not from having an officer or director who is a non-citizen.

 

*EqualEmployment Opportunity*

 

On November20, 2002, the FCC released a new set of equal employment opportunity ruleswhich became effective on March 10, 2003. The new rules require us to complywith certain recruiting, outreach, record keeping and reporting requirements inaddition to complying with the general prohibition against employment discrimination.  On February 6, 2003, interested partiesfiled a joint petition for partial reconsideration of the FCC’s new rules.  We are unable to predict the resolution ofthe petition for reconsideration.  Thenew rules remain in effect pending the resolution of this petition forreconsideration.

 

*MustCarry/Retransmission Consent*

 

The CableTelevision Consumer Protection and Competition Act of 1992, or Cable Act, andthe FCC’s implementing regulations give television stations the right tocontrol the use of their signals on cable television systems.  Under the Cable Act, at three year intervalsbeginning in June 1993, every qualified television station is required to electwhether it wants to avail itself of must-carry rights or, alternatively, togrant retransmission consent.  Whether astation is qualified depends on factors such as the number of activatedchannels on a cable system, the location and size of a cable system, the amountof duplicative programming on a broadcast station and the signal quality of thestation at the cable system’s head end. If a television station elects retransmission consent, cable systems arerequired to obtain the consent of that television station for the use of itssignal and could be required to pay the television station for such use.  The Cable Act further requires mandatorycable carriage of all qualified local television stations electing theirmust-carry rights or not exercising their retransmission rights.  Under the FCC’s rules, television stationswere required to make their latest periodic election between must-carry andretransmission consent status by October 1, 2002, for the period from January1, 2003 through December 31, 2005. Television stations that failed to make an election by the specifieddeadline are deemed to have elected must-carry status for the relevantthree-year period.  For the three yearperiod beginning January 1, 2003, each of our stations has either elected itsmust-carry rights, entered into retransmission consent agreements, or obtainedan extension to permit us to continue negotiating a retransmission consentagreement with substantially all cable systems in its designated market area.

 

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 digital television, or DTV,service.  In its initial order, the FCCtentatively concluded that broadcasters would not be entitled to mandatorycarriage of both their analog and DTV signals and that broadcasters withmultiple DTV video programming streams would be required to designate a singleprimary video stream eligible for mandatory carriage.  Alternatively, a broadcaster may negotiate with cable systems forcarriage of its DTV signal in addition to its analog signal, or for carriage ofmultiple programming streams within its DTV signal, under retransmissionconsent.  The FCC is expected toreexamine these carriage issues in its next order, which we expect to be issuedthis year.  We are not able to predictwhether the FCC will require cable systems to: (i) carry all programmingstreams within a station’s DTV signal and/or (ii) to carry a station’s analogand DTV signals simultaneously.

 

*SatelliteHome Viewer Improvement Act*

 

Under theSatellite Home Viewer Improvement Act, or SHVIA, a satellite carrier generallymust obtain retransmission consent before carrying a television station’ssignal. Specifically, SHVIA:

 

•                  provides astatutory copyright license to enable satellite carriers to retransmit a localtelevision broadcast station into the station’s local market;

 

•                  permits thecontinued importation of network signals that originate outside of a satellitesubscriber’s local television market or designated market areas for certainexisting subscribers;

 

•                  providesbroadcast stations with retransmission consent rights in their local markets;and

 

•                  mandatescarriage of broadcast signals in their local markets after a phase-in period.

 

•                  Local marketsare defined to include both a station’s designated market area and its countyof license.

 

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SHVIA permitssatellite carriers to provide distant or nationally broadcast programming tosubscribers in “unserved” households. Households are unserved by a particular network if they do not receive asignal of at least a specified intensity from a station affiliated with thatnetwork or may qualify as unserved pursuant to other limitedcircumstances.  However, satellitetelevision providers can retransmit the distant signals of no more than twostations per day for each television network. As of January 1, 2002, a satellite carrier retransmitting the signal ofany local broadcast station into the station’s local market generally mustcarry all stations licensed to the carried station’s local market upon request.The portion of SHVIA that grants satellite carriers a compulsory copyrightlicense to provide distant network signals to unserved households is set toexpire at the end of 2004. In January 2004, legislation was introduced in theSenate which would extend the term of this provision to December 31, 2009.Absent an extension of the compulsory copyright license, a satellite carriermay not deliver a distant network signal to households unless it first obtainsthe agreement of the copyright owners of the copyrighted programming broadcastby the station.

 

Pursuant toSHVIA, satellite carriers are beginning to offer local broadcast signals tosubscribers in some of the nation’s large and mid-sized television markets. Asof March 5, 2004, satellite carrier DIRECTV carried the signals of our stationsKBWB, WDWB and WKBW and announced plans to carry KSEE, KBJR and WPTA sometimein 2004.  EchoStar currently carriesKBWB, WDWB, WKBW and KSEE.

 

*DigitalTelevision*

 

Pursuant to the Telecommunications Act of 1996, theFCC has adopted rules authorizing and implementing digital television, or DTV,service, technology that should improve the quality of both the audio and videosignals of television stations. The FCC has “set aside” channels within theexisting television spectrum for DTV and limited initial DTV eligibility toexisting television stations and certain applicants for new televisionstations.  The FCC has adopted a DTV tableof allotments as well as service and licensing rules to implement DTVservice.  The DTV allotment tableprovides a channel for DTV operations for each existing broadcaster and isintended to enable existing broadcasters to replicate their existing analogservice areas.  The affiliates of CBS,NBC, ABC and Fox in the ten largest U.S. television markets were required toinitiate commercial DTV service with a digital signal by May 1, 1999.  Affiliates of these networks located in the11th through the 30th largest U.S. television markets were required to beginDTV operation by November 1, 1999.  Allother commercial stations were required to construct DTV facilities by May 1,2002.  In November 2001, the FCCmodified its digital television transition rules in an effort to ease theburden of the required build out. Among other changes, the FCC relaxed itsinitial build out requirement.  Underthe new rules, a station will not have to replicate its entire analog servicearea until a date to be set in a proceeding initiated in February 2003.  The FCC has not established a date by whichstations must replicate their analog service area.

 

Congress hasgenerally required broadcasters to convert to DTV service, terminate theirexisting analog service and surrender one of their two television channels tothe FCC, on or before December 31, 2006. This 2006 transition date may be extended, however, upon the request ofa station, in the event that:

 

•                  one or more ofthe stations in the station’s market licensed to or affiliated with one of thetop four largest national television networks are not broadcasting a digitaltelevision signal, and the FCC finds that each such station has exercised duediligence and satisfies the conditions for an extension of the applicable constructiondeadlines for digital television service in that market;

 

•                  digital-to-analogconverter technology is not generally available in such market; or

 

•                  15% or more ofthe television households in the station’s market either, do not subscribe to amulti-channel video programming distributor that carries the DTV channelsoffered in that market; or do not have either at least one television receivercapable of      receiving DTV service orat least one television receiver of analog service signals equipped withdigital-to-analog converter technology.

 

The FCC alsohas adopted rules that permit DTV licensees to offer ancillary or supplementaryservices on their DTV channels under certain circumstances.  The FCC rules further require DTV licenseesto pay a fee of 5% of the gross revenues received from any ancillary orsupplemental uses of the DTV spectrum for which the company chargessubscription fees or other specified compensation.  No fees will be due for commercial advertising revenues receivedfrom free over-the-air broadcasting services. The FCC recently adopted rules intended to protect digital televisiontransmissions from unauthorized redistribution. Specifically, the FCC adopteduse of a mechanism known as the “broadcast flag” to protect digital transmissionsfrom unauthorized redistribution and also established rules to ensure thatequipment on both the transmission and reception side is capable of givingeffect to the broadcast flag.  The FCCalso has initiated a notice of inquiry to examine whether additional publicinterest obligations should be imposed on DTV licensees.  Various proposals in this proceeding wouldrequire DTV stations to increase their program diversity, focus more 

 

17

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programming and resources on addressing local issues and politicaldiscourse, increase access for disabled viewers and improve emergency warningsystems.

 

KBWB, WEEK andKSEE have initiated full power operation of their DTV facilities pursuant to anFCC license.  WPTA has constructed itsfacilities, begun full-power operation pursuant to automatic program testauthority, and filed an application for a license to cover this operation,which application remains pending. Similarly, WDWB has constructed full-power DTV facilities and begunfull-power operation pursuant to automatic program test authority, but has notyet filed an application seeking a license to cover this operation.

 

KBJR and WTVHcompleted construction of their DTV facilities and operate their DTV facilitiespursuant to  special temporaryauthorizations for limited build-out operation, which expire on April 22, 2004and June 15, 2004, respectively.  Asindicated above, the FCC expressly authorized limited buildout of DTVfacilities in order to facilitate the DTV transition, and DTV operationpursuant to a special temporary authorization automatically extends a station’sDTV construction permit indefinitely. We may request additional six-month extensions of KBJR’s and WTVH’sspecial temporary authorizations as necessary, which we predict will beapproved under the FCC’s current rules.

 

WKBW completedconstruction of its DTV facilities in March 2004 and operates its DTVfacilities pursuant to a special temporary authorization for limited buildoutoperation, the initial term of which expires August 17, 2004.

 

The FCC hadpreviously denied WKBW’s request for a third extension of its DTV constructionpermit on October 16, 2003, and admonished WKBW for failure to completeconstruction of its DTV facilities before the required deadline.  As a result of this denial, WKBW wasrequired to submit regular progress reports documenting its constructionefforts. WKBW has petitioned the FCC for reconsideration of the admonishment andpredicts that its DTV construction permit will be extended indefinitely byvirtue of its limited buildout operation pursuant to a special temporaryauthorization.

 

The FCC hasnot yet addressed the DTV requirements applicable to satellite stations likeKRII.

 

*ClassA Television Stations*

 

In November1999, Congress enacted the Community Broadcasters Protection Act, which createda new Class A status for low power television stations.  Under this statute, low power televisionstations which previously had secondary status to full power televisionstations are eligible for Class A status and are entitled to protection fromfuture displacement by modifications to full-power television stations undercertain circumstances.  The FCC hasadopted rules governing the extent of interference protection that must beafforded to Class A stations and the eligibility criteria for thesestations.  Because Class A stations arerequired to provide interference protection to previously authorized full-powertelevision stations, these new facilities are not expected to adversely affectthe operations of our television stations.

 

*ProposedLegislation and Regulations*

 

The FCCcurrently has under consideration, and the Congress and the FCC may in thefuture consider and adopt, new or modified laws, regulations and policiesregarding a wide variety of matters that could, directly or indirectly, affectthe operation, ownership, and profitability of our broadcast properties, resultin the loss of audience share and advertising revenues for our stations, oraffect our ability to acquire additional stations or finance acquisitions.  Such matters include but are not limited to:

 

•                  extension of theSHVIA compulsory copyright license for satellite carriers’ delivery of localstations;

 

•                  Penalties forthe broadcast of indecent programming;

 

•                  Broadcastownership limits;

 

•                  expediting thedigital television transition;

 

•                  minority andfemale involvement in the broadcasting industry;

 

•                  public interestobligations of broadcasters;

 

18

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•                  technical andfrequency allocation matters;

 

•                  changes tobroadcast technical requirements;

 

•                  an examinationof whether the cable must-carry requirement mandates carriage of both analogand digital television signals.

 

We cannotpredict whether such changes will be adopted or, if adopted, the effect thatsuch changes would have on our business.

 

**Item 2.    Properties**

 

Our principal executive offices are located in New York, New York.  The lease agreement, for approximately 9,500square feet of office space in New York, expires January 31, 2011.

 

The types ofproperties required to support each of our stations include offices, studios,transmitter sites and antenna sites.  Astation’s studios are generally housed with its offices in downtown or businessdistricts.  The transmitter sites andantenna sites are generally located so as to provide maximum marketcoverage.  The following table containscertain information describing the general character of our properties:

 

 
| **Station** |   | **Metropolitan  Area and Use**                          |   | **Owned or  Leased** |   | **Approximate  Size  (square feet)** |   | **Expiration  of Lease** |   |
|-------------|--------|---------------------------------------------------------|--------|----------------------|--------|--------------------------------------|--------|--------------------------|--------|
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| WTVH        |   | Syracuse, New YorkOffice and Studio                     |   | Owned                |   | 41,500                               |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
|        |   | Onondaga, New YorkTower Site                            |   | Owned                |   | 2,300                                |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| KSEE        |   | Fresno, CaliforniaOffice and Studio                     |   | Owned                |   | 32,000                               |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
|        |   | Bear Mountain, Fresno County, CaliforniaTower Site      |   | Leased               |   | 9,300                                |   | 3/22/51                  |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
|        |   | Meadow Lake, California  Tower Site                     |   | Leased               |   | 1,000                                |   | 5/16/13                  |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| WPTA        |   | Fort Wayne, IndianaOffice, Studio and Tower Site        |   | Owned                |   | 18,240                               |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| WEEK        |   | Peoria, Illinois  Office, Studio and Tower Site         |   | Owned                |   | 20,000                               |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| KBJR        |   | Duluth, Minnesota, Superior, WisconsinOffice and Studio |   | Owned                |   | 20,000                               |   | —                   |   |
|        |   | Tower Site                                              |   | Owned                |   | 3,300                                |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| KBWB        |   | San Francisco, California  Office and Studio            |   | Leased               |   | 25,777                               |   | 8/31/12                  |   |
|        |   | Tower Site                                              |   | Leased               |   | 2,750                                |   | 2/28/05                  |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| WKBW        |   | Buffalo, New York  Office and Studio                    |   | Owned                |   | 32,000                               |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
|        |   | Colden, New York  Tower Site                            |   | Owned                |   | 3,406                                |   | —                   |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| WDWB        |   | Southfield, MichiganOffice                              |   | Leased               |   | 8,850                                |   | 12/31/05                 |   |
|        |   | Studio and Tower Site                                   |   | Leased(1)            |   | 30,000                               |   | 9/30/06                  |   |
|        |   |                                                    |   |                 |   |                                 |   |                     |   |
| KRII        |   | Chilsom, MinnesotaTower Site                            |   | Owned                |   | 1,250                                |   | —                   |   |

 

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(1)           We own a 3,400 square foot building on the property.

 

19

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**Item 3.  Legal Proceedings**

 

We are fromtime to time involved in various claims and lawsuits that are incidental to itsbusiness.  We are not aware of anypending or threatened litigation, arbitration or administrative proceedingsinvolving claims or amounts that, individually or in the aggregate, we believeare likely to materially harm our business, financial condition or futureresults of operations.  Any litigation,however, involves risk and potentially significant litigation costs, andtherefore we cannot give any assurance that any litigation which may arise inthe future will not materially harm our business, financial condition or futureresults of operations.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

On February25, 2003, the holders of all of our Voting Common Stock adopted resolutions byunanimous written consent in lieu of a special meeting amending the GraniteBroadcasting Corporation Management Stock Plan, effective January 1, 2003, toprovide for performance awards and the deferral of awards.

 

On May 5, 2003, the holders of all of our VotingCommon Stock adopted resolutions by unanimous written consent in lieu of anannual meeting (i) appointing Ernst & Young LLP as independent auditors and(ii) electing W. Don Cornwell, Stuart J. 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 VeronicaPollard as directors.

 

20

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**PART II**

 

**Item 5.  Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of EquitySecurities**

 

Our CommonStock (Nonvoting) is traded over-the-counter on the Nasdaq Small Cap Marketunder the stock symbol GBTVK.  As ofMarch 5, 2004, the approximate number of record holders of Common Stock(Nonvoting) was 228.

 

The following table sets forth the closing market price ranges pershare of Common Stock (Nonvoting) during 2002 and 2003, as reported by NASDAQ:

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| 2002           |   |     |   |    |   |
| First Quarter  |   | $        | 2 9/20 |    | $      | 2 1/50 |   |
| Second Quarter |   | 3 3/5    |   | 2 1/25  |   |
| Third Quarter  |   | 2 19/50  |   | 1 7/20  |   |
| Fourth Quarter |   | 2 1/2    |   | 1 3/10  |   |
|           |   |     |   |    |   |
| 2003           |   |     |   |    |   |
| First Quarter  |   | 2 17/81  |   | 1 2/5   |   |
| Second Quarter |   | 3 7/10   |   | 1 11/25 |   |
| Third Quarter  |   | 3 3/20   |   | 2 9/29  |   |
| Fourth Quarter |   | 2 20/29  |   | 1 1/3   |   |
|                |        |          |        |         |        |  |  |

 

As of March 5,2004 the closing price per share for our Common Stock (Nonvoting), as reportedby NASDAQ was $1.62 per share.

 

There is noestablished public trading market for our Class A Voting Common Stock, parvalue $.01 per share, our Voting Common Stock. The Voting Common Stock and the Common Stock (Nonvoting) are referred toherein collectively as the Common Stock. As of March 5, 2004, the number of record holders of Voting Common Stockwas two.  Granite is a ControlledCompany as defined by Nasdaq Marketplace Rule 4350(c)(5).

 

We have neverdeclared or paid a cash dividend on our Common Stock and do not anticipatepaying a dividend on our Common Stock in the foreseeable future.  The payment of cash dividends on any of ourequity securities is subject to certain limitations under the Indenturegoverning our 9 3/4% Senior Secured Notes and under the Certificate ofDesignations of our 12 3/4% Cumulative Exchangeable Preferred Stock.  We are also prohibited from paying dividendson any Common Stock until all accrued but unpaid dividends on our Series AConvertible Preferred Stock, par value $.01 per share, are paid in full.  All outstanding shares of Series A PreferredStock were converted into Common Stock (Nonvoting) in August 1995.  Accrued dividends on the Series A PreferredStock, which totaled $262,844 at December 31, 2003, are payable on the date onwhich such dividends may be paid under our existing debt instruments.

 

**EquityCompensation Plan Information**

 
| **Plan category**                                           |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights** |   | **Weighted  average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  securities  remaining available for  future issuance** |      |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|-----------|
| Equity compensation plans approved by  security holders     |   | 7,544,626                                                                                           |   | $                                                                                   | 5.76   |                                                                | 2,250,000 |   |
| Equity compensation plans not approved by  security holders |   | —                                                                                              |   | —                                                                              |   | —                                                              |      |
| Total                                                       |   | 7,544,626                                                                                           |   | $                                                                                   | 5.76   |                                                                | 2,250,000 |   |

 

On December22, 2003, we completed a $405,000,000 offering of our 9 3/4% Senior SecuredNotes due December 1, 2010.  The SeniorSecured Notes have not been registered under the Securities Act of 1933.  We will use our reasonable best efforts tocause to become effective a registration statement with respect to an offer toexchange the Notes for registered Notes.

 

21

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**Item 6.  SelectedFinancial Data**

 

Theinformation set forth below should be read in conjunction with the consolidatedfinancial statements and notes thereto included at Item 8 herein.  The selected consolidated financial data hasbeen derived from our audited Consolidated Financial Statements.

 

Ouracquisitions and dispositions of operating properties during the periodsreflected in the following selected financial data materially affect thecomparability of such data from one period to another.

 
|                                                                                         |   | **Years  Ended December 31,**                     |    |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|
|                                                                                         |   | **1999**                                          |    | **2000** |   | **2001** |   | **2002(a)** |   | **2003** |   |
|                                                                                         |   |                                              |    |   |   |   |   | **Restated** |   |   |   |
|                                                                                         |   | **(Dollars  in thousands except per share data)** |    |
| Statement of Operations Data:                                                                |   |                                              |    |   |   |   |   |   |   |   |   |
| Net revenues                                                                                 |   | $                                                 | 149,847 |   | $ | 140,070 |   | $ | 113,075 |   | $ | 135,344 |   | $ | 108,544 |   |
| Station operating expenses                                                                   |   | 92,874                                            |    | 104,396 |   | 116,374 |   | 103,963 |   | 92,033 |   |
| Depreciation                                                                                 |   | 5,455                                             |    | 5,725 |   | 6,076 |   | 5,897 |   | 6,285 |   |
| Amortization of intangible assets                                                            |   | 26,667                                            |    | 26,865 |   | 26,735 |   | 21,965 |   | 9,976 |   |
| Corporate expense                                                                            |   | 8,862                                             |    | 10,392 |   | 9,687 |   | 9,536 |   | 11,767 |   |
| Non-cash compensation expense                                                                |   | 935                                               |    | 1,974 |   | 1,473 |   | 1,508 |   | 896 |   |
| Operating income (loss)                                                                      |   | 15,054                                            |    | (9,282 | ) | (47,270 | ) | (7,525 | ) | (12,413 | ) |
|                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                        |   | 36,352                                            |    | 28,975 |   | 45,923 |   | 33,812 |   | 30,024 |   |
| Non-cash interest expense                                                                    |   | 3,115                                             |    | 3,008 |   | 7,951 |   | 13,031 |   | 4,969 |   |
| Non-cash preferred stock dividend                                                            |   | —                                            |    | — |   | — |   | — |   | 12,774 |   |
| Gain on sale of assets                                                                       |   | (101,292                                          | )       | — |   | — |   | (192,406 | ) | — |   |
| Gain from insurance claim                                                                    |   | (4,079                                            | )       | (1,247 | ) | — |   | — |   | — |   |
| Loss (gain) on extinguishment of debt (b)                                                    |   | 642                                               |    | (6,184 | ) | 2,012 |   | 15,097 |   | 3,215 |   |
| Other expenses                                                                               |   | 1,870                                             |    | 2,079 |   | 1,141 |   | 869 |   | 584 |   |
| Income (loss) before income taxes and  cumulative effect of a change in accounting principle |   | 78,446                                            |    | (35,913 | ) | (104,297 | ) | 122,072 |   | (63,979 | ) |
| Provision (benefit) for income taxes                                                         |   | 31,317                                            |    | (8,404 | ) | (27,550 | ) | 53,161 |   | (17,032 | ) |
| Income (loss) before cumulative effect of a  change in accounting principle                  |   | 47,129                                            |    | (27,509 | ) | (76,747 | ) | 68,911 |   | (46,947 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                            |    | — |   | — |   | 150,479 |   | — |   |
| Net income (loss)                                                                            |   | $                                                 | 47,129  |   | $ | (27,509 | ) | $ | (76,747 | ) | $ | (81,568 | ) | $ | (46,947 | ) |
|                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Net income (loss) attributable to common  shareholders                                       |   | $                                                 | 19,912  |   | $ | (56,345 | ) | $ | (109,311 | ) | $ | (80,745 | ) | $ | (59,828 | ) |
|                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Per common share:                                                                            |   |                                              |    |   |   |   |   |   |   |   |   |
| Basic income (loss) before cumulative  effect of a change in accounting principle            |   | $                                                 | 1.43    |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | 3.72 |   | $ | (3.15 | ) |
| Basic net income (loss)                                                                      |   | $                                                 | 1.43    |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | (4.31 | ) | $ | (3.15 | ) |
| Weighted average common shares outstanding                                                   |   | 13,969                                            |    | 18,203 |   | 18,569 |   | 18,749 |   | 18,991 |   |
|                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Net income (loss) attributable to common  shareholders – assuming dilution              |   | $                                                 | 21,588  |   | $ | (56,345 | ) | $ | (109,311 | ) | $ | (80,745 | ) | $ | (59,828 | ) |
|                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Per common share:                                                                            |   |                                              |    |   |   |   |   |   |   |   |   |
| Diluted income (loss) cumulative effect of  a change in accounting principle                 |   | $                                                 | 1.16    |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | 3.65 |   | $ | (3.15 | ) |
| Diluted net income (loss)                                                                    |   | $                                                 | 1.14    |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | (4.23 | ) | $ | (3.15 | ) |
| Weighted average common shares outstanding  – assuming dilution                         |   | 19,012                                            |    | 18,203 |   | 18,569 |   | 19,098 |   | 18,991 |   |

 

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(a)                                  Results for the year2002 have been restated by $2,979,000 to reflect a change in accounting policyrelated to the amortization of network affiliation agreements.  See note 2 to the consolidated financialstatements.

 

(b)                                 InJanuary 2003, we retroactively adopted Statement of Financial AccountingStandards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.  This statement eliminates the requirement to classify all gainsand losses related to the extinguishment of debt as extraordinary items.  Accordingly, prior years were reclassifiedto reflect extraordinary (gain) loss as a component of income from continuingoperations.

 

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|                                |   | **As of  December 31,** |    |
|-------------------------------------|--------|-------------------------|---------|
|                                |   | **1999**                |    | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
| Selected Balance Sheet Data:        |   |                    |    |   |   |   |   |   |   |   |   |
| Total assets                        |   | $                       | 730,591 |   | $ | 732,091 |   | $ | 731,097 |   | $ | 472,184 |   | $ | 519,023 |   |
| Total debt                          |   | 303,874                 |    | 311,391 |   | 401,206 |   | 312,791 |   | 400,087 |   |
| Total long-term liabilities         |   | 123,012                 |    | 133,050 |   | 116,081 |   | 108,473 |   | 327,173 |   |
| Redeemable preferred stock (a)      |   | 210,709                 |    | 239,545 |   | 272,109 |   | 198,125 |   | — |   |
| Stockholders’ equity (deficit) |   | 50,084                  |    | 7,816 |   | (98,144 | ) | (190,295 | ) | (249,432 | ) |
|                                     |        |                         |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                  We adopted****Statementof Financial Accounting Standards No. 150, Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.  Accordingly, the redeemable preferred stock($198,481) has been classified as a long-term liability at December 31, 2003.

 

**Item 7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*Executive Summary*

 

We own andoperate eight network affiliated television stations in geographically diversemarkets reaching over 6% of the nation’s television households.  Three stations are affiliated with NBC, twowith ABC and one with CBS, our Big Three Affiliates,  and two stations are affiliated with the Warner BrothersTelevision Network, our WB Affiliates. The NBC affiliates are KSEE-TV, Fresno-Visalia, California, WEEK-TV,Peoria-Bloomington, Illinois, and KBJR-TV, Duluth, Minnesota and Superior,Wisconsin.  The ABC affiliates areWKBW-TV, Buffalo, New York and WPTA-TV, Fort Wayne, Indiana.  The CBS affiliate is WTVH-TV, Syracuse, NewYork.  The WB affiliates are KBWB-TV,San Francisco, California and WDWB-TV, Detroit, Michigan.

 

Upon adoptionof Financial Accounting Standards No. 142 on January 1, 2002, we considered thevalue of the network affiliation agreements as indefinite-lived and were notamortizing the intangible assets.  Inthe fourth quarter of 2003, we adopted a new policy for recognizing the usefullives of our network affiliation agreements and that such intangibles will beamortized over a period of 25-year life retroactive to January 1, 2002.  As a result of this decision, we restatedour earnings for the full year ended December 31, 2002 and for the first threequarters of 2003, and recorded additional amortization expense of $2,979,000 onthese intangible assets in 2002 and $745,000 for each of the first threequarters of 2003.

 

23

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During 2001,we owned and operated KNTV as an independent television station.  On January 1, 2002, KNTV switched from anindependent station to the NBC affiliate for the San Francisco - Okland - SanJose television market until its sale on April 30, 2002.  KNTV was a Big Three Affiliate during thoseperiods.  Comparisons of ourconsolidated financial statements between the years ended December 31, 2002 and2001 have been affected by the sale of KNTV and a reduction in amortizationexpense of certain goodwill and other indefinite lived intangible assets inaccordance with Statement of Financial Accounting Standards No. 142, Goodwilland Other Intangible Assets, or Statement 142, which was effective January 1,2002.  Comparisons of our consolidatedfinancial statements between the years ended December 31, 2003 and 2002 havebeen also affected by the sale of KNTV.

 

We believe that inflation has not had a materialimpact on our results of operations for each of the three years in the periodended December 31, 2003.  However, therecan be no assurance that future inflation would not have an adverse impact onour operating results and financial condition.

 

Our operating revenues are generally lower in the first calendarquarter and generally higher in the fourth calendar quarter than in the othertwo quarters, due in part to increases in retail advertising in the fall monthsin preparation for the holiday season, and in election years due to increasedpolitical advertising.

 

Our revenues are derived principally from local and nationaladvertising and, to a lesser extent, from network compensation for thebroadcast of programming and revenues from studio rental and commercialproduction activities.  The primaryoperating expenses involved in owning and operating television stations areemployee salaries, depreciation and amortization, programming, advertising andpromotion.  Amounts referred to in thefollowing discussion have been rounded to the nearest thousand.

 

Set forth below are the principal types of television revenues receivedby our television stations for the periods indicated and the percentagecontribution of each to the gross television revenues of our televisionstations.

 

**GROSSREVENUES, BY CATEGORY,FOR OUR STATIONS**

(dollars in thousands)

 
|                 |   | **Years  Ended December 31,** |    |
|----------------------|--------|-------------------------------|---------|
|                 |   | **2001**                      |    | **2002** |   | **2003** |   |
|                 |   | **Amount**                    |    | **%** |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|                 |   |                          |    |   |   |   |   |   |   |   |   |   |   |
| Local/Regional       |   | $                             | 70,876  |   | 52.0 | % | $ | 77,730 |   | 47.6 | % | $ | 66,126 |   | 50.8 | % |
| National             |   | 55,583                        |    | 40.8 | % | 66,673 |   | 40.9 | % | 54,785 |   | 42.1 | % |
| Network Compensation |   | 4,272                         |    | 3.1 | % | 3,093 |   | 1.9 | % | 3,205 |   | 2.5 | % |
| Political            |   | 1,167                         |    | 1.0 | % | 10,882 |   | 6.7 | % | 1,882 |   | 1.5 | % |
| Other                |   | 4,276                         |    | 3.1 | % | 4,772 |   | 2.9 | % | 4,048 |   | 3.1 | % |
| Gross Revenue        |   | 136,174                       |    | 100.0 | % | 163,150 |   | 100.0 | % | 130,046 |   | 100.0 | % |
| Agency Commissions   |   | 23,099                        |    |   |   | 27,806 |   |   |   | 21,502 |   |   |   |
| Net Revenue          |   | $                             | 113,075 |   |   |   | $ | 135,344 |   |   |   | $ | 108,544 |   |   |   |

 

Automotive advertising constitutes our single largestsource of gross revenues, accounting for approximately 21% of our total grossrevenues in 2003.  Gross revenues fromrestaurants, paid programming, and entertainment businesses accounted forapproximately 22% of our total gross revenues in 2003.  Each other category of advertising revenuerepresents less than 5% of our total gross revenues.

 

**Critical AccountingPolicies**

 

Our accountingpolicies are described in Note 2 of the consolidated financial statements inItem 8.  We prepare our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States, which require us to

 

24

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make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the year. Actual results could differ from those estimates.  We consider the following policies, whichwere discussed with the Audit Committee of the Board of Directors, to be mostcritical in understanding the judgments involved in preparing our consolidatedfinancial statements and the uncertainties that could affect our results ofoperations, financial condition and cash flows.

 

*Revenue recognition*

 

Our primarysource of revenue is the sale of television time to advertisers.  Revenue is recorded when the advertisementsare aired.  Other sources of revenue arecompensation from the networks, studio rental and commercial productionactivities.  These revenues are recordedwhen the programs are aired and the services are performed. Revenue from bartertransactions is recognized when advertisements are broadcast and merchandise orservices received are charged to expense when received or used.  Barter revenue totaled $1,723,000,$1,922,000 and $1,894,000 for the years ended December 31, 2001, 2002 and 2003respectively.  Barter expense totaled$1,487,000, $1,090,000 and $1,572,000 for the years ended December 31, 2001, 2002and 2003 respectively.

 

*Film Contract Rights*

 

Film contractrights are recorded as assets at gross value when the license period begins andthe films are available for broadcasting. Film contract rights are amortized on an accelerated basis over the estimatedusage of the films, and are classified as current or non-current on thatbasis.  Our accounting for long-livedprogram assets requires judgment as to the likelihood that such assets willgenerate sufficient revenue to cover the associated expense.  We review our program inventory forimpairment by projecting the amount of revenue the program will generate overthe remaining life of the contract and comparing it to the program’s expense.  We have written down the value of certainprograms by $5,600,000 and $3,000,000 in the years ended December 31, 2002 and2003, respectively.  Film contractrights payable are classified as current or non-current in accordance with thepayment terms of the various license agreements.  Film contract rights are reflected in the consolidated balancesheet at the lower of unamortized cost or estimated net realizable value.

 

*Goodwill andIntangible Assets*

 

We have madeacquisitions in the past for which a significant portion of the purchase pricewas allocated to goodwill and other identifiable intangible assets.

 

In accordance with Statement 142, goodwill and otherintangible assets deemed to have indefinite lives are no longer beingamortized, but instead are subject to annual impairment tests. Annualimpairment tests are done using a discounted cash flow model.  We then compare the estimated fair marketvalue to the book value to determine if an impairment exists.  Our discounted cash flow model is based onour judgment of future market conditions within the designated marketing areaof each broadcast license as well as discount rates that would be used bymarket participants in an arms-length transaction.  Our goodwill and other indefinite-lives intangible assets couldbe impaired if future events result in a conclusion that market conditions havedeclined or discount rates have increased. Any resulting impairment loss could have a material adverse impact onour financial condition and results of operations. We adopted the new rule onaccounting for goodwill and other intangible assets beginning on January 1,2002.  We recorded a charge to reducethe carrying value of its goodwill and other indefinite-lived intangible assetsby $95,000,000 and $114,000,000 respectively during the first quarter of2002.  The annual impairment testingrequired by Statement 142 was completed as of December 31, 2003 and did notresult in any additional write down of the carrying value of our goodwill andother intangible assets.  Upon theadoption of Statement 142, we considered the value of the network affiliationagreements as indefinite-lived and were not amortizing these intangibleassets.  In light of recently statedpositions by the Securities and Exchange Commission regarding amortization ofnetwork affiliation agreements, we have changed our accounting policy toamortize these assets over a 25-year life retroactive to January 1, 2002.  As of December 31, 2003, we had $205,381,000in goodwill and other intangible assets with indefinite lives net of accumulatedamortization.

 

*Long-Lived Assets*

 

We review ourlong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset is not recoverable.  At such time as an impairment in value of along-lived asset is identified the impairment will be measured in accordancewith Statement of Financial Accounting Standard No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” as the amount by which thecarrying amount of a long-lived asset exceeds its fair value.  To determine fair value we would employ anexpected present value technique, which utilizes multiple cash flow scenariosthat reflect the range of possible outcomes and an appropriate discount rate.

 

*Allowance forDoubtful Accounts*

 

We must make estimates of the uncollectibility of ouraccounts receivable.  We specificallyreview historical write-off activity by market, large customer concentrations,customer credit worthiness, and changes in our customer payment terms whenevaluating the adequacy of the allowance for doubtful accounts.  Our experience has been that the level ofcustomer defaults have been predictable and that the allowance for doubtfulaccounts has been adequate to cover such defaults.  If circumstances change, such as higher than expected defaults oran unexpected material adverse change in an agency’s ability to meet itsfinancial obligation to us, our estimates of the recoverability of amounts dueour company could be reduced by a material amount.

 

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**RESULTSOF OPERATIONS**

** **

*Overview*

 

Net revenuefor our existing eight-station group decreased 1.4% due primarily to areduction in political spending in a non-election year.  Political revenue was $9,222,000 in 2002,comprising over 7% of advertising revenue.  In 2003, political revenue was $1,882,000, a decrease of$7,340,000 or 80%.  Excluding politicalrevenue, net revenue at our eight stations increased 4.6%.   Local non-political revenue growth wasstrongest during the first nine months of the year at almost 8%.  Our strong news brands and targeted salesinitiatives are the foundation for this solid local performance.  National non-political revenue growth ofover 6% in the first half of 2003 was driven by growth of over 10% at our WBaffiliates, which were largely unaffected by the advertising disruption causedby the war in Iraq. National non-political revenue at our Big Three affiliatesdecreased less than 2% in the first half of the year but began to recover inthe second half, increasing 3.5% in the fourth quarter.   We expect non-political national growth atour Big Three affiliates to continue into 2004.  Overall, automotive, our largest revenue category, increased 13%.  We also experienced growth in several othermajor categories, such as telecommunications, home remodeling, and financialservices. Our WB affiliates experienced decreases in non-political nationalrevenue of 8% in the second half of the year due primarily to declines in twoof our WB station’s top categories, movies and fast food, which were downsignificantly in the second half of 2003. We expect this national revenue trendat our WB affiliates to continue at least through the first quarter of 2004 dueto declines in the same categories.  Itshould be noted that in the second half of 2002, non-political national revenueat our WB affiliates increased 35%.

 

Operatingexpenses consist primarily of personnel-related costs such as salary, benefitsand taxes, and the cost of programming. Rising healthcare costs, compensation increases, increases in electricalpower costs resulting from the launch of digital broadcasting in four markets,and increased sales expense due to higher non-political revenue, new salesmanagement and new sales and research tools were offset, in part, by lower filmamortization expense primarily due to lower film write-downs at our WBaffiliates.  In 2004, we expectcontinued double-digit increases in healthcare costs as well as additionalincreases in electrical power costs as all eight of our stations will havecommenced digital broadcasting.

 

In the fourthquarter of 2003, we completed a refinancing of our debt capital structurethrough the offering of $405,000,000 of our 9-3/4% Senior Secured Notes due2010.  The proceeds from this offeringwere used in part to eliminate all of our near-term debt maturities and provideus with more flexibility to achieve our strategic vision, which includesselling or swapping our WB affiliated stations for news-oriented stations andto capitalize on the operating efficiencies that consolidation provides bycreating duopolies in some of our current markets.

 

Comparisons ofresults for the twelve-months ended December 31, 2003 versus the same period ayear earlier are impacted by the disposition of KNTV on April 30, 2002.   In order to better highlight theperformance of the eight stations group we currently operate, we presentcertain information on a “same station” basis, which removes the operatingresults of KNTV from 2002 and 2001.

 

*Years ended December 31, 2003 and 2002*

 

Net revenuedecreased $26,800,000 or 20% to $108,544,000 for the year ended December 31,2003, from $135,344,000 for the year ended December 31, 2002.   The decrease was primarily due to the saleof KNTV on April 30, 2002.  Net revenuesfrom KNTV for the four months ended April 30, 2002 were $25,295,000.  Same station net revenue decreased$1,505,000 or 1.4% due primarily to a $7,340,000 decrease in politicaladvertising offset, in part, by increases in local and national non-politicaladvertising.  Same station non-politicallocal advertising increased 6.5% or $4,059,000 and non-political nationalincreased almost 2% or $1,016,000.  Same station political advertising comprised $9,222,000 or 7.4% of totaladvertising revenue in 2002 and excluding political, same station net revenueincreased 4.6%.

 

Stationoperating expenses decreased $11,930,000 or 11.5% to $92,033,000 for the yearended December 31, 2003, from $103,963,000 for the same period a year earlier.The decrease was primarily due to the sale of KNTV on April 30, 2002.  KNTV’s operating expenses for the fourmonths ended April 30, 2002 were $12,694,000. Same station operating expenses increased $764,000 or less than 1% dueprimarily to rising healthcare costs, higher sales expense and increased powercosts resulting from the onset of digital broadcasting, offset, in part, bylower film amortization expense due to write downs of certain syndicatedprograms at the WB affiliates.

 

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*Big Three Affiliates– Same Station*

 

Net revenue atour Big Three affiliates decreased $2,800,000 or 3.7% to $73,258,000 from$76,058,000 primarily due to a $7,139,000 decrease in political advertisingoffset, in part, by increases in local non-political revenue of $2,757,000.  Non-political national revenue wasessentially flat.  Excluding political,net revenue increased a healthy 4.8%. The Big Three affiliates contributed 67% to net revenue during the year.

 

Operatingexpenses at our Big Three affiliates increased $3,033,000 or 8.4% to$53,213,000 from $50,180,000 due primarily to rising healthcare costs, highersales expense and increased power costs resulting from the onset of digitalbroadcasting at four stations.

 

*WB Affiliates*

 

Net revenue atour WB affiliates increased $1,304,000 or 3.6% to $35,211,000 from $33,907,000on healthy local and national non-political increases.  Non-political local increased 6.2% whilenon-political national increased 5.1%. The WB affiliates do not generate meaningful political revenue, as theydo not broadcast local news.  The WBaffiliates contributed 33% to net revenue during the year.

 

Operatingexpenses at our WB affiliates decreased $2,265,000 or 5.7% to $38,761,000 from$41,026,000 primarily due to reduced film amortization driven by lower filmwrite downs.   We wrote film assets downto net realizable value in 2002 and 2003 by $4,500,000 and $3,000,000,respectively.  

 

Amortizationexpense decreased $11,988,000 or 55% during the twelve months ended December31, 2003 compared to the same period a year earlier.  Included in the twelve months ended December 31, 2002 is$9,033,000 of amortization expense related to KNTV.  Amortization expense at the remaining stations decreased$2,955,000 or 23% due to a reduction in amortization of a covenant not tocompete.  Depreciation expense increased$388,000 or 7% during the twelve months ended December 31, 2003 compared to thesame period a year earlier.  Included inthe twelve months ended December 31, 2002 is $525,000 of depreciation relatedto KNTV.  Depreciation expense at theremaining stations increased $913,000 or 17% due to increased capitalexpenditures for the conversion to digital television.

 

Corporateexpense totaled $11,768,000; an increase of $2,231,000 or 23% compared to$9,536,000 for the twelve months ended December 31, 2002.  The increase was primarily due an increasein compensation, professional fees and officers’ and directors’ liabilityinsurance.  Non-cash compensationexpense decreased $613,000 or 41% due to a reduction in stock awards granted tocertain executives.

 

Interestexpense totaled $31,305,000; a decrease of $3,584,000 or 10% compared to$34,889,000 for the twelve months ended December 31, 2002.  The decrease was primarily due to loweraverage debt balances and lower interest rates on then our outstanding seniorcredit agreement.  Interest incometotaled $1,281,000; an increase of $204,000, or 19% compared to the twelvemonths ended December 31, 2002.  Theincrease was primarily due to the recognition of interest income on an interestrate hedge related to the 8 7/8% Senior Subordinated Notes.  Non-cash interest expense totaled$4,969,000; a decrease of $8,061,000 or 62% primarily due to the imputation ofinterest related to KNTV’s NBC affiliation agreement, until its sale on April30, 2002, offset in part by reduced amortization of deferred financing fees.

 

We recorded asan expense the accrual of dividends on our 12 3/4% Cumulative ExchangeablePreferred Stock totaling $12,774,000 during the six months ended December 31,2003 as required by Statement of Financial Accounting Standards No.150.  See Recent Accounting Pronouncements.

 

We recorded a$3,215,000 loss on the early extinguishment of debt in 2003 due to thewrite-off of unamortized deferred financing fees associated with the debtrepaid.  We recorded a $15,097,000 losson the early extinguishment of debt in 2002 due to the write-off of unamortizeddeferred financing fees associated with the then outstanding senior creditfacility

 

In connectionwith the sale of KNTV, we recorded a pre-tax gain on the sale of $192,406,000in 2002.

 

We recorded abenefit for income taxes of $17,032,000 in 2003, consisting of a currentbenefit of $16,111,000 and a deferred benefit of $921,000 compared to aprovision for income taxes of $53,162,000 in 2002.

 

Upon adoption of Statement 142 as of January 1, 2002,we recorded a one-time, non-cash charge of $150,479,000, net of a tax benefitof $58,351,000, to reduce the carrying value of our goodwill and otherindefinite-lived intangible assets.  Thedecline in the carrying value of goodwill and other indefinite-lived intangibleassets relates solely to our WB affiliates. Such charge is non-operational in nature and is reflected as acumulative effect of an accounting change in the accompanying consolidatedstatement of operations.  We completedour annual impairment test as of December 31, 2003 as required by Statement 142and concluded that no

 

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additional write down ofgoodwill and other indefinite lived intangible assets is required.  We performed detailed fair valuedeterminations and concluded that no additional write down of the carryingvalue of goodwill and other indefinite-lived intangible assets is required.

 

*Years Ended December 31, 2002 and 2001*

 

Net revenueincreased $22,269,000 or 19.7% to $135,344,000 for the year ended December 31,2002, up from $113,075,000 for the year ended December 31, 2001.   The increase was primarily due to operatingKNTV as an NBC affiliate until its sale on April 30, 2002.  Net revenues from KNTV increased $14,539,000to $25,295,000 for the four months ended April 30, 2002 compared to a full yearof operating the station in 2001.   KNTVcontributed 19% to our net revenue during the year. Excluding KNTV, our netrevenue increased $7,730,000 or 7.6% on the strength of a $9,661,000 increasein political and Olympic advertising primarily from our Big Three affiliates,representing approximately 8% of 2002’s advertising revenue.  The WB affiliates’ national non-politicalalso contributed to the increase by posting a 16% or $2,895,000 revenueincrease over 2001. The increase mostly took place in the second half of theyear, when national non-political revenue rose 35% versus the second half of2001 on the strength of robust movie business and paid programming.   This increase was offset, in part, by a$1,244,000 decrease in network compensation at our NBC affiliates and by a$3,227,000 or 13.9% decrease in local non-political at our WB affiliates due tolower spending in the automotive and restaurant/fast food categories.   Local non-political revenue at our WBaffiliates decreased 22.8% or $4,051,000 in the first nine months of 2002versus 2001 and showed signs of improvement in the fourth quarter of 2002 whenlocal non-political revenue increased $824,000 or 15.1%.

 

Stationoperating expenses decreased $12,411,000 or 10.7% to $103,963,000 for the yearended December 31, 2002, from $116,374,000 for the same period a year earlier.The decrease was primarily due to the sale of KNTV on April 30, 2002.  KNTV’s operating expenses decreased$10,801,000 to $12,694,000 for the four months ended April 30, 2002 compared toa full year of 2001.  Excluding KNTV,operating expenses decreased $1,610,000 or 1.7% due to a $2,333,000 reductionin program amortization expense primarily related to lower film write-downs atour WB affiliates and a $1,027,000 decrease primarily related to the run-off ofcertain syndicated programming at our Big Three affiliates.  This decrease was offset, in part, by a$985,000 increase in news expense at our Big Three affiliates, primarilyrelated to the launch of expanded locally produced news, entertainment andinformation programming at our Fresno and Buffalo stations. Sales expensesincreased at our Big Three affiliates $769,000, driven by higher sales researchtools expenditures.

 

*Big Three AffiliatesExcluding KNTV*

 

Net revenue atour Big Three affiliates increased $7,096,000 or 10.3% to $76,058,000 from$68,962,000 primarily due to a $9,506,000 increase in political and Olympicadvertising offset, in part, by a $1,244,000 decrease in network compensationat our NBC affiliates.  Non-politicallocal and national revenue increased 2.9% and 2.1% respectively. The Big Threeaffiliates contributed 56 percent to net revenue during the year.

 

Operatingexpenses at our Big Three affiliates increased $484,000 or 1.0% to $50,180,000from $49,696,000 related to a  $985,000increase in news expenses most of which came from the launch of expandedlocally produced news, entertainment and information programming at our Fresnoand Buffalo stations. Sales expenses increased $769,000, driven by higher salesresearch tools expenditures.  Theseincreases were offset, in part, by a $1,027,000 decrease primarily related to therun-off of certain syndicated programming.

 

*WB Affiliates*

 

Net revenue atour WB affiliates increased $634,000 or 1.9% to $33,991,000 from $33,357,000 onhealthy national non-political advertising spending.  Non-political national increased 16.4% or $2,895,000 driven by a35% gain in national non-political in the second half of the year.  Local non-political at our WB affiliatesdecreased $3,227,000 partially because of declines in the automotive andrestaurant/fast food categories.   Localnon-political revenue at our WB affiliates decreased 22.8% or $4,051,000 in thefirst nine months of 2002 versus 2001 and showed signs of improvement in thefourth quarter of 2002 when local non-political revenue increased $824,000 or15.1%.  The WB affiliates contributed25% to net revenue during the year.

 

Operating expenses at ourWB affiliates decreased $2,093,000 or 4.8% to $41,090,000 from $43,183,000primarily due to a $2,333,000 reduction in program amortization expense relatedto lower film write-downs.  This wasoffset, in part, by a $501,000 increase in promotion expenses.

 

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Amortizationexpense decreased $4,471,000 or 18% during the twelve months ended December 31,2002 compared to the same period a year earlier primarily due to theelimination of the amortization of goodwill and other indefinite-livedintangible assets in accordance with Statement 142.  Corporate expense totaled $9,536,000; a decrease of $151,000 or lessthan 2% compared to $9,687,000 for the twelve months ended December 31, 2001.

 

Interestexpense totaled $34,889,000; a decrease of $12,593,000 or 27% compared to$47,482,000 for the twelve months ended December 31, 2001.  The decrease was primarily due to lowerlevels of outstanding indebtedness and lower interest rates on our thenoutstanding senior credit facility. Interest income totaled $1,077,000; adecrease of $482,000 or 31% compared to the twelve months ended December 31,2001 primarily due to lower cash balances, and lower interest rates.  Non-cash interest expense totaled$13,031,000; an increase of $5,079,000 or 64% primarily due to the imputationof interest related to KNTV’s NBC affiliation agreement, until its sale onApril 30, 2002, offset in part by reduced amortization of deferred financingfees associated with the then outstanding senior credit facility.

 

We recorded a$15,097,000 loss on the early extinguishment of debt in 2002 due to thewrite-off of unamortized deferred financing fees associated with the thenoutstanding senior credit facility.  Werecorded a loss on the early extinguishment of debt of $2,012,000 in 2001.

 

In connectionwith the sale of KNTV, we recorded a pre-tax gain on the sale of $192,406,000in 2002.

 

We recorded aprovision for income taxes of $53,162,000 in 2002, consisting of a currentportion of $18,873,000 and a deferred portion of $34,289,000 compared to abenefit for income taxes of $27,550,000 in 2001.

 

Upon adoptionof Statement 142 as of January 1, 2002, we recorded a one-time, non-cash chargeof $150,479,000, net of a tax benefit of $58,351,000, to reduce the carryingvalue of its goodwill and other indefinite-lived intangible assets.  The decline in the carrying value ofgoodwill and other indefinite-lived intangible assets relates solely to our WBaffiliates.  Such charge isnon-operational in nature and is reflected as a cumulative effect of anaccounting change in the accompanying consolidated statement of operations.

 

*Liquidity andCapital Resources*

 

On December22, 2003, we completed a $405,000,000 offering of our 9 3/4% Senior SecuredNotes (the “Notes”) due December 1, 2010, at a discount, resulting in proceedsto us of $400,067,100.  Interest on theNotes is payable on December 1 and June 1 of each year, beginning on June 1,2004.  The Notes are secured bysubstantially all of our assets.  Weused the net proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under our senior credit agreement,  (ii) redeem at par, plus accrued interest,all of our 9 3/8% and 10 3/8% senior subordinated notes due May and December2005, respectively, and (iii) to repurchase at par, plus accrued interest, allof our 8 7/8% senior subordinated notes due May 2008.  The remaining proceeds will be used for general working capitalpurposes.

 

As of February 29, 2004, we had approximately$87,800,000 of cash on hand.  We believethat cash on hand together with internally generated funds from operations anda $16,000,000 income tax refund expected to be received in second quarter of2004 will be sufficient to satisfy our cash requirements for its existingoperations for the next twelve months.

 

Under theterms of the Certificate of Designations for our 12 3/4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”), we were required to makethe semi-annual dividends on such shares in cash beginning October 1,2002.  The cash payment of dividends hadbeen restricted by the terms of the senior credit agreement and the indenturegoverning our senior subordinated notes and is prohibited under the indenturegoverning the Notes.  Consequently wehave not paid the semi-annual dividend due to the holders since October 1,2002.  Since three or more semi-annualdividend payments have not been paid, the holders of the Preferred Stock havethe right to elect the lesser of two directors or that number of directorsconstituting 25% of the members of the Board of Directors.  The right of the holders of the PreferredStock to elect members of the Board of Directors as set forth above willcontinue until such time as all accumulated dividends that are required to bepaid in cash and that are in arrears on the Preferred Stock are paid in full incash.  We are restricted from payingcash dividends under the Indenture governing the Notes and does not anticipatepaying cash dividends on its Preferred Stock in the foreseeable future.

 

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As part of anoverall effort to reduce station operating expenses, we have made substantialprogress replacing unprofitable programming with competitive, profitableprogramming.  For example, we havereplaced certain programming at our WB stations costing approximately $8million annually with competitive programming that will cost approximately$500,000 annually.

 

Film paymentsat our WB affiliates were $20.1 million for the year ended December 31, 2003.Based on completed negotiations and current market conditions for the purchaseof programming, we expect annual film payments at the WB affiliates to declineby approximately 50% by 2007.

 

Film paymentsat our Big Three affiliates were $5.2 million for the year ended December 31,2003.  Based on completed negotiationsand current market conditions for the purchase of programming, we expect annualfilm payments at the Big Three affiliates to decline by approximately 20% by2007.

 

Net cash usedin operating activities was $20,775,000 during the year ended December 31, 2003compared to $73,410,000 during the year ended December 31, 2002.  The change from 2002 to 2003 was primarilythe result of a decrease in the payment of interest expense and income taxesand a decrease in net assets offset in part by a decrease in operating cashflow.

 

Net cash used in investing activities was $12,653,000during the year ended December 31, 2003 compared to net cash provided by ininvesting activities of $250,900,000 during the year ended December 31,2002.  The change from 2002 to 2003 wasprimarily due to the sale of KNTV on April 30, 2002.  We spent $14,119,000 and $12,653,000 on capital expendituresduring 2002 and 2003, respectively, primarily related to the implementation ofdigital technology.  We expect to spendapproximately $8,500,000 in 2004 on capital expenditures, of which approximately$2,700,000 is related to digital technology. The conversion to digital technology was completed during the firstquarter of 2004.  We expect asignificant decrease in annual spending on capital expenditures in futureyears.

 

Net cashprovided by financing activities was $69,321,000 during the year ended December31, 2003 compared to net cash used in financing activities of $152,598,000during the year ended December 31, 2002. The change from 2002 to 2003 primarily resulted an increase in netborrowings in 2003 and the repurchase of redeemable Preferred Stock in 2002.

 

*Capital andCommercial Commitments*

 

The followingtable and discussion reflect our significant contractual obligations and othercommercial commitments as of December 31, 2003:

 
|                                                                          |   | **Payment  Due by Period** |        |
|-------------------------------------------------------------------------------|--------|----------------------------|-------------|
| **Capital Commitment**                                                        |   | **Total**                  |        | **1 Year** |   | **2-3 years** |   | **4-5 years** |   | **After  5 years** |   |
|                                                                          |   |                       |        |   |   |   |   |   |   |   |   |
| Principal amount of Long-term debt                                            |   | $                          | 405,000,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 405,000,000 |   |
| Operating leases                                                              |   | 15,668,752                 |        | 1,312,481 |   | 2,018,370 |   | 1,269,911 |   | 11,067,990 |   |
| Program contracts                                                             |   | 90,283,711                 |        | 29,166,753 |   | 36,404,689 |   | 15,195,078 |   | 9,517,191 |   |
| WB Affiliation                                                                |   | 8,070,203                  |        | 2,950,103 |   | 3,413,400 |   | 1,706,700 |   | — |   |
| Interest                                                                      |   | 270,818,437                |        | 37,184,062 |   | 78,975,000 |   | 78,975,000 |   | 75,684,375 |   |
| 12 3/4% Cumulative Exchangeable Preferred  Stock, including accrued dividends |   | 245,084,000                |        | — |   | — |   | — |   | 245,084,000 |   |
|                                                                               |        |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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*Recent AccountingPronouncements*

 

In January 2003, the FASB issued Interpretation No. 46, Consolidationof Variable Interest Entities, or Interpretation 46.  Interpretation 46 addresses when a company should include in itsfinancial statements the assets, liabilities and activities of anotherentity.  This interpretation No. 46requires certain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additional subordinatedfinancial support from other parties. We adopted Interpretation 46 for the year ended December 31, 2003 andthe application of Interpretation 46 did not have an impact on our financialposition, results of operations, or cash flows.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity, or Statement 150.  Statement 150 establishes standards forclassifying and measuring as liabilities certain financial instruments thathave characteristics of both liabilities and equity.  The provisions of Statement 150 are effective beginning with thefirst interim period after June 15, 2003. We adopted Statement 150 during the six months ended December 31,2003.  Our 12 3/4% CumulativeExchangeable Preferred Stock, which we refer to as the Preferred Stock, hasbeen reclassified on our consolidated balance sheet as a long-term liabilityand the accrual of dividends for the six months ended December 31, 2003 hasbeen recorded as a charge to expense on the consolidated statement ofoperations.  The impact of adoptingStatement 150 reduced income before income taxes by $12,774,000 for the yearended December 31, 2003.  Previously,dividends on the Preferred Stock were treated as a reduction of shareholders’equity.

 

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***Risk Factors***

 

We cannot identify nor can we control all circumstances that couldoccur in the future that may adversely affect our business and results ofoperations.  Some of the circumstancesthat may occur and may impair our business are described below.  If any of the following circumstances wereto occur, our business could be materially adversely affected.

 

**We have limited sources of liquidity and noworking capital facility or other credit facility and therefore may not be ableto service all of our obligations, absent changes in our operations or capitalstructure.**

 

Our sources ofavailable liquidity are (i) our cash on hand ($ 87.8 million as ofFebruary 29, 2004) and (ii) a refund of approximately $16 million ofincome taxes paid during calendar year 2002 which we expect to receive duringthe second quarter of 2004.  Absentchanges to our capital structure or the successful implementation of ourbusiness strategy, we may not have enough liquidity to service our existingobligations on an ongoing basis.  Theholders of our redeemable preferred stock currently have certain additionalvoting rights since three semi-annual dividend payments have not been paid.Lack of liquidity would have a material adverse effect on our ability toimplement our business strategy and, therefore, affect our ability to makepayments on the notes.

 

**Our principal strategy, seeking growththrough acquisitions of television stations and duopolies, may not beachievable absent dispositions of certain of our television stations.**

 

Our ability tomake acquisitions is in large part dependent on our having successfullyconsummated asset dispositions.  We maynot be able to find buyers willing to acquire our stations at prices and onterms and conditions satisfactory to us, or at all.  The current uncertainty in the regulatory environment surroundingmultiple station ownership in certain of our existing television stationmarkets may impede the sale of these stations at the present time.

 

We also pursueselective acquisitions of television stations with the goal of improving theiroperating performance by applying our management’s business and growthstrategy.  However, we may not besuccessful in identifying attractive acquisition targets.  Future acquisitions involve inherent risks,such as increasing leverage and debt service requirements and combining companycultures and facilities, which could have a material adverse effect on ouroperating results, particularly during the period immediately following anyacquisitions. We may not be able to successfully implement effective costcontrols, increase advertising revenues or increase audience share with respectto any acquired station. In addition, our future acquisitions may result in ourassumption of unexpected liabilities and may result in the diversion ofmanagement’s attention from the operation of our business.

 

In addition,television station acquisitions are subject to the approval of the FCC and,potentially, other regulatory authorities. For example, FCC rules restrict thenumber of television stations an entity may own within a single market. See“Business—Television duopoly rule’’ under Item 1. The need for FCC and otherregulatory approvals could restrict our ability to consummate futuretransactions and potentially require us to divest some television stations ifthe FCC or the Department of Justice believes that a proposed acquisition wouldresult in excessive concentration in a market, even if the proposedcombinations may otherwise comply with FCC ownership limitations.

 

The indenturefor our Senior Secured Notes limits, and future debt obligations may limit, ourability to pursue our acquisition strategy, including certain limitations inthe indenture with respect to acquisitions for cash. If our acquisitionstrategy is not successful, our ability to make payments on the notes could beadversely affected. Even if our acquisition strategy is successful, we may beunable to make payments on the notes due to events which are beyond our controlsuch as prevailing business, financial and economic conditions.

 

Our failure tosuccessfully implement our business strategy may negatively affect our futureliquidity and materially adversely affect us and our ability to make paymentson the notes.

 

**FCC ownership rules and policies may limitour ability to create duopoly-type operating arrangements under local servicesor other similar agreements, which would impair our acquisition strategy.**

 

We would liketo own or provide services to affiliated television stations with a stronglocal news presence, particularly in television markets in which we alreadyoperate a station. We are actively pursuing this strategy which includes thecreation of duopoly-type operating arrangements in our current markets throughownership of one station and a combination of agreements (such as sharedservices, local services, sales representation, marketing, operating or otheragreements) with a second station in that market—and the sale of our WBstations in order to acquire news-oriented television stations. While theseagreements take varying forms, a typical local services agreement, for example,is an agreement between two separately owned television stations serving the 

 

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same market,whereby the owner of one station provides operational assistance to the otherstation, subject to ultimate editorial and other controls being exercised bythe latter station’s owner. By operating or entering into a local servicesagreement with a second television station in a market in which we own astation, we believe that we could achieve significant operational efficiencies,broaden our audience reach and enhance our ability to capture more advertisingspending in a given market. We do not currently operate any stations pursuantto a local services agreement. While these duopoly-type operating arrangementshave been approved by the FCC pursuant to delegated authority as consistentwith current FCC rules and policies, we cannot assure you that the FCC willcontinue to permit local services or other similar agreements as a means ofcreating duopoly-type opportunities, that the FCC will not assert its authorityover the FCC staff in this area (which may result in modifications to currentpolicy) or that the FCC’s treatment of duopoly-type operating arrangements wemay enter into will be consistent with the treatment described above or onterms that will permit us to realize the benefits described above.Specifically, the FCC may change its current policies with regard to theregulatory treatment of and acceptability of certain terms and conditions ofduopoly-type operating arrangements for a variety of reasons, such as inresponse to direction from legislators or public opinion, in a way thatprevents duopoly-type operating arrangements or requires significantmodifications to the financial or other material terms of such arrangements.For example, the FCC recently decided to treat joint sales agreements betweensame-market radio stations as attributable ownership interests for purposes ofapplying its media ownership rules and indicated an intention to initiate aproceeding to seek public comment on whether to treat joint sales agreementsbetween same-market television stations also as attributable ownershipinterests. See “Business —FCC regulation of television broadcasting’’ and‘‘Business—Attribution.’’ If the FCC, on its own initiative or in response to athird party complaint, were to challenge such arrangements and determine thatsuch arrangements violate the FCC’s rules or policies, we may be unable toimplement our ‘‘duopoly’’ business strategy. Any such change in FCC policiesconcerning arrangements involving joint sales agreements, local servicesagreements or similar agreements could limit our ability to establish or maintainduopoly-type arrangements and implement our acquisition strategy.

 

**Current FCC ownership rules or revised FCCownership rules, whether revised through FCC action, judicial review or federallegislation, may limit our acquisition strategy.**

 

FCC ownershiprules currently impose significant limitations on the ability of broadcastlicensees to have attributable interests in multiple media properties. One ofthese local market ownership restrictions, known as the television duopolyrule, includes an ownership limit of one television station in medium andsmaller markets and two stations in larger markets provided that there are atleast eight independently owned and operating full-power television stations inthe market and one of the combining stations is not ranked among the top fourstations in the market. The FCC’s current rules also permit a waiver of theduopoly rule but only if one of the two television stations is a failed orfailing station, if the proposed transaction would result in the constructionof an unbuilt television station or if compelling public interest factors arepresent, provided that a waiver applicant demonstrates that no reasonableout-of-market buyer was available. Under the existing television duopoly rule,absent a waiver, we would not be able to acquire a second station in ourexisting Big-3 affiliated stations’ markets because our stations and the mostlikely target stations would be amongst the top-four rated stations in themarket. Our ability to obtain a waiver of the existing duopoly rule also isseverely restricted because neither our stations nor our most likely targetstations would qualify as failed, failing or unbuilt stations. As a result, wewould have to demonstrate the presence of compelling public interest factors inorder to obtain a waiver. We are unable to predict whether the FCC would grantsuch a waiver. If we were to acquire a second station in a market pursuant to awaiver of the duopoly rule, we could not sell the duopoly to a third partyunless that third party also: (i) obtained a waiver at the time of the proposedsale; or (ii) acquired one of the stations directly and established aduopoly-type arrangement—through a local services agreement or otherwise—withanother party who then would acquire the second station.

 

OnJune 2, 2003, the FCC voted to substantially amend many of its ownershiprules. The television duopoly rule was relaxed to permit ownership of up tothree stations in certain large markets and two stations in many mid-sizedmarkets, provided that no more than one of the co-owned stations can be amongthe top four rated stations in the market. In the markets in which we operateour Big-3 affiliated stations, absent a waiver, we would not be able to takeadvantage of this new duopoly rule because our station and the most likelytarget stations would be amongst the top-four rated stations in the market. TheFCC further declared that it would grant waivers of the top-four restrictionunder certain circumstances, such as in markets where it can be establishedthat ownership consolidation in small to mid-sized television markets with 11or fewer television stations could lead to significant public interestbenefits. We are unable to predict whether the FCC would grant us a waiverpursuant to this standard. The FCC further determined that a non-conformingcombination permitted by a waiver of the duopoly rule could not be transferredjointly either as a separate asset or through the transfer of control of thelicensee, except by obtaining a waiver of the rule upon each transfer or bysale to certain eligible small business entities. Therefore, as is currentlythe case under the present duopoly rule, if we were to acquire a second stationin a market pursuant to a waiver, our ability to sell or transfer that duopolywould be restricted because any potential acquirer would need to 

 

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obtain awaiver from the FCC in order to own the duopoly or establish its eligibility asa small business entity or would need to acquire one of the stations directlyand establish a duopoly-type arrangement with another party who then wouldacquire the second station.

 

None of theamended FCC media ownership rules currently are in effect because they aresubject to a stay issued by the United States Court of Appeals for the ThirdCircuit while the court reviews the appeals of the FCC’s newly-adopted rules.We are unable to predict the outcome of any regulatory, judicial or legislativeproceedings regarding these rules or the effects that any of the above willhave on the willingness of the FCC or its staff to continue to grant waivers ofits duopoly rule. Should the new rules become effective, attractiveopportunities may arise for additional television station and other mediaacquisitions; however, these potential changes also create additionalcompetition for us from other entities, such as national broadcast networks,large station groups, newspaper chains and cable operators who may be betterpositioned to take advantage of such changes and benefit from the resultingoperating synergies both nationally and in specific markets. Should the FCC orits staff not grant such waivers, our ability to pursue our acquisitionstrategy would be materially and adversely affected.

 

**A duopoly special purpose vehicle may makedecisions regarding the operation of its station that could reduce the amountof cash we might receive under a local service agreement.**

 

In connectionwith our strategy of realigning our group of television stations, we may enterinto a duopoly-type operating arrangement in a market or markets. If we enterinto any such arrangement, one of the stations in the market may be owned by anindependent third party. We may enter into various local services arrangementswith such entity pursuant to which we will provide the services to thatentity’s station. Under these arrangements, we would receive substantially allof the available cash, after payment of operating expenses and debt servicecosts, generated by the station. We also may guarantee such entity’s debt,which would have been incurred primarily in connection with the acquisition ofa station or stations, and such entity could guarantee the notes. We would alsohave an option to purchase the station. If we entered into such arrangements,we would expect to consolidate the results of operations and financial positionof the station(s) with our results of operations and financial position.However, while we would be deemed to have a controlling financial interest inthe other entity under generally accepted accounting principles in the UnitedStates, the other entity would still own and control the station. For thisarrangement to comply with FCC rules, the other entity must maintain completeresponsibility for and control over programming, finances, personnel andoperations of its stations. Because we would not own or control such entity,such entity could make decisions with which we disagree and which could reducethe cash flow generated by these stations and, as a consequence, the amount wewould receive under our local services arrangement with such entity.

 

**Our operating results are primarily dependenton advertising revenues and, as a result, we may be more vulnerable to economicdownturns than businesses in other industries.**

 

Our operatingresults are primarily dependent on advertising revenues. The success of ouroperations depends in part upon factors beyond our control, such as:

 

•                    national andlocal economic conditions;

 

•                    theavailability of high profile sporting events, such as the Olympics, the SuperBowl and the NCAA Men’s Basketball Tournament;

 

•                    the relativepopularity of the programming on our stations;

 

•                    thedemographic characteristics of our markets; and

 

•                    the activitiesof our competitors.

 

Our programmingmay not attract sufficient targeted viewership and we may not achieve favorableratings. Our ratings depend partly upon unpredictable and volatile factorsbeyond our control, such as viewer preferences, the quality of the programmingprovided to us by the networks, competing programming and the availability ofother entertainment activities. A shift in viewer preferences could cause ourprogramming not to gain popularity or to decline in popularity, which couldcause our advertising revenues to decline. In addition, we and those that werely on for programming may not be able to anticipate and react effectively toshifts in viewer tastes and interests in the markets.

 

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**Because a high percentage of our operatingexpenses are fixed, a relatively small decrease in advertising revenue couldhave a significant negative impact on our results of operations.**

 

Our businessis characterized generally by high fixed costs, primarily for debt service,programming costs, operating leases and personnel. Other than commissions paidto our sales staff and outside sales agencies, our expenses do not varysignificantly with the increase or decrease in advertising revenue. As aresult, a relatively small change in advertising revenue could have adisproportionate effect on our financial results.

 

**We are dependent to a significant degree onautomotive advertising.**

 

Approximately21% of our total revenues for the year ended December 31, 2003, and 17%for the year ended December 31, 2002, consisted of automotive advertising.A significant decrease in these revenues in the future could materially andadversely affect our results of operations and cash flows, which could affectour ability to fund operations and service our debt obligations.

 

**We have a history of net losses and asubstantial accumulated deficit.**

 

We have hadnet losses of $46,947,872 for the year ended December 31, 2003,$81,567,338 for the year ended December 31, 2002 and $76,746,894 for theyear ended December 31, 2001, primarily as a result of amortization ofintangible assets and debt service obligations. In addition, as ofDecember 31, 2003, we had an accumulated stockholders’ deficit of$249,431,806.  We may not be able toachieve or maintain profitability. The future utilization of a portion of ournet operating losses for federal income tax purposes is subject to an annuallimitation.

 

**Our strategy of seeking growth throughacquisitions of television stations could pose various risks and increase ourleverage.**

 

We intend topursue selective acquisitions of television stations with the goal of improvingtheir operating performance by applying our management’s business and growthstrategy. However, we may not be successful in identifying attractiveacquisition targets. Future acquisitions involve inherent risks, such asincreasing leverage and debt service requirements and combining companycultures and facilities, which could have a material adverse effect on ouroperating results, particularly during the period immediately following anyacquisitions. We may not be able to successfully implement effective costcontrols, increase advertising revenues or increase audience share with respectto any acquired station. In addition, our future acquisitions may result in ourassumption of unexpected liabilities and may result in the diversion ofmanagement’s attention from the operation of our business.

 

**If we are unable to compete effectively, ourrevenue could decline.**

 

Theentertainment industry, and particularly the television industry, is highlycompetitive and is undergoing a period of consolidation and significant change.Many of our current and potential competitors have greater financial,marketing, programming and broadcasting resources than we do. Technological innovationand the resulting proliferation of television entertainment, such as cabletelevision, wireless cable, terrestrial multi-channel video distribution anddata systems, satellite-to-home distribution services, pay-per-view, digitalvideo recorders and home video and entertainment systems, have fractionalizedtelevision viewing audiences and have subjected free over-the-air televisionbroadcast stations to new types of competition. In addition, as a result of theTelecommunications Act of 1996, the legislative ban on telephone cableownership has been repealed and telephone companies are now permitted to seekFCC approval to provide video services to homes. If these changes result indeclining advertising revenue or increased operating or programming costs, ourfinancial condition and results of operations may suffer.

 

**Our revenue and profitability are affected bypolitical campaigns and the Olympics.**

 

In the past,we have generated substantial advertising revenue from political campaignadvertising, and to a lesser extent, from broadcasting the Olympics. In 2002,mid-term political elections significantly increased net revenue during theperiods in which they were broadcast. The absence of political advertising in2003 has had a negative impact on our revenues and profitability.

 

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**Recently-enacted campaign finance legislationmay substantially limit political advertising, upon which we heavily rely.**

 

Politicaladvertising is a significant source of advertising revenue during eachelectoral cycle. Recently-enacted campaign finance legislation restrictscertain forms of political advertising and imposes significant reporting andother burdens on political advertising. The legislation became effective in November 2002.On December 10, 2003, the legislation was upheld substantially in full bythe United States Supreme Court. It is not certain at this time precisely whatwill be the impact on our business of the Supreme Court’s ruling, but it is likelyto decrease the amount of advertising spent on television in connection withpolitical campaigns.

 

**The loss or modification of networkaffiliation agreements could materially and adversely affect our results ofoperations.**

 

Thenon-renewal or termination of a network affiliation agreement could have amaterial adverse effect on us. See ‘‘Business—Network affiliation’’ under Item1. Each of the networks generally provides our affiliated stations with 22hours of prime time programming per week in the case of the Big-Three stationsand 13 hours of prime time programming per week in the case of the WB stations.Each of these agreements is subject to periodic renewal. In addition, some ofour network affiliation agreements are subject to earlier termination by the networksunder specified circumstances including as a result of a change of control ofour affiliated stations, which would generally result upon the acquisition of50% of our voting power. W. Don Cornwell and Stuart J. Beck, through theirownership of all of the outstanding shares of our voting common stock, possess55% and 45%, respectively, of our voting power. Some of the networks with whichour stations are affiliated have required us and other broadcast groups, uponrenewal of affiliation agreements, to reduce or eliminate network affiliationcompensation and, in specific cases, to make cash payments to the network, andto accept other material modifications of existing affiliation agreements.Consequently our affiliation agreements may not all remain in place and eachnetwork may not continue to provide programming or compensation to affiliateson the same basis as it currently provides programming or compensation. If thisoccurs, we would need to find alternative sources of programming, which may beless attractive and more expensive.  Wehave no reason to believe that the network affiliation agreements will not berenewed when they expire.

 

**Our industry is subject to significantsyndicated and other programming costs, and increased programming costs couldadversely affect our operating results.**

 

Our industryis subject to significant syndicated and other programming costs. We may beexposed in the future to increased programming costs which may adversely affectour operating results. We often acquire program rights two or three years inadvance, making it difficult for us to accurately predict how a program willperform. In some instances, we may have to replace programs before their costshave been fully amortized, resulting in write-offs that increase stationoperating costs.

 

**Any extraordinary, newsworthy event,including hostilities or terrorist attacks, may affect our revenues and resultsof operations.**

 

During each ofthe three-month periods ended March 31, 2003 and June 30, 2003, weexperienced a loss of advertising revenue and incurred additional broadcastingexpenses due to the initiation of military action. The military actiondisrupted our television stations’ regularly scheduled programming and some ofour clients rescheduled or delayed advertising campaigns to avoid beingassociated with war coverage. We expect that if the United States engages inother foreign hostilities, there is a terrorist attack against the UnitedStates or there is some other extraordinary, newsworthy event, we may lose additionaladvertising revenue and incur increased broadcasting expenses due to furtherpre-emption, delay or cancellation of advertising campaigns and the increasedcosts of providing coverage of such events. We cannot predict the extent andduration of any future disruption to our programming schedule, the amount ofadvertising revenue that would be lost or delayed or the amount by which ourbroadcasting expenses would increase as a result. The loss of revenue andincreased expenses could negatively affect our results of operations.

 

**We are dependent on key personnel.**

 

W. DonCornwell, our Chief Executive Officer and Chairman of our Board of Directors,and Stuart J. Beck, our President and Secretary each have an employmentagreement with us. The agreements provide for a two-year employment term, whichis automatically renewed for subsequent two-year terms unless advance notice ofnonrenewal is given (the current term under such agreements, which wereautomatically renewed in September 2003, expires September 19, 2005).The agreements provide that Mr. Cornwell and Mr. Beck will not engage in anybusiness activities during the term of such agreements outside the scope oftheir employment with us unless approved by a majority of our independentdirectors. The loss of the services of certain key operating and 

 

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executivepersonnel currently employed by us could have an adverse impact on us. Therecan be no assurance that the services of such personnel will continue to bemade available to us. We do not maintain key-man life insurance on any of ouremployees.

 

**The industry-wide mandatory conversion todigital television requires us to make significant capital expenditures forwhich we might not see a return on our investment.**

 

The FCCrequired all commercial television stations in the United States to startbroadcasting in digital format by May 1, 2002 unless the FCC granted anextension. Stations may broadcast both analog and digital signals untilDecember 31, 2006, when they must abandon the analog format, provided that85% of households within the relevant DMA have the capability to receive adigital signal. The digital transmissions may initially be low-power, butfull-power transmission will be required by a date to be established by theFCC.

 

It isexpensive to convert from the current analog format to digital format. We havecompleted the upgrades to our television stations to enable them to broadcastwith digital technology either with full-power or low-power transmissions, asauthorized by the FCC. See ‘‘Business—FCC regulation of televisionbroadcasting’’ and ‘‘Business—Digital television’’ under Item 1.  We have spent approximately $16,000,000 todate on the implementation of digital technology.

 

The transitionto digital television, or DTV, eventually will require consumers to purchasenew televisions that are capable of receiving and displaying DTV signals, oradapters to receive DTV signals and convert them to analog signals for displayon their existing receivers. Currently, very few households have either adigital television or an adapter. Although the FCC has adopted some rulesintended to facilitate consumers’ transition to digital television—e.g., thoseconcerning ‘‘plug and play’’ compatibility and DTV tuners—it is possible thatmany households will never make the switch to digital television. See‘‘Business—FCC regulation of television broadcasting’’ and ‘‘Business—Digitaltelevision’’ under Item 1. Such households would not be able to view our stations’signals over-the-air if and when the FCC requires us to cease broadcastinganalog signals. If this happens our investment in upgrading our stations tobroadcast digitally will have been largely wasted with respect to suchhouseholds and our audience share could be diminished. In addition, digitaltechnology could expose us to additional competition since digital technologyallows broadcasting of multiple channels within the additional allocatedspectrum, compared to only one channel today using analog technology. We do notknow now what effect this will have on the competitive landscape in ourindustry.

 

**If direct broadcast satellite companies donot carry the stations that we own and operate or provide services to, we couldlose revenue and audience share.**

 

TheSatellite Home Viewer Improvement Act of 1999, as amended, allows directbroadcast satellite television companies to transmit local broadcast televisionsignals to subscribers in local markets provided that they offer to carry alllocal stations in that market. However, satellite providers have limitedsatellite capacity to deliver local station signals in local markets. As ofMarch 5, 2004, satellite carrier DirecTV carries the signals of ourstations KBWB, WDWB and WKBW and announced plans to carry KSEE and KBJR andWPTA sometime in 2004 while EchoStar currently carries KBWB, WDWB, WKBW andKSEE. Satellite providers, such as DirecTV and EchoStar, may choose not tocarry local stations in any of our other markets. In those markets in which thesatellite providers do not carry local station signals, subscribers to thosesatellite services will be unable to view our stations without making furtherarrangements, such as installing antennas and switches. Furthermore, whendirect broadcast satellite companies do carry local television stations in amarket, they are permitted to charge subscribers extra for such service; somesubscribers may choose not to pay extra to receive local television stations.In the event subscribers to satellite services do not receive the stations thatwe own and operate or provide services to, we could lose audience share, whichwould adversely affect our revenue and earnings. In certain limitedcircumstances where satellite subscribers cannot receive an adequateover-the-air signal from one of our stations or when we grant a waiver of ourrights, satellite carriers may provide the signals of distant stations with thesame network affiliations as our stations. The availability of another stationwith the same network affiliation as ours in our markets could negativelyaffect our audience share. Such negative effects could increase if thesubscribership of these satellite providers continues to grow.

 

**Item 7A. Quantitative and Qualitative Disclosures about Market Risk**

 

The interest rate on our outstanding Senior Secured Notes is fixed at9.75%.  Consequently, our earnings willnot be affected by changes in short-term interest rates.

 

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

 

Index to Consolidated Financial Statements

 
|                                                                                                                      |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Auditors                                                                                            |   |
| Consolidated Statements of Operations for  the years ended December 31, 2001, 2002 and 2003                          |   |
| Consolidated Balance Sheets as of December 31, 2002 and 2003                                                         |   |
| Consolidated Statements of Stockholder’s  Equity (Deficit) for the years ended December 31, 2001, 2002 and 2003 |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2001, 2002 and 2003                          |   |
| Notes to the Consolidated Financial  Statements                                                                           |   |
| Schedule II — Valuation and Qualifying  Accounts                                                                |   |

 

 

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**Report of IndependentAuditors**

 

The Board of Directors and StockholdersGranite Broadcasting Corporation

 

We have audited the accompanying consolidated balance sheets of GraniteBroadcasting Corporation as of December 31, 2003 and 2002 and the relatedconsolidated statements of operations, stockholders’ deficit and cash flows foreach of the three years in the period ended December 31, 2003.  Our audits also included the financialstatement schedule listed in the Index at Item 15(a).  These financial statements and the schedule arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements and the schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofGranite Broadcasting Corporation at December 31, 2003 and 2002, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2003 in conformity with accountingprinciples generally accepted in the United States.  Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

As discussed in Note 2 to the consolidated financial statements,Granite Broadcasting Corporation has restated its financial statements as ofand for the year ended December 31, 2002. Also, as discussed in Note 2 to the consolidated financial statements,on January 1, 2002 Granite Broadcasting Corporation adopted Statement ofFinancial Accounting Standards No. 142, Goodwill and Intangible Assets.  Further, as discussed in Note 8 to theconsolidated financial statements, on January 1, 2003 Granite BroadcastingCorporation retroactively adopted Statement of Financial Accounting StandardsNo. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13 and Technical Corrections.

 

 
|   | ERNST & YOUNG LLP |   |
|--------|-----------------------|--------|

 

 

New York, New York

February 20, 2004

 

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                                         |   | **For the  Years Ended December 31,** |         |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------------|
|                                                                                         |   | **2001**                                   |         | **2002** |   | **2003** |   |
|                                                                                         |   | **(Restated)**                             |         |
| Net revenues                                                                                 |   | $                                          | 113,075,276  |   | $ | 135,344,151 |   | $ | 108,544,424 |   |
| Station operating expenses                                                                   |   | 116,373,938                                |         | 103,963,240 |   | 92,033,163 |   |
| Depreciation                                                                                 |   | 6,076,212                                  |         | 5,896,626 |   | 6,285,077 |   |
| Amortization of intangible assets                                                            |   | 26,735,547                                 |         | 21,964,771 |   | 9,976,310 |   |
| Corporate expense                                                                            |   | 9,686,952                                  |         | 9,536,424 |   | 11,767,659 |   |
| Non-cash compensation expense (1)                                                            |   | 1,472,735                                  |         | 1,508,048 |   | 895,539 |   |
|                                                                                         |   |                                       |         |   |   |   |   |
| Operating loss                                                                               |   | (47,270,108                                | )            | (7,524,958 | ) | (12,413,324 | ) |
|                                                                                         |   |                                       |         |   |   |   |   |
| Other expenses (income):                                                                     |   |                                       |         |   |   |   |   |
| Interest expense                                                                             |   | 47,481,899                                 |         | 34,889,378 |   | 31,305,297 |   |
| Interest income                                                                              |   | (1,559,321                                 | )            | (1,077,327 | ) | (1,281,251 | ) |
| Non-cash interest expense                                                                    |   | 7,951,079                                  |         | 13,030,566 |   | 4,969,421 |   |
| Non-cash preferred stock dividend                                                            |   | —                                     |         | — |   | 12,773,922 |   |
| Gain on sale of assets                                                                       |   | —                                     |         | (192,406,138 | ) | — |   |
| Loss on extinguishment of debt                                                               |   | 2,011,801                                  |         | 15,096,641 |   | 3,214,524 |   |
| Other                                                                                        |   | 1,141,058                                  |         | 868,724 |   | 584,324 |   |
| (Loss) income before income taxes and  cumulative effect of a change in accounting principle |   | (104,296,624                               | )            | 122,073,198 |   | (63,979,561 | ) |
| Provision (benefit) for income taxes:                                                        |   |                                       |         |   |   |   |   |
| Current                                                                                      |   | 214,000                                    |         | 18,873,040 |   | (16,110,412 | ) |
| Deferred                                                                                     |   | (27,763,730                                | )            | 34,288,913 |   | (921,277 | ) |
| Total (benefit) provision for income taxes                                                   |   | (27,549,730                                | )            | 53,161,953 |   | (17,031,689 | ) |
| (Loss) income before cumulative effect of a  change in accounting principle                  |   | (76,746,894                                | )            | 68,911,245 |   | (46,947,872 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit of $58,350,946    |   | —                                     |         | 150,478,583 |   | — |   |
| Net loss                                                                                     |   | $                                          | (76,746,894  | ) | $ | (81,567,338 | ) | $ | (46,947,872 | ) |
|                                                                                         |   |                                       |         |   |   |   |   |
| Net loss attributable to common  shareholders                                                |   | $                                          | (109,310,870 | ) | $ | (80,744,517 | ) | $ | (59,899,430 | ) |
|                                                                                         |   |                                       |         |   |   |   |   |
| Per basic common share:                                                                      |   |                                       |         |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                  |   | $                                          | (5.89        | ) | $ | 3.72 |   | $ | (3.15 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                     |         | (8.03 | ) | — |   |
| Basic net loss per share                                                                     |   | $                                          | (5.89        | ) | $ | (4.31 | ) | $ | (3.15 | ) |
|                                                                                         |   |                                       |         |   |   |   |   |
| Weighted average common shares outstanding                                                   |   | 18,568,811                                 |         | 18,749,363 |   | 18,990,919 |   |
|                                                                                         |   |                                       |         |   |   |   |   |
| Per diluted common share:                                                                    |   |                                       |         |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle                  |   | $                                          | (5.89        | ) | $ | 3.65 |   | $ | (3.15 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |   | —                                     |         | (7.88 | ) | — |   |
| Diluted net loss per share                                                                   |   | $                                          | (5.89        | ) | $ | (4.23 | ) | $ | (3.15 | ) |
|                                                                                         |   |                                       |         |   |   |   |   |
| Weighted average common shares outstanding  — assuming dilution                         |   | 18,568,811                                 |         | 19,098,326 |   | 18,990,919 |   |

 

----

(1)                                  Allocationof non-cash compensation expense to other operating expenses:

 
|                          |   | **For the  Years Ended December 31,** |      |
|-------------------------------|--------|--------------------------------------------|-----------|
|                          |   | **2001**                                   |      | **2002** |   | **2003** |   |
| Station operating expenses    |   | $                                          | 409,863   |   | $ | 295,652 |   | $ | 756,270 |   |
| Corporate expense             |   | 1,062,872                                  |      | 1,212,396 |   | 139,269 |   |
| Non-cash compensation expense |   | $                                          | 1,472,735 |   | $ | 1,508,048 |   | $ | 895,539 |   |

 

See accompanying notes.

 

40

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED BALANCESHEET****S**

 
|                                                                                                                                                                                                                                                                                                                                                                                     |   | **December 31,** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                                                     |   | **2002**              |        | **2003** |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   | **(Restated)**        |        |   |   |
| Assets                                                                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                          |   |                  |        |   |   |
| Cash and cash equivalents (including  $1,777,115 of restricted cash at December 31, 2002)                                                                                                                                                                                                                                                                                           |   | $                     | 54,319,597  |   | $ | 90,213,995 |   |
| Accounts receivable, less allowance for  doubtful accounts ($747,520 in 2002 and $1,319,238 in 2003)                                                                                                                                                                                                                                                                                     |   | 23,211,637            |        | 21,464,965 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                                     |   | 19,713,849            |        | 15,299,993 |   |
| Income tax receivable                                                                                                                                                                                                                                                                                                                                                                    |   | 5,334,846             |        | 16,326,799 |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                                                     |   | 4,781,201             |        | 5,795,794 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                     |   | 107,361,130           |        | 149,101,546 |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                              |   | 41,813,349            |        | 48,449,586 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                                     |   | 12,918,123            |        | 8,446,229 |   |
| Other non current assets                                                                                                                                                                                                                                                                                                                                                                 |   | 3,461,975             |        | 7,891,335 |   |
| Deferred financing fees, less accumulated  amortization ($7,612,443 in 2002 and $50,902 in 2003)                                                                                                                                                                                                                                                                                         |   | 5,630,704             |        | 13,373,623 |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                                            |   | 83,051,302            |        | 78,049,529 |   |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                                                  |   | 127,331,829           |        | 127,331,829 |   |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                                                |   | 87,365,957            |        | 86,379,757 |   |
| Other intangibles, net                                                                                                                                                                                                                                                                                                                                                                   |   | 3,250,000             |        | — |   |
| Total Assets                                                                                                                                                                                                                                                                                                                                                                             |   | $                     | 472,184,369 |   | $ | 519,023,434 |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                               |   |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                         |   | $                     | 2,807,730   |   | $ | 2,903,728 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                                         |   | 3,158,876             |        | 987,187 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                                |   | 6,941,220             |        | 7,039,091 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                                             |   | 26,601,355            |        | 27,314,160 |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                                                |   | 3,581,243             |        | 2,951,001 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                |   | 43,090,424            |        | 41,195,167 |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                           |   | 312,791,038           |        | 400,086,598 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                                             |   | 33,379,694            |        | 24,616,575 |   |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                                   |   | 44,736,713            |        | 46,203,797 |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                               |   | —                |        | 198,480,586 |   |
| Accrued dividends on redeemable preferred  stock                                                                                                                                                                                                                                                                                                                                         |   | 19,160,885            |        | 44,708,729 |   |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                                            |   | 11,195,374            |        | 13,163,788 |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                               |   | 198,125,314           |        | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                                                              |   |                  |        |   |   |
| Common stock: 41,000,000 shares authorized  consisting of 1,000,000 shares of Class A Common Stock, $.01 par value, and  40,000,000 shares of Common Stock   (Nonvoting), $.01 par value; 178,500 shares of Class A Common Stock  and 18,834,179 shares of Common Stock (Nonvoting) (18,581,510 shares at  December 31, 2002) issued and outstanding at December 31, 2003 |   | 187,600               |        | 190,126 |   |
|                                                                                                                                                                                                                                                                                                                                                                                     |   |                  |        |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                      |   | (188,779,415          | )           | (248,118,609 | ) |
| Less:                                                                                                                                                                                                                                                                                                                                                                                    |   |                  |        |   |   |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                                                    |   | (851,334              | )           | (627,648 | ) |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                                  |   | (851,924              | )           | (875,675 | ) |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                         |   | (190,295,073          | )           | (249,431,806 | ) |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                         |   | $                     | 472,184,369 |   | $ | 519,023,434 |   |

 

See accompanying notes.

 

41

----

 

**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT****)**

 

For the Years Ended December 31, 2001,2002 and 2003

 

 
|                                                                            |   | **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, 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                                     | )      |
| Dividends on redeemable preferred stock                                         |   |                      |   |                          |   | (18,560,342                     | )      | (10,508,080                                   | )         |                       |   |                               |   |                |       | (29,068,422                                     | )      |
| Gain on retirement of Cumulative Exchangeable Preferred  Stock                  |   |                      |   |                          |   | 30,299,037                      |   |                                          |      |                       |   |                               |   |                |       | 30,299,037                                      |   |
| Accretion of offering costs related to Cumulative  Exchangeable Preferred Stock |   |                      |   |                          |   | (407,794                        | )      |                                          |      |                       |   |                               |   |                |       | (407,794                                        | )      |
| Grant of stock award under stock plans                                          |   |                      |   |                          |   | 799,691                         |   |                                          |      | (799,691                   | )      |                               |   |                |       | —                                          |   |
| Exercise of stock options                                                       |   |                      |   | 20                            |   | 2,980                           |   |                                          |      |                       |   |                               |   |                |       | 3,000                                           |   |
| Issuance of Common Stock (Nonvoting)                                            |   |                      |   | 1,316                         |   | (1,316                          | )      |                                          |      |                       |   |                               |   |                |       | —                                          |   |
| Repurchase of Common Stock (Nonvoting)                                          |   |                      |   |                          |   |                            |   |                                          |      |                       |   |                               |   | (554,924            | )          | (554,924                                        | )      |
| Stock expense related to stock plans                                            |   |                      |   |                          |   | 17,624                          |   |                                          |      | 1,082,084                  |   |                               |   |                |       | 1,099,708                                       |   |
| Cancellation of warrants                                                        |   |                      |   |                          |   | (12,149,880                     | )      |                                          |      |                       |   |                               |   |                |       | (12,149,880                                     | )      |
| Discount on loans to officers                                                   |   |                      |   |                          |   |                            |   |                                          |      | 195,452                    |   |                               |   |                |       | 195,452                                         |   |
| Net loss (Restated)                                                             |   |                      |   |                          |   |                            |   | (81,567,338                                   | )         |                       |   |                               |   |                |       | (81,567,338                                     | )      |
| Balance at December 31, 2002 (Restated)                                    |   | 1,785                     |   | 185,815                       |   | —                          |   | (188,779,415                                  | )         | (851,334                   | )      | —                             |   | (851,924            | )          | (190,295,073                                    | )      |
| Dividends on redeemable preferred stock                                         |   |                      |   |                          |   | (382,600                        | )      | (12,391,322                                   | )         |                       |   |                               |   |                |       | (12,773,922                                     | )      |
| Accretion of offering costs related to Cumulative  Exchangeable Preferred Stock |   |                      |   |                          |   | (177,636                        | )      |                                          |      |                       |   |                               |   |                |       | (177,636                                        | )      |
| Grant of stock award under stock plans                                          |   |                      |   |                          |   | 402,900                         |   |                                          |      | (402,900                   | )      |                               |   |                |       | —                                          |   |
| Exercise of stock options                                                       |   |                      |   | 175                           |   | 26,075                          |   |                                          |      |                       |   |                               |   |                |       | 26,250                                          |   |
| Issuance of Common Stock (Nonvoting)                                            |   |                      |   | 2,351                         |   | (2,351                          | )      |                                          |      |                       |   |                               |   |                |       | —                                          |   |
| Repurchase of Common Stock (Nonvoting)                                          |   |                      |   |                          |   |                            |   |                                          |      |                       |   |                               |   | (23,751             | )          | (23,751                                         | )      |
| Stock expense related to stock plans                                            |   |                      |   |                          |   | 133,612                         |   |                                          |      | 431,133                    |   |                               |   |                |       | 564,745                                         |   |
| Discount on loans to officers                                                   |   |                      |   |                          |   |                            |   |                                          |      | 195,453                    |   |                               |   |                |       | 195,453                                         |   |
| Net loss                                                                        |   |                      |   |                          |   |                            |   | (46,947,872                                   | )         |                       |   |                               |   |                |       | (46,947,872                                     | )      |
| Balance at December 31, 2003                                               |   | $                         | 1,785  |                          | $      | 188,341                         |   | $                                             | —    |                       | $      | (248,118,609                       | )      | $                   | (627,648   | )                                               | $      | — |   | $ | (875,675 | ) | $ | (249,431,806 | ) |

 

See accompanying notes.

 

42

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                         |   | **For the  Years Ended December 31,** |        |
|------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|
|                                                                         |   | **2001**                                   |        | **2002** |   | **2003** |   |
|                                                                         |   | **(Restated)**                             |        |
| Cash flows from operating activities:                                        |   |                                       |        |   |   |   |   |
| Net loss                                                                     |   | $                                          | (76,746,894 | ) | $ | (81,567,338 | ) | $ | (46,947,872 | ) |
|                                                                         |   |                                       |        |   |   |   |   |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                       |        |   |   |   |   |
| Amortization of intangible assets                                            |   | 26,735,547                                 |        | 21,964,771 |   | 9,976,310 |   |
| Depreciation                                                                 |   | 6,076,212                                  |        | 5,896,626 |   | 6,285,077 |   |
| Non-cash compensation expense                                                |   | 1,472,735                                  |        | 1,508,048 |   | 895,539 |   |
| Non-cash interest expense                                                    |   | 7,951,079                                  |        | 13,030,566 |   | 4,969,421 |   |
| Non-cash preferred stock dividend                                            |   | —                                     |        | — |   | 12,773,922 |   |
| Deferred tax benefit                                                         |   | (26,959,263                                | )           | (24,060,838 | ) | (921,277 | ) |
| Loss on extinguishments  of debt                                        |   | 2,011,801                                  |        | 15,096,641 |   | 3,214,524 |   |
| Gain on sale of assets                                                       |   | —                                     |        | (192,406,138 | ) | — |   |
| Cumulative effect of a change in accounting  principle                       |   | —                                     |        | 208,829,529 |   | — |   |
| Change in assets and liabilities net of  effects from sale of station:       |   |                                       |        |   |   |   |   |
| Decrease (increase) in accounts receivable                                   |   | 4,335,909                                  |        | (34,970,057 | ) | 1,746,672 |   |
| Increase (decrease) in accrued liabilities                                   |   | 2,773,245                                  |        | 1,941,543 |   | (2,073,818 | ) |
| (Decrease) increase in accounts payable                                      |   | (1,835,829                                 | )           | 1,131,254 |   | 95,998 |   |
| NBC affiliation prepayment                                                   |   | (27,778,694                                | )           | — |   | — |   |
| WB affiliation payment                                                       |   | (4,523,428                                 | )           | (4,523,428 | ) | (2,096,753 | ) |
| Increase in income tax receivable                                            |   | —                                     |        | (5,334,846 | ) | (10,991,953 | ) |
| Decrease (increase) in film contract rights  and other assets                |   | 11,644,324                                 |        | (5,692,854 | ) | 2,485,695 |   |
| Increase (decrease) in film contract rights  payable and other liabilities   |   | 17,892,764                                 |        | 5,746,953 |   | (186,005 | ) |
| Net cash used in operating activities                                        |   | (56,950,492                                | )           | (73,409,568 | ) | (20,774,520 | ) |
|                                                                         |   |                                       |        |   |   |   |   |
| Cash flows from investing activities:                                        |   |                                       |        |   |   |   |   |
| Proceeds from sale of station                                                |   | —                                     |        | 265,018,849 |   | — |   |
| Capital expenditures                                                         |   | (3,231,733                                 | )           | (14,118,797 | ) | (12,652,554 | ) |
| Net cash (used in) provided by investing  activities                         |   | (3,231,733                                 | )           | 250,900,052 |   | (12,652,554 | ) |
|                                                                         |   |                                       |        |   |   |   |   |
| Cash flows from financing activities:                                        |   |                                       |        |   |   |   |   |
| Proceeds from senior credit facility                                         |   | 205,000,000                                |        | 80,000,000 |   | — |   |
| Proceed from senior secured notes                                            |   | —                                     |        | — |   | 400,067,100 |   |
| Repayment of bank debt                                                       |   | (113,672,428                               | )           | (170,000,000 | ) | (316,677,910 | ) |
| Payment of deferred financing fees                                           |   | (10,927,740                                | )           | (8,778,814 | ) | (14,070,217 | ) |
| Repurchase of cumulative exchangeable  preferred stock                       |   | —                                     |        | (53,264,005 | ) | — |   |
| Repurchase of common stock                                                   |   | —                                     |        | (554,924 | ) | (23,751 | ) |
| Exercise of stock options                                                    |   | —                                     |        | — |   | 26,250 |   |
| Net cash provided by (used in) financing  activities                         |   | 80,399,832                                 |        | (152,597,743 | ) | 69,321,472 |   |
|                                                                         |   |                                       |        |   |   |   |   |
| Net increase in cash and cash equivalents                                    |   | 20,217,607                                 |        | 24,892,741 |   | 35,894,398 |   |
| Cash and cash equivalents, beginning of  year                                |   | 9,209,249                                  |        | 29,426,856 |   | 54,319,597 |   |
| Cash and cash equivalents, end of year                                       |   | $                                          | 29,426,856  |   | $ | 54,319,597 |   | $ | 90,213,995 |   |
|                                                                         |   |                                       |        |   |   |   |   |
| Supplemental information:                                                    |   |                                       |        |   |   |   |   |
| Restricted cash                                                              |   | $                                          | 9,286,326   |   | $ | 1,777,115 |   | $ | — |   |
| Cash paid for interest                                                       |   | 41,386,874                                 |        | 40,634,741 |   | 33,473,446 |   |
| Cash paid for income taxes                                                   |   | 443,604                                    |        | 26,759,484 |   | 832,765 |   |
| Non-cash capital expenditures                                                |   | 513,640                                    |        | 600,455 |   | 142,335 |   |
| Cumulative exchangeable preferred stock  dividend                            |   | 32,063,828                                 |        | 27,679,733 |   | 25,547,844 |   |
| Fair value of warrants issued                                                |   | 2,065,000                                  |        | — |   | — |   |
| Cancellation of warrants                                                     |   | —                                     |        | 12,150,000 |   | — |   |

 

See accompanying notes.

 

43

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**GRANITEBROADCASTING CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 – Operationsof the Company**

 

The business operations of Granite Broadcasting Corporation and itswholly owned subsidiaries (the “Company”) consist of eight network affiliatedtelevision stations (three with NBC, two with ABC, two with the WB Network andone with CBS).  The Company’s stationsare located in New York, California, Michigan, Indiana, Illinois and Minnesota.

 

**Note 2 – Summary ofSignificant Accounting Policies**

 

*Financial statement presentation*

 

The consolidated financial statements include the accounts of GraniteBroadcasting Corporation and its wholly owned subsidiaries.  All significant inter-company accounts andtransactions have been eliminated.  Asdiscussed below, the Company changed its accounting policy with respect to theamortization of network affiliation agreements.  Accordingly, the consolidated financial statements at and for theyear ended December 31, 2002 have been restated.

 

*Restatement of Financial Results*

 

Upon the adoption of Statement of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets (“Statement 142”), the Companyconsidered the value of its network affiliation agreements as indefinite liveassets that should not be subject to amortization.  In light of recently stated positions by the Securities and ExchangeCommission regarding amortization of network affiliation agreements, theCompany has changed its accounting policy to amortize these assets retroactiveto January 1, 2002 using a 25 year useful life.  As a result, the financial results for each of the quarters endedMarch 31, 2002 through September 30, 2003 are being restated.  The total impact of the adjustment was anincrease in amortization expense of $744,839 in each quarterly period, with acorresponding adjustment to (loss) income before cumulative effect of a changein accounting principle and net loss in each period of $484,145.  Basic and diluted net loss per shareincreased by $0.02 in the quarter ended March 31, 2002, basic net income pershare decreased by $0.02 and diluted net income per share decreased by $0.03 inthe quarter ended June 30, 2002, basic and diluted net loss per share increasedby $0.03 and $0.02 in the quarters ended September 30, 2002 and December 31,2002, respectively.  Basic and dilutednet loss per share increased by $0.02, $0.03 and $0.02 in the quarters endedMarch 31, 2003, June 30, 2003, and September 30, 2003, respectively.

 

*Revenue recognition*

 

The Company’s primary source of revenue is the sale of television timeto advertisers.  Revenue is recordedwhen the advertisements are aired and collectibility is reasonablyassured.  Other sources of revenue arecompensation from the networks, studio rental and commercial productionactivities.  These revenues are recordedwhen the programs are aired and the services are performed.

 

*Allowance for Doubtful Accounts*

 

The Company makes estimates of the uncollectibility of accountsreceivable and specifically reviews historical write-off activity by market,large customer concentrations, customer credit worthiness, and changes incustomer payment terms when evaluating the adequacy of the allowance fordoubtful accounts.  Historically, thelevel of customer defaults have been predictable and the allowance for doubtfulaccounts has been adequate to cover such defaults.

 

*Intangibles*

 

Intangible assets at December 31 are summarized as follows:

 

 
|                     |   | **2002**       |        | **2003**     |   |
|--------------------------|--------|----------------|-------------|--------------|--------|
|                     |   | **(Restated)** |        |         |   |
| Goodwill                 |   | $              | 111,252,372 |         | $      | 106,250,599 |   |
| Covenant not to compete  |   | 30,000,000     |        | 30,000,000   |   |
| Network affiliations     |   | 127,622,742    |        | 133,362,852  |   |
| Broadcast licenses       |   | 159,647,594    |        | 159,647,594  |   |
|                     |   | 428,522,707    |        | 429,261,045  |   |
| Accumulated amortization |   | (127,523,620   | )           | (137,499,930 | )      |
|                     |   |           |        |         |   |
| Net intangible assets    |   | $              | 300,999,088 |         | $      | 291,761,115 |   |

 

The Company adoptedStatement 142 on January 1, 2002. Upon adoption of Statement 142, the Company recorded a one-time non-cashcharge to reduce the carrying value of goodwill and other indefinite livedintangible assets by $95,000,000 and $114,000,000, respectively during2002.  The decline in the carrying valueof goodwill and other-indefinite lived intangible assets relates solely to theCompany’s Warner Brothers affiliates. Such charge is non-operational in nature and is reflected as acumulative effect of a change in accounting principle in the statement ofoperations.  In calculating theimpairment charge, the fair value was

 

44

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estimated using adiscounted cash flow methodology.  TheCompany completed its required annual impairment test as of December 31,2003, and concluded that no additional write down to the carrying value ofgoodwill and other indefinite-lived intangible assets is required.  The Company reduced goodwill during the yearended December 31, 2003 by $5,001,773 to reverse tax reserves established inconnection with an acquisition that are no longer needed.

 

As of December 31, 2002 and 2003, the Company’s intangible assetsand related accumulated amortization consisted of the following:

 
|                                            |   | **December 31,  2002** |        | **December 31,  2003**   |   |
|-------------------------------------------------|--------|-----------------------------|-------------|-------------------------------|--------|
|                                            |   | **(Restated)**              |        |                          |   |   |   |
|                                            |   | **Gross  Carrying Value**   |        | **Accumulated  Amortization** |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   |
|                                            |   |                        |        |                          |   |   |   |   |   |
| Intangible assets subject to amortization:      |   |                        |        |                          |   |   |   |   |   |
| Network affiliation agreements                  |   | $                           | 127,622,742 |                          | $      | (40,256,785 | ) | $ | 133,362,852 |   | $ | (46,983,095 | ) |
| Covenant not to compete                         |   | 30,000,000                  |        | (26,750,000                   | )      | 30,000,000 |   | (30,000,000 | ) |
|                                            |   | $                           | 157,622,742 |                          | $      | (67,006,785 | ) | $ | 163,362,852 |   | $ | (76,983,095 | ) |
|                                            |   |                        |        |                          |   |   |   |   |   |
| Intangible assets not subject to  amortization: |   |                        |        |                          |   |   |   |   |   |
| Goodwill                                        |   | $                           | 111,252,372 |                          | $      | (28,201,070 | ) | $ | 106,250,599 |   | $ | (28,201,070 | ) |
| Broadcast licenses                              |   | 159,647,594                 |        | (32,315,765                   | )      | 159,647,594 |   | (32,315,765 | ) |
|                                            |   | $                           | 270,899,966 |                          | $      | (60,516,835 | ) | $ | 265,898,193 |   | $ | (60,516,835 | ) |

 

The Company recorded amortization expense of $21,965,000 and $9,976,000during the years ended December 31, 2002 and 2003, respectively.  Based on the current amount of intangibleassets subject to amortization, the estimated amortization expense for each ofthe succeeding 5 years are as follows: 2004: $7,435,000; 2005: $7,409,000;2006: $7,409,000; 2007: $7,409,000 and 2008: $3,091,000.  As acquisitions anddispositions occur in the future, these amounts may vary.

 

The 2001 results on a historical basis do not reflect the provisions ofStatement 142.  Had the Company adoptedStatement 142 on January 1, 2001, the historical net loss and basic anddiluted net loss per common share would have changed to the adjusted amountsindicated below:

 

 
|                         |   | **December 31,  2001** |        |
|------------------------------|--------|-----------------------------|-------------|
|                         |   |                        |        | **Per basic  and diluted  common share** |   |
| Net loss                     |   | $                           | (76,746,894 | ) | $ | (5.89 | ) |
| Add: Goodwill amortization   |   | 5,898,800                   |        | 0.32 |   |
| Add: Intangible amortization |   | 7,433,402                   |        | 0.40 |   |
| Adjusted net loss            |   | $                           | (63,414,692 | ) | $ | (5.17 | ) |

 

*Long-Lived Assets*

 

Long-lived assets for impairment are reviewed whenever events orchanges in circumstances indicate that the carrying amount of an asset is notrecoverable.  At such time as animpairment in value of a long-lived asset is identified, except for goodwilland other intangible assets deemed to have indefinite lives as previously discussed,the impairment will be measured in accordance with Statement of FinancialAccounting Standards No. 144, Accounting for the Impairment of Disposal ofLong-Lived Assets, as the amount by which the carrying amount of a long-livedasset exceeds its fair value.  A presentvalue technique, which utilizes multiple cash flow scenarios that reflect therange of possible outcomes and an appropriate discount rate, is used todetermine fair value.  There were noimpairments of long-lived assets at December 31, 2003.

 

*Deferred financing fees*

 

On December 22, 2003, the Company completed an offering of 9 3/4%Senior Secured Notes (the Notes). Proceeds from the Notes were used to (i) repay all outstandingborrowings, plus accrued interest, under the Senior Credit Agreement, (ii) toredeem

 

45

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at par, plus accrued interest, all of the 9 3/8% and 10 3/8% SeniorSubordinated Notes due 2005 and (iii) to repurchase at par, plus accruedinterest, all of the 8 7/8% Senior Subordinated Notes due 2008.  The unamortized deferred financing feesrelated to the Company’s senior credit agreement and the Company’s seniorsubordinated notes of $3,215,000 were written off in 2003.  The Company incurred fees of $13,425,000 inconnection with the sale of the Senior Secured Notes.  These fees are being amortized straight-line over seven years.

 

*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 35years.  Maintenance and repairs arecharged to operations as incurred.

 

*Film contract rights*

 

Film contract rights are recorded as assets at gross value when thelicense period 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 non-current on that basis. The Company’s accounting for long-lived program assets requires judgmentas to the likelihood that such assets will generate sufficient revenue to coverthe associated expense.  The Companyreviews its program inventory for impairment by projecting the amount ofrevenue the program will generate over the remaining life of the contract andcomparing it to the program’s expense. The Company has written down the value of certain programs by $5,600,000and $3,000,000 in the years ended December 31, 2002 and 2003,respectively.  Film contract rightspayable are classified as current or non-current in accordance with the paymentterms of the various license agreements. Film contract rights are reflected in the consolidated balance sheet atthe lower of unamortized cost or estimated net realizable value.

 

At December 31, 2003, the obligation for programming that had notbeen recorded because the program rights were not available for broadcastingaggregated $38,353,000.

 

*Barter transactions*

 

Revenue from barter transactions is recognized when advertisements arebroadcast and merchandise or services received are charged to expense whenreceived or used.  Barter revenuetotaled $1,723,000, $1,922,000 and $1,894,000 for the years endedDecember 31, 2001, 2002 and 2003 respectively.  Barter expense totaled $1,487,000, $1,090,000 and $1,572,000 forthe years ended December 31, 2001, 2002 and 2003 respectively.

 

*Advertising*

 

The cost of advertising is expensed as incurred.  Advertising expense was $2,028,000,$3,511,000 and $3,689,000 for the years ended December 31, 2001, 2002 and2003 respectively.

 

*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 inEurodollar deposits and United States government obligations. Cash totaling$1,777,115 at December 31, 2002, was restricted in its use for the paymentof interest on the then outstanding senior credit facility.

 

*Stock options*

 

The Company has adopted the disclosure-only provisions of Statement ofFinancial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation” (“SFAS 123”). Accordingly, no compensation expense has been recognized for the stockoption plans.  For purposes of SFAS 123pro forma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period; therefore, the impact on pro formanet loss in 2001, 2002 and 2003 may not be representative of the impact infuture years.  The Company’s pro formainformation for years ended December 31, follows:

 

46

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|                                            |   | **2001**  |        | **2002**       |   | **2003**    |   |
|-------------------------------------------------|--------|-----------|-------------|----------------|--------|-------------|--------|
|                                            |   |      |        | **(Restated)** |   |        |   |
| Net loss                                        |   | $         | (76,746,894 | )              | $      | (81,567,338 | )      | $ | (46,947,872 | ) |
| Pro forma compensation expense                  |   | 2,113,526 |        | 2,300,977      |   | 1,381,366   |   |
| Less: Option compensation expense, as  reported |   | —    |        | 98,600         |   | 48,000      |   |
| Pro forma net loss                              |   | $         | (78,860,420 | )              | $      | (83,769,715 | )      | $ | (48,281,238 | ) |
|                                            |   |      |        |           |   |        |   |
| Basic net loss per share,                       |   | $         | (5.89       | )              | $      | (4.31       | )      | $ | (3.15 | ) |
| Pro forma compensation expense                  |   | (0.11     | )           | (0.12          | )      | (0.07       | )      |
| Pro forma basic net loss per share              |   | $         | (6.00       | )              | $      | (4.43       | )      | $ | (3.22 | ) |
|                                            |   |      |        |           |   |        |   |
| Diluted net loss per share                      |   | $         | (5.89       | )              | $      | (4.23       | )      | $ | (3.15 | ) |
| Pro forma compensation expense                  |   | (0.11     | )           | (0.12          | )      | (0.07       | )      |
| Pro forma diluted net loss per share            |   | $         | (6.00       | )              | $      | (4.35       | )      | $ | (3.22 | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black Scholes option pricing model with the following assumptions forthe various grants made during 2001, 2002 and 2003:

 
|                    |   | **2001** |   | **2002** |   | **2003**      |   |
|-------------------------|--------|----------|--------|----------|--------|---------------|--------|
| Risk-free interest rate |   | 4.08%    |   | 3.00%    |   | 2.93% - 3.19% |   |
| Dividend yield          |   | —   |   | —   |   | —        |   |
| Expected volatility     |   | 86%      |   | 103%     |   | 59%- 92%      |   |
| Expected lives          |   | 5        |   | 4        |   | 5             |   |

 

The Black Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  Inaddition, option valuation models require the input of highly subjectiveassumptions 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.

 

*Net income (loss) per common share*

 

The following table sets forth the computation of basic and dilutedearnings per share:

 
|                                                                          |   | **Years  Ended December 31,** |         |
|-------------------------------------------------------------------------------|--------|------------------------------------|--------------|
|                                                                          |   | **2001**                           |         | **2002** |   | **2003** |   |
|                                                                          |   |                               |         | **(Restated)** |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle   |   | $                                  | (76,746,894  | ) | $ | 68,911,245 |   | $ | (46,947,872 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit    |   | —                             |         | 150,478,583 |   | — |   |
|                                                                          |   |                               |         |   |   |   |   |
| Net loss                                                                      |   | (76,746,894                        | )            | (81,567,338 | ) | (46,947,872 | ) |
|                                                                          |   |                               |         |   |   |   |   |
| Gain on retirement of cumulative  exchangeable preferred stock                |   | —                             |         | (30,299,037 | ) | — |   |
| Cumulative exchangeable preferred stock  dividends                            |   | 32,063,828                         |         | 29,068,422 |   | 12,773,922 |   |
| Accretion of offering costs on cumulative  exchangeable preferred stock       |   | 500,148                            |         | 407,794 |   | 177,636 |   |
|                                                                          |   |                               |         |   |   |   |   |
| Net loss attributable to common  shareholders                                 |   | $                                  | (109,310,870 | ) | $ | (80,744,517 | ) | $ | (59,899,430 | ) |
|                                                                          |   |                               |         |   |   |   |   |
| Weighted average common shares outstanding  for basic net loss per share      |   | 18,568,811                         |         | 18,749,363 |   | 18,990,919 |   |
| ADD:                                                                          |   |                               |         |   |   |   |   |
| Effect of dilutive securities:                                                |   |                               |         |   |   |   |   |
| Stock options                                                                 |   | —                             |         | 348,963 |   | — |   |
|                                                                          |   |                               |         |   |   |   |   |
| Adjusted weighted average common shares  outstanding – assuming dilution |   | 18,568,811                         |         | 19,098,326 |   | 18,990,919 |   |
|                                                                          |   |                               |         |   |   |   |   |
| Per basic common share:                                                       |   |                               |         |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle   |   | $                                  | (5.89        | ) | $ | 3.72 |   | $ | (3.15 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit    |   | —                             |         | (8.03 | ) | — |   |
| Basic net loss per share                                                      |   | $                                  | (5.89        | ) | $ | (4.31 | ) | $ | (3.15 | ) |
|                                                                          |   |                               |         |   |   |   |   |
| Per diluted common share:                                                     |   |                               |         |   |   |   |   |
| (Loss) income before cumulative effect of a  change in accounting principle   |   | $                                  | (5.89        | ) | $ | 3.65 |   | $ | (3.15 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit    |   | —                             |         | (7.88 | ) | — |   |
| Diluted net loss per share                                                    |   | $                                  | (5.89        | ) | $ | (4.23 | ) | $ | (3.15 | ) |

 

47

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Stock options totaling 210,070 and 45,565 for the years endedDecember 31, 2001 and 2003, respectively were excluded from thecomputation of diluted earnings per share due to their anti-dilutive effect.

 

*Recent Accounting Pronouncements*

 

On April 30, 2002, the FASB issued Statement No. 145, Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections. (“Statement 145”) Statement 145 updates, clarifies andsimplifies existing accounting pronouncements. Statement 145 rescinds Statement 4, which required all gains and lossesfrom extinguishments of debt to be aggregated and, if material, classified asan extraordinary item, net of related income tax effect. Statement 145 iseffective for fiscal years beginning after June 15, 2002.  All prior extraordinary items relating tothe extinguishments of debt have been retroactively adjusted and reclassifiedto income from continuing operations. The impact of adopting Statement 145 reduced income from continuingoperations by $2,012,000 and $15,097,000 for the years ended December 31,2001 and 2002, respectively.

 

In June 2002, the FASB issued Statement of Financial AccountingStandards No. 146, Accounting for Costs Associated with Exit or DisposalActivities (“Statement 146”).  Statement146 addresses financial accounting and reporting for costs associated with exitor disposal activities and nullifies Emerging Issues Task Force (“EITF”) issueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including Certain Costs Incurred in aRestructuring).”  The provisions ofStatement 146 are effective for exit or disposal activities that are initiatedafter December 31, 2002, with early application encouraged.  The adoption of Statement 146 did not have asignificant impact on the Company’s financial position, results of operations,or cash flows.

 

In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities (“Interpretation 46”).  Interpretation 46 addresses when a companyshould include in its financial statements the assets, liabilities andactivities of another entity.  TheInternational No. 46 requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The Company adoptedInterpretation 46 in 2003 and the application of Interpretation 46 did not havean impact on the Company’s financial position, results of operations or cashflows.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity (“Statement 150”).  Statement 150 establishes standards forclassifying and measuring as liabilities certain financial instruments thathave characteristics of both liabilities and equity.  The provisions of Statement 150 are effective beginning with thefirst interim period after June 15, 2003. The Company adopted Statement 150 during the six months endedDecember 31, 2003.  The Company’s12 3/4% Cumulative Exchangeable Preferred Stock has been reclassified on theCompany’s consolidated balance sheet as a long-term liability and the accrualof dividends for the six months ended December 31, 2003 has been recordedas a charge to expense on the consolidated statement of operations.  The impact of adopting Statement 150 resultedin a reduction of income before income taxes by $12,774,000 for the year endedDecember 31, 2003.

 

**Note 3 – AssetDisposition**

 

On April 30, 2002, the Company completed the sale of KNTV toNBC.  NBC paid the Company $230,000,000,plus a

 

48

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working capital and other adjustments of $14,545,000.  In addition, NBC refunded the Company$20,473,000 of the January 1, 2002 affiliation payment due to NBC underthe terms of the KNTV NBC affiliation agreement (“San Francisco AffiliationAgreement”), which the Company prepaid on March 6, 2001.  The Company repaid $170,000,000 ofoutstanding senior debt and $14,763,000 of deferred interest and other feesassociated with the senior credit facility and the amended credit agreementdiscussed in Note 8 upon consummation of the sale.  The San Francisco Affiliation Agreement terminated upon theclosing of the sale and the Company is not required to make any furtheraffiliation payments to NBC.  The4,500,000 warrants issued to NBC as part of the San Francisco AffiliationAgreement have been returned to the Company. The Company’s affiliation agreements for KSEE-TV, WEEK-TV, and KBJR-TVinvolve no payment obligations to NBC and have a contractual term throughDecember 31, 2011.

 

**Note 4 – Property andEquipment**

 

The major classifications of property and equipment are as follows:

 
|                                  |   | **December 31,** |       |
|---------------------------------------|--------|-----------------------|------------|
|                                  |   | **2002**              |       | **2003** |   |
| Land                                  |   | $                     | 1,546,960  |   | $ | 1,555,500 |   |
| Buildings and improvements            |   | 14,900,395            |       | 15,222,913 |   |
| Furniture and fixtures                |   | 7,983,447             |       | 8,326,326 |   |
| Technical equipment and other         |   | 52,073,472            |       | 62,102,192 |   |
|                                  |   | 76,504,274            |       | 87,206,931 |   |
|                                  |   |                  |       |   |   |
| Less:   Accumulated depreciation |   | 34,690,925            |       | 38,757,345 |   |
|                                  |   |                  |       |   |   |
| Net property and equipment            |   | $                     | 41,813,349 |   | $ | 48,449,586 |   |

 

**Note 5 – OtherAccrued Liabilities**

 

Other accrued liabilities are summarized below:

 
|                                                   |   | **December 31,** |      |
|--------------------------------------------------------|--------|-----------------------|-----------|
|                                                   |   | **2002**              |      | **2003** |   |
| Compensation and benefits                              |   | $                     | 1,933,272 |   | $ | 2,365,768 |   |
| Severance and other costs related to the  sale of KNTV |   | 3,152,558             |      | 1,396,571 |   |
| Professional fees                                      |   | 266,940               |      | 1,283,221 |   |
| Other                                                  |   | 1,588,450             |      | 1,993,531 |   |
|                                                   |   |                  |      |   |   |
| Total                                                  |   | $                     | 6,941,220 |   | $ | 7,039,091 |   |

 

 

**Note 6 – OtherCurrent Liabilities**

 

Other current liabilities are summarized below:

 
|                        |   | **December 31,** |      |
|-----------------------------|--------|-----------------------|-----------|
|                        |   | **2002**              |      | **2003** |   |
| WB affiliation payment, net |   | $                     | 2,073,070 |   | $ | 1,825,278 |   |
| Barter payable              |   | 757,850               |      | 862,507 |   |
| Other                       |   | 750,323               |      | 263,216 |   |
|                        |   |                  |      |   |   |
| Total                       |   | $                     | 3,581,243 |   | $ | 2,951,001 |   |

 

**Note 7 – OtherCurrent Assets**

 

Other current assets are summarized below:

 
|                         |   | **December 31,** |      |
|------------------------------|--------|-----------------------|-----------|
|                         |   | **2002**              |      | **2003** |   |
| Barter and other receivables |   | $                     | 2,882,538 |   | $ | 4,079,532 |   |
| Prepaid film contract rights |   | 24,854                |      | — |   |
| Other                        |   | 1,873,809             |      | 1,716,262 |   |
|                         |   |                  |      |   |   |
| Total                        |   | $                     | 4,781,201 |   | $ | 5,795,794 |   |

 

49

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**Note 8 – Long-termDebt**

 

The carrying amounts and fair values of the Company’s long-term debtare as follows:

 
|                                                           |   | **December 31,  2002** |        | **December 31,  2003** |   |
|----------------------------------------------------------------|--------|-----------------------------|-------------|-----------------------------|--------|
|                                                           |   | **Carrying  Amount**        |        | **Fair Value**              |   | **Carrying  Amount** |   | **Fair Value** |   |
| Senior Credit Agreement                                        |   | $                           | 115,000,000 |                        | $      | 115,000,000 |   | $ | — |   | $ | — |   |
| 9-3/4% Senior Secured Notes                                    |   | —                      |        | —                      |   | 400,086,598 |   | 401,287,365 |   |
| 9-3/8% Senior Subordinated Notes, net of  unamortized discount |   | 34,608,659                  |        | 28,023,259                  |   | — |   | — |   |
| 10-3/8% Senior Subordinated Notes                              |   | 100,717,000                 |        | 86,616,620                  |   | — |   | — |   |
| 8-7/8% Senior Subordinated Notes, net of  unamortized discount |   | 62,465,379                  |        | 50,578,029                  |   | — |   | — |   |
|                                                           |   |                        |        |                        |   |   |   |   |   |
| Total                                                          |   | $                           | 312,791,038 |                        | $      | 280,217,908 |   | $ | 400,086,598 |   | $ | 401,287,365 |   |

 

The fair value of the Company’s senior subordinated notes atDecember 31, 2002 and the senior secured notes at December 31, 2003is estimated based on quoted market prices. The carrying amount of the Company’s borrowings at December 31,2002 under the Company’s senior credit agreement approximated fair value.

 

*Senior Secured Notes*

 

On December 22, 2003, the Company completed a $405,000,000 offeringof its 9 3/4% Senior Secured Notes (the “Notes”) due December 1, 2010, ata discount, resulting in proceeds to the Company of $400,067,100.  Interest on the Notes is payable onDecember 1 and June 1 of each year, beginning on June 1,2004.  The Notes are secured bysubstantially all of the assets of the Company.  The Company used the net proceeds from the offering in part to(i) repay all outstanding borrowings, plus accrued interest, under the seniorcredit agreement,  (ii) redeem at par,plus accrued interest, all of our 9 3/8% and 10 3/8% senior subordinated notesdue May and December 2005, respectively, and (iii) to repurchase at par,plus accrued interest, all of our 8 7/8% senior subordinated notes due May2008. The remaining proceeds will be used for general working capital purposes.

 

The Indenture governing the Notes contain certain covenants that, amongother things, limits the ability of the Company and its subsidiaries to incurdebt, pay cash dividends on or repurchase capital stock, enter into agreementswhich create liens against the assets of the Company, restrict the ability of asubsidiary to pay money or transfer assets to the Company, enter into certaintransactions with affiliates and to merge, consolidate or sell substantiallyall of the assets of the Company.

 

The Notes are redeemable at any time on or after December 1, 2006,at the option of the Company, in whole or in part at certain prices decliningannually to 100% of the principal amount on or after.  The Company may redeem up to 35% of the aggregate principalamount of the Notes using proceeds of certain equity offerings completed on orbefore December 1, 2005.   TheCompany is required to offer to purchase all outstanding Notes at 101% of theprincipal amount thereof plus accrued interest in the event of a Change ofControl (as defined in the Indenture governing the Notes).

 

On April 30, 2002, the Company entered into an amended andrestated Senior Credit Agreement (the Credit Agreement).  The Credit Agreement consisted of (i) a committed$60,000,000 Tranche A term loan facility, (ii) a committed $80,000,000 TrancheB term loan facility, and (iii) an uncommitted $10,000,000 Tranche Csupplemental term loan facility.  Theobligations of the Company with respect to all of the loan facilities weresecured by substantially all of the assets of the Company and itssubsidiaries.  As discussed above, theCredit Agreement was repaid in full with a portion of the proceeds of the 93/4% Senior Secured Notes.

 

*Senior Subordinated Notes*

 

The Company had outstanding $100,717,000 aggregate principal amount ofits 10-3/8% Senior Subordinated Notes (the “10-3/8% Notes”) due May 15, 2005and $34,660,000 aggregate principal amount of its 9-3/8% Senior SubordinatedNotes (the “9-3/8% 

 

50

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Notes”) due December 1, 2005. On December 22, 2003, the Company to redeemed in full the 10-3/8%and 9-3/8% Notes at par, plus accrued interest and repurchased all of theoutstanding 8-7/8% Senior Subordinated Notes due May 15, 2008 at par , plusaccrued interest.  In connection withthese transactions, the Company recognized a loss on the extinguishment of debtof $3,215,000 related to the write-off of unamortized deferred financing feesand 30-day holding period interest on the 9-3/8% Notes and 10-3/8% Notes fromDecember 22, 2003 to January 21, 2004, the date of redemption.

 

During 2001, the Company recognized a loss on the extinguishment ofdebt of $2,012,000 related to the repayment of all outstanding borrowings underthe then existing bank credit agreement and the write-off of related deferredfinancing fees.  During 2002, theCompany recognized a loss on the extinguishment of debt of $15,097,000 relatedto the repayment of all outstanding borrowings under the then existing bankcredit agreement and the write-off of related deferred financing fees.

 

The scheduled principal maturities on all long-term debt for the fiveyears subsequent to December 31, 2003, are as follows:

 
| 2004                |   | $           | —      |   |
|---------------------|--------|-------------|-------------|--------|
| 2005                |   | —      |        |
| 2006                |   | —      |        |
| 2007                |   | —      |        |
| 2008                |   | —      |        |
| 2009 and thereafter |   | 405,000,000 |        |
|                |   | $           | 405,000,000 |   |

 

**Note 9 – Commitments**

 

Future minimum lease payments under long-term operating leases as ofDecember 31, 2003 are as follows:

 
| 2004                |   | $          | 1,312,481  |   |
|---------------------|--------|------------|------------|--------|
| 2005                |   | 1,359,241  |       |
| 2006                |   | 659,129    |       |
| 2007                |   | 622,545    |       |
| 2008                |   | 647,366    |       |
| 2009 and thereafter |   | 11,067,990 |       |
|                |   | $          | 15,668,752 |   |

 

Rent expense, including escalation charges, was approximately$1,412,000, $887,000 and $1,050,000 for the years ended December 31, 2001,2002 and 2003, respectively.

 

Future payments under film contract rights agreements as ofDecember 31, 2003 are as follows:

 

 
| 2004                |   | $          | 29,166,733 |   |
|---------------------|--------|------------|------------|--------|
| 2005                |   | 20,361,176 |       |
| 2006                |   | 16,043,513 |       |
| 2007                |   | 9,134,133  |       |
| 2008                |   | 6,060,945  |       |
| 2009 and thereafter |   | 9,517,191  |       |
|                |   | $          | 90,283,711 |   |

 

**Note 10 – RedeemablePreferred Stock**

 

*Series A Preferred Stock*

 

The Company authorized 100,000 shares of its Series A ConvertiblePreferred Stock (“Series A Stock”), par value $.01 per share, which were issuedat an aggregate price of $1,210,000. All outstanding shares of the Series A Stock were converted into sharesof the Company’s Common Stock (Nonvoting), par value $.01 per share (the“Common Stock (Nonvoting)”) in August 1995.  Prior to conversion, dividends accrued on the Series A Stock atan annual rate of $.40 per share which accumulated, without interest, ifunpaid.  Accrued but unpaid dividends onthe Series A Stock totaled $262,844 at December 31, 2002 and 2003 and arerecorded in other non-current liabilities on the Company’s balance sheet.  Accrued dividends are due and payable on thedate on which such dividends may be paid under the Company’s debt instruments.

 

51

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

 

In January 1997, the Company authorized the issuance of 400,000shares of its 12-3/4% Cumulative Exchangeable Preferred Stock (the “12-3/4%Cumulative Exchangeable Preferred Stock”), par value $.01 per share.  In connection with the Company’s acquisitionof WDWB-TV, 150,000 shares of the 12-3/4% Cumulative Exchangeable PreferredStock were issued in January 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 Company paid dividends on and prior toApril 1, 2002 in additional shares of 12-3/4% Cumulative ExchangeablePreferred Stock.  On and afterOctober 1, 2002, the Company is required to pay such dividends incash.  However, the payment of cashdividends on the 12-3/4% Cumulative Exchangeable Preferred Stock was restrictedby the terms of the indentures governing the Company’s senior subordinatednotes and was prohibited under the terms of the Senior Credit Agreement. Sincethree or more semi-annual dividend payments have not been paid, the holders ofthe Preferred Stock have the right to elect the lesser of two directors or thatnumber of directors constituting 25% of the members of the Board of Directors.  The right of the holders of the PreferredStock to elect members of the Board of Directors as set forth above willcontinue until such time as all accumulated dividends that are required to bepaid in cash and that are in arrears on the Preferred Stock are paid in full incash. The Company is restricted by the terms of the indenture governing theCompany’s senior secured notes from paying cash dividends on the 12-3/4%Cumulative Exchangeable Preferred Stock. The Company does not anticipate paying cash dividends on the 12-3/4%Cumulative Exchangeable Preferred Stock in the foreseeable future.  Dividends on the 12-3/4% CumulativeExchangeable Preferred Stock are cumulative and accrue without interest, ifunpaid.  Accrued but unpaid dividends onthe 12-3/4% Cumulative Exchangeable Preferred Stock totaled $44,709,000 as ofDecember 31, 2003 are recorded in other non-current liabilities on theCompany’s balance sheet.

 

The Company adopted Statement 150 during the three months endedSeptember 30, 2003.  The Company’s12 3/4% Cumulative Exchangeable Preferred Stock has been reclassified on theCompany’s consolidated balance sheet as a long-term liability and the accrualof dividends for the six months ended December 31, 2003 has been recordedas a charge to expense on the consolidated statement of operations.  The impact of adopting Statement 150resulted in a reduction of income before income taxes by $12,774,000 for theyear ended December 31, 2003.

 

During 2002, the Company repurchased and retired a total of 83,920shares of its $1,000 face amount 12-3/4% Cumulative Exchangeable PreferredStock for $53,264,000.  The shares wererepurchased at an average price of $634.70 per share, generating a gain, aftertransaction related expenses and the write off of a portion of the initialoffering costs, of $30,299,000.  Thegain was recorded in additional paid in capital on the Company’s consolidatedbalance sheet.

 

The 12-3/4% Cumulative Exchangeable Preferred Stock is entitled to apreference of $1,000 per share initially, plus accumulated and unpaid dividendsin the event of liquidation or winding up of the Company ($245,084,000liquidation value at December 31, 2003). The Company is required, subject to certain conditions, to redeem all ofthe 12-3/4% Cumulative Exchangeable Preferred Stock outstanding onApril 1, 2009, at a redemption price equal to 100% of the then effectiveliquidation preference thereof, plus, without duplication, accumulated andunpaid dividends to the date of redemption. Based on quoted market prices, the fair value of the 12-3/4% CumulativeExchangeable Preferred Stock at December 31, 2003 is $128,240,248.

 

Subject to certain conditions, each share of the 12-3/4% CumulativeExchangeable Preferred Stock is exchangeable, in whole or in part, at theoption of the Company, for the Company’s 12-3/4% Exchange Debentures (the“12-3/4% Exchange Debentures”) on any scheduled dividend payment date at therate of $1,000 principal amount of 12-3/4% Exchange Debentures for each shareof 12-3/4% Cumulative Exchangeable Preferred Stock outstanding at the time ofthe exchange.

 

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

 

*Stock option plans*

 

In April 1990 the Company adopted a stock option plan (the “StockOption Plan”) for officers and certain key employees. The Stock Option Planterminated on April 1, 2000.  AtDecember 31, 2002 and 2003, options granted under the Stock Option Planwere outstanding for the purchase of 4,285,500 and 4,232,700 shares of CommonStock (Nonvoting), respectively.

 

On April 27, 2000, the Company adopted a new stock option plan(the “2000 Stock Option Plan”) for officers and certain key employees.  The number of shares of Common Stock(Nonvoting) subject to options available for grant is 4,000,000.  Options may be 

 

52

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granted under the 2000 Stock Option Plan at an exercise price (fortax-qualified incentive stock options) of not less than 100% of the fair marketvalue of the Common Stock (Nonvoting) on the date the option is granted, or110% of such fair market value for option recipients who hold 10% or more ofthe Company’s voting stock.  Theexercise price for non-qualified stock options may be less than, equal to orgreater than the fair market value of the Common Stock (Nonvoting) on the datethe option is granted. At December 31, 2002 and 2003, options grantedunder the 2000 Stock Option Plan were outstanding for the purchase of 1,627,500and 1,750,000 shares of Common Stock (Nonvoting) respectively.

 

On March 1, 1994, the Company adopted a Director Stock Option Plan(the “Director Option Plan”) providing for the grant, from time to time, ofnonqualified stock options to non-employee directors of the Company to purchaseshares of Common Stock (Nonvoting).  OnApril 23, 2002, the Director Option Plan was amended to increase theshares of Common Stock (Nonvoting) subject to options available for grant to1,500,000.  As of December 31, 2002and 2003, options granted under the Director Option Plan were outstanding forthe purchase of 808,435 shares of Common Stock (Nonvoting).  The options granted under the DirectorOption Plan serve as compensation for attendance at regularly scheduledmeetings and for service on certain committees of the Board of Directors.

 

The Company’s stock option information is as follows:

 
|                                                            |   | **2001**    |   | **2002**                                |   | **2003**    |      |
|-----------------------------------------------------------------|--------|-------------|--------|-----------------------------------------|--------|-------------|-----------|
|                                                            |   | **Options** |   | **Weighted-  Average  Exercise  price** |   | **Options** |      | **Weighted-  Average  Exercise  price** |   | **Options** |   | **Weighted-  Average  Exercise  price** |   |
|                                                            |   |        |   |                                    |   |        |      |   |   |   |   |   |   |
| Outstanding at beginning of year                                |   | 6,115,785   |   | $                                       | 7.51   |        | 5,957,985 |   | $ | 6.98 |   | 6,721,435 |   | $ | 6.33 |   |
| Granted                                                         |   | 25,000      |   | 1.50                                    |   | 1,030,500   |      | 2.34 |   | 160,000 |   | 2.10 |   |
| Exercised                                                       |   | —      |   | —                                  |   | (2,000      | )         | 1.50 |   | (17,500 | ) | 1.50 |   |
| Forfeited                                                       |   | (182,800    | )      | 9.23                                    |   | (265,050    | )         | 5.52 |   | (72,800 | ) | 9.29 |   |
| Outstanding at end of year                                      |   | 5,957,985   |   | 6.98                                    |   | 6,721,435   |      | 6.33 |   | 6,791,135 |   | 6.21 |   |
| Exercisable at end of year                                      |   | 3,221,910   |   | 6.68                                    |   | 3,980,210   |      | 6.35 |   | 4,637,535 |   | 5.96 |   |
| Weighted-average fair value of options  granted during the year |   | $           | 1.01   |                                    |   |        | $         | 1.65 |   |   |   | $ |  1.36 |   |   |   |
|                                                                 |        |             |        |                                         |        |             |           |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                          |   |
|-------------------------------|--------|--------------------------|--------|---------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **at  12/31/03**         |   | **Weighted-Average  Remaining  Contractual Life** |   | **Weighted-  Average  Exercise Price** |   | **Number   Outstanding at   12/31/03** |   | **Weighted-  Average  Exercise Price** |   |
|                          |   |                     |   |                                              |   |   |   |   |   |   |   |
| $1.47 - $2.70                 |   | 1,695,500                |   | 7.56 years                                        |   | $ | 2.05 |   | 900,600 |   | $ | 2.05 |   |
| $3.00 - $5.50                 |   | 301,300                  |   | 1.34 years                                        |   | 3.12 |   | 301,300 |   | 3.12 |   |
| $6.13 - $6.88                 |   | 1,565,200                |   | 5.12 years                                        |   | 6.47 |   | 1,463,500 |   | 6.48 |   |
| $7.00 - $9.75                 |   | 2,022,635                |   | 4.06 years                                        |   | 7.61 |   | 1,875,135 |   | 7.61 |   |
| $10.00 - $12.44               |   | 1,207,000                |   | 5.07 years                                        |   | 10.11 |   | 97,000 |   | 11.33 |   |
|                               |        |                          |        |                                                   |        |  |  |  |  |  |  |  |  |

 

*Management Stock Plan*

 

In April 1993, the Company adopted a Management Stock Planproviding for the grant from time to time of awards denominated in shares ofCommon Stock (Nonvoting) (the “Bonus Shares”) to salaried executive employeesof the Company.  On December 2,2002 the Company increased the reserve of shares from 1,500,000 to2,000,000.  Shares generally vest over afive-year period. As of December 31, 2003, the Company has allocated atotal of 1,634,425 Bonus Shares pursuant to the Management Stock Plan,1,445,025 of which had vested through December 31, 2003.  For the years ended December 31, 2002and 2003, 391,000 and 187,613 shares, respectively, were granted pursuant tothe Management Stock Plan.  The weighted-averagegrant-date fair value of those shares is $2.27 and $2.15, respectively.

 

*Non-Employee Directors’ Stock Plan*

 

In April 1997, the Company adopted a Non-Employee Directors’ StockPlan (the “Director Stock Plan”), providing an annual grant of shares of theCompany’s Common Stock (Nonvoting) to each eligible non-employee director.  On December 2, 2002, the Companyincreased the reserve of shares of Common Stock (Nonvoting) for grant under theDirector Stock Plan from 400,000 shares 

 

53

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to 600,000 shares, and increased the compensation to be received byeach eligible non-employee director on January 1st of eachcalendar year beginning January 1, 2003 to a number of shares of CommonStock (Nonvoting) equal to $50,000 divided by the fair market value per shareon the date of grant; provided, that, any Directors Stock Plan Participant mayelect prior to the grant date to be paid up to $30,000 of such grant in cash inlieu of shares having an aggregate fair market value equal to the amount ofsuch cash payment.  Shares granted vestimmediately.  For the years endedDecember 31, 2002 and 2003, 77,672 and 107,780 shares, respectively, weregranted pursuant to the Director Stock Plan with weighted-average grant datefair values of $2.06 and $2.05, respectively.

 

*Employee Stock Purchase Plan*

 

On February 28, 1995, the Company adopted the Granite BroadcastingCorporation Employee Stock Purchase Plan (the “Stock Purchase Plan”) for thepurpose of enabling its employees to acquire ownership of Common Stock(Nonvoting) at a discount, thereby providing an additional incentive to promotethe growth and profitability of the Company. The Stock Purchase Plan enables employees of the Company to purchase upto an aggregate of 1,000,000 shares of Common Stock (Nonvoting) at 85% of thethen current market price through application of regularly made payrolldeductions.

 

In March 2001, the Company issued 753,491 stock purchase warrantsto its then senior lenders.  Thewarrants were issued at an exercise price of $1.75 and are exercisable at anytime prior to March 6, 2006.

 

The total number of common shares outstanding at December 31, 2003assuming the exercise of all outstanding stock options and warrants is asfollows:

 

 
| Class A Common Stock     |   | 178,500    |   |
|--------------------------|--------|------------|--------|
| Common Stock (Nonvoting) |   | 18,834,179 |   |
| Stock options            |   | 6,791,135  |   |
| Warrants                 |   | 753,491    |   |
|                     |   | 26,557,305 |   |

 

**Note 12 – IncomeTaxes**

 

The Company records income taxes using a liability approach forfinancial accounting and reporting that results in the recognition andmeasurement of deferred tax assets based on the likelihood of realization oftax benefits in future years.

 

The (benefit) provision for income taxes for the years endedDecember 31 consists of the following:

 
|                                 |   | **2001**    |        | **2002**   |   | **2003**    |   |
|--------------------------------------|--------|-------------|-------------|------------|--------|-------------|--------|
| Current taxes:                       |   |        |        |       |   |        |   |
| Federal                              |   | $           | —      |       | $      | 15,593,922  |   | $ | (16,326,799 | ) |
| State                                |   | 214,000     |        | 3,279,118  |   | 216,387     |   |
|                                 |   | 214,000     |        | 18,873,040 |   | (16,110,412 | )      |
| Deferred taxes:                      |   |        |        |       |   |        |   |
| Federal                              |   | (26,014,730 | )           | 29,353,347 |   | (1,303,162  | )      |
| State                                |   | (1,749,000  | )           | 4,935,566  |   | 381,885     |   |
|                                 |   | (27,763,730 | )           | 34,288,913 |   | (921,277    | )      |
| (Benefit) provision for income taxes |   | $           | (27,549,730 | )          | $      | 53,161,953  |   | $ | (17,031,689 | ) |

 

Deferred income taxes reflect the tax effects of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes.  Components of the Company’s deferred taxasset and liability as of December 31 are as follows:

 
|                             |   | **December 31,** |       |
|----------------------------------|--------|-----------------------|------------|
|                             |   | **2002**              |       | **2003** |   |
| Deferred tax liability:          |   |                  |       |   |   |
| Depreciation and amortization    |   | $                     | 51,121,862 |   | $ | 51,744,230 |   |
| Total deferred tax liability     |   | 51,121,862            |       | 51,744,230 |   |
|                             |   |                  |       |   |   |
| Deferred tax assets:             |   |                  |       |   |   |
| Net operating loss carry forward |   | 8,988,492             |       | 12,854,961 |   |
| Other                            |   | 6,385,149             |       | 2,412,919 |   |
| Valuation allowance              |   | (8,988,492            | )          | (9,727,447 | ) |
| Total deferred tax assets        |   | 6,385,149             |       | 5,540,433 |   |
| Net deferred tax liability       |   | $                     | 44,736,713 |   | $ | 46,203,797 |   |

 

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The difference between the U.S. federal statutory tax rate and theCompany’s effective tax rate for the years ended December 31 is asfollows:

 
|                                            |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| U.S. statutory rate                             |   | 35.0     | %      | 35.0     | %      | 35.0     | %      |
| Nondeductible amortization                      |   | (1.3     | )      | —   |   | —   |   |
| State and local taxes                           |   | 1.0      |   | 3.9      |   | (0.6     | )      |
| Increase (decrease) in valuation allowance      |   | (8.6     | )      | 0.2      |   | —   |   |
| Accrued dividend on redeemable preferred  stock |   | —   |   | —   |   | (7.0     | )      |
| Other                                           |   | —   |   | (0.5     | )      | (0.7     | )      |
| Effective tax rate                              |   | 26.1     | %      | 38.6     | %      | 26.7     | %      |

 

At December 31, 2003, the Company had a net operating loss carryforward for federal tax purposes of approximately $11,000,000 almost of whichare subject to limitations and expire in 2004 through 2018.

 

The valuation allowance decreased $7,333,000 during 2003, increased by$219,000 during 2002 and decreased by $8,770,000 during 2001.

 

During 2002, new tax legislation was enacted that allows for a fiveyear carry back of alternative minimum tax net operating losses to fully offsetalternative minimum taxable income.  Assuch, during 2002, the Company filed for and received a refund of prioralternative minimum tax paid of approximately $2,900,000.  The Company anticipates receiving a federalincome tax refund of approximately $16,000,000 during 2004.

 

**Note 13 – DefinedContribution Plan**

 

The Company has a trusteed profit sharing and savings plan (the “Plan”)covering substantially all of its employees. Contributions by the Company to the Plan are based on a percentage ofthe amount of employee contributions to the Plan and are made at the discretionof the Board of Directors.  Companycontributions, which are funded monthly, amounted to $847,494, $735,158 and$451,645 for the years ended December 31, 2001, 2002 and 2003respectively.

 

**Note 14 – RelatedParty**

 

Between 1995 and 1998, the Company loaned W.Don Cornwell, the Company’s Chief Executive Officer, $2,911,000 in fourseparate transactions.  OnJanuary 1, 2001, the Company loaned Mr. Cornwell an additional$375,000.  On February 15, 2001,the Company agreed to consolidate the five loans into one promissory note inthe amount of $3,286,000.  The newpromissory note matures on January 25, 2006 or, if earlier, 30 days afterMr. Cornwell’s termination of employment. The new promissory note does not bear interest, but interest at anannual rate of 6.75 % 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, $20 or$25, respectively. In addition, on February 15, 2001 the Company forgave$232,247 of interest accrued on the old loans during the year-endedDecember 31, 2000.  TheCompany took a charge for this amount in 2001.

 

In 1995, the Company loaned Stuart Beck, the Company’s President,$221,200. On February 15, 2001, the Company agreed to cancel thisnote and issue a new promissory note in the same amount.  The new promissory note matures onJanuary 25, 2006 or, if earlier, 30 days after Mr. Beck’s termination ofemployment.  The new promissory notedoes not bear interest, but interest at an annual rate of 6.75 % will beimputed as additional compensation to the officer.  The new promissory note allows for the loan to be forgiven inone-third increments if the Company’s Common Stock (Nonvoting) trades for ten consecutivetrading days at $15, $20, and $25, respectively, or if the per shareconsideration received by the Company’s common stockholders in a Change ofControl (as defined in the Indentures governing the Company’s seniorsubordinated notes) equals at least $15, $20 or $25, respectively.  In addition, on 

 

55

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February 15, 2001 the Company forgave $19,908 of interest accruedon the old loan during the year-ended December 31, 2000.  The Company took a charge for this amount in2001.

 

On February 25, 2003, the Compensation Committee recommended, andthe Board of Directors approved, an incentive award of $3,286,065 to each ofMr. Cornwell and Mr. Beck to be paid, subject to vesting terms, only upon theoccurrence of the refinancing with a maturity of at least two years, of thesenior debt due April 15, 2004. On December 22, 2003, the Company issued$405 million aggregate principal amount of 9 3/4% Senior Secured Notes, theproceeds of which were used by the Company in part to repay all outstandingborrowings (plus accrued interest) under the Company’s senior credit agreement,which satisfied the performance objective of the awards.  Mr. Cornwell’s award, which vests evenlyover three years from the refinancing date, will be used to repay in full hisoutstanding loan from the Company of $3,286,065 due January 25, 2006.  Mr. Cornwell has irrevocably elected todefer all payments otherwise due until January 25, 2006 when his loan isrepaid.  A portion of Mr. Beck’s awardwill be used to repay in full his outstanding loan from the Company of $221,200due January 25, 2006, and the remaining amount of Mr. Beck’s incentiveaward will be paid, at the discretion of the Board of Directors, in the form ofcash or shares of our Common Stock (Nonvoting).  Mr. Beck has irrevocably elected to defer $221,200 of his awarduntil January 25, 2006 when his loan is repaid and thereafter all paymentsuntil the first to occur of January 31, 2011, a change of control of theCompany or the termination of his employment. Mr. Beck’s award vests evenlyover three years from the refinancing date, and the amount of any Common Stock(Nonvoting) to be received will be valued on the date of payment.

 

**Note15 – Quarterly Results of Operations (unaudited)**

 

The quarterly amounts for each quarter in 2002 and the first threequarters of 2003 have been restated due to a change in accounting policyregarding the amortization of network affiliation agreements as more fullydescribed in Note 2.

 

The following is asummary of the quarterly results of operations for the years endedDecember 31, 2002 and 2003:

 
|                                                                        |   | **March 31,  2002** |       | **June 30,  2002** |   | **September 30,  2002** |   | **December 31,  2002** |       |
|-----------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|--------|------------------------------|--------|-----------------------------|------------|
|                                                                        |   | **(Restated)**           |       |
| Net revenue                                                                 |   | $                        | 43,542,357 |                    | $      | 32,553,314                   |   | $                           | 26,083,671 |   | $ | 33,164,809 |   |
| (Loss) income before cumulative effect of a  change in accounting principle |   | (13,539,658              | )          | 89,333,015              |   | (3,135,834                   | )      | (3,746,278                  | )          |
| Net (loss) income                                                           |   | (164,018,241             | )          | 89,333,015              |   | (3,135,834                   | )      | (3,746,278                  | )          |
|                                                                        |   |                     |       |                    |   |                         |   |                        |       |
| Per common share:                                                           |   |                     |       |                    |   |                         |   |                        |       |
| (Loss) income before cumulative effect of a  change in accounting principle |   |                     |       |                    |   |                         |   |                        |       |
| Basic                                                                       |   | $                        | (1.18      | )                       | $      | 5.87                         |   | $                           | (0.42      | ) | $ | (0.54 | ) |
| Diluted                                                                     |   | (1.18                    | )          | 5.80                    |   | (0.42                        | )      | (0.54                       | )          |
| Net (loss) income                                                           |   |                     |       |                    |   |                         |   |                        |       |
| Basic                                                                       |   | (9.21                    | )          | 5.87                    |   | (0.42                        | )      | (0.54                       | )          |
| Diluted                                                                     |   | (9.21                    | )          | 5.80                    |   | (0.42                        | )      | (0.54                       | )          |

 
|              |   | **March 31,  2003** |       | **June 30,  2003** | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|-------------------|--------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
|              |   | **(Restated)**           |       | **(Restated)**          |       | **(Restated)**               | ** ** |                        | ** ** |
| Net revenue       |   | $                        | 24,657,193 |                    | $          | 28,467,458                   |       | $                           | 25,719,558 |   | $ | 29,700,215 |   |
| Net loss          |   | (9,450,982               | )          | (7,354,868              | )          | (14,912,058                  | )          | (15,229,964                 | )          |
|              |   |                     |       |                    |       |                         |       |                        |       |
| Per common share: |   |                     |       |                    |       |                         |       |                        |       |
| Net loss          |   |                     |       |                    |       |                         |       |                        |       |
| Basic             |   | (0.84                    | )          | (0.73                   | )          | (0.78                        | )          | (0.80                       | )          |
| Diluted           |   | (0.84                    | )          | (0.73                   | )          | (0.78                        | )          | (0.80                       | )          |
|                   |        |                          |            |                         |            |                              |            |                             |            |  |  |  |  |

 

56

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**SCHEDULE IIGRANITE BROADCASTING CORPORATION****VALUATIONAND QUALIFYING 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, 2001 |   | $                                  | 648,862 |                                        | $      | 541,646                    |   | $                            | 660,235 |   | $ | 530,273 |   |
|                                      |   |                               |    |                                        |   |                       |   |                         |    |
| For the year ended December 31, 2002 |   | 530,273                            |    | 952,499                                     |   | 735,252                    |   | 747,520                      |    |
|                                      |   |                               |    |                                        |   |                       |   |                         |    |
| For the year ended December 31, 2003 |   | $                                  | 747,520 |                                        | $      | 541,326                    |   | $                            | (30,392 | ) | $ | 1,319,238 |   |

 

----

(1)                                  Netof recoveries.

 

57

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**Item 9.****           Changesand Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.  Controls andProcedures**

 

As of December 31, 2003, an evaluation was carried out under thesupervision and with the participation of Granite Broadcasting’s management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls and procedures(as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934).Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that the design and operation of these disclosure controlsand procedures were effective as of December 31, 2003. No significantchanges were made in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation.

 

58

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**PART III**

 

**Item 10.  Directors and ExecutiveOfficers of the Registrant**

 

The following table sets forth information concerning our executiveofficers and directors as of March   , 2004:

 

 
| **Name**                          |   | **Age** |   | **Position**                                                |
|-----------------------------------|--------|---------|--------|-------------------------------------------------------------|
|                              |   |    |   |                                                        |
| W. Don Cornwell (1)               |   | 56      |   | Chairman of the Board, Chief Executive Officer and Director |
| Stuart J. Beck(1)                 |   | 57      |   | President, Secretary and Director                           |
| Robert E. Selwyn, Jr.             |   | 60      |   | Senior Operating Advisor and Director                       |
| Lawrence I. Wills                 |   | 43      |   | Senior Vice President-Chief Administrative Officer          |
| Ellen McClain                     |   | 39      |   | Senior Vice President-Chief Financial Officer               |
| John Deushane                     |   | 47      |   | Chief Operating Officer                                     |
| James L. Greenwald(2)             |   | 76      |   | Director                                                    |
| Martin F. Beck                    |   | 86      |   | Director                                                    |
| Edward Dugger, III                |   | 54      |   | Director                                                    |
| Thomas R. Settle(1)(3)(4)         |   | 63      |   | Director                                                    |
| Charles J. Hamilton, Jr.(2)(3)(4) |   | 56      |   | Director                                                    |
| M. Fred Brown(2)                  |   | 57      |   | Director                                                    |
| Jon E. Barfield(3)                |   | 52      |   | Director                                                    |
| Veronica Pollard(3)               |   | 58      |   | Director                                                    |

 

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(1)                                  Member of the StockOption Committee.  The stock optioncommittee is only authorized to grant stock options to employees other thanexecutive officers.

(2)                                  Member of the AuditCommittee.

(3)                                  Member of theCompensation Committee.

(4)                                  Member of theManagement Stock Plan Committee.

 

Mr. Cornwell is a founder of our company and has been Chairman of ourBoard of Directors and our Chief Executive Officer sinceFebruary 1988.  Mr. Cornwell servedas our President, which office then included the duties of chief executiveofficer, until September 1991 when he was elected to the newly createdoffice of Chief Executive Officer.  Priorto founding Granite, Mr. Cornwell served as a Vice President in the InvestmentBanking Division of Goldman, Sachs & Co. from May 1976 toJuly 1988.  In addition, Mr.Cornwell was the Chief Operating Officer of the Corporate Finance Department ofGoldman, Sachs & Co. from January 1980 to August 1987.  Mr. Cornwell is a director of Avon Products,Inc., Pfizer, Inc. and CVS Corporation. Mr. Cornwell received a Bachelor of Arts degree from Occidental Collegein 1969 and a Masters degree in Business Administration from Harvard BusinessSchool in 1971.

 

Mr. Stuart Beck is a founder of our company and has been a member ofour Board of Directors and our Secretary since February 1988 and ourPresident since September 1991. Prior to founding Granite, Mr. Beck was an attorney in private practiceof law in New York, New York and Washington, DC.  Mr. Beck received a Bachelor of Arts degree from Harvard Collegein 1968 and a Juris Doctor degree from Yale Law School in 1971.  Mr. Beck is the son of Martin F. Beck.

 

Mr. Selwyn has been our Senior Operating Advisor since January 1,2003 and a member of our Board of Directors since May 11, 1998.  In addition, Mr. Selwyn served as our ChiefOperating Officer from 1996 to 2002. Prior to joining Granite, Mr. Selwyn was employed by New WorldCommunications, Inc. from May 1993 to June 1996 serving as Chairman andChief Executive Officer of the New World Television Station Group.  Mr. Selwyn received a Bachelor of Sciencedegree from the University of Tennessee in 1968.  From 1990 until 1993, Mr. Selwyn was the President ofBroadcasting for SCI Television, Inc.

 

Mr. Wills has been our Senior Vice President–Chief AdministrativeOfficer since February 2001.  Inaddition, Mr. Wills served as our Vice President—Finance and Controller from1990 to 2001.  Prior to joining Granite,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 our Senior Vice President–Chief Financial Officersince February 2001.  In addition, Ms.McClain served as our Vice President—Corporate Development and Treasurer from1994 to 2001.  Prior to joining Granite,Ms. McClain attended Harvard Business School, where she received a Mastersdegree in Business Administration in June 1993.  From 1990 to 1991, Ms. McClain was an Assistant Vice Presidentwith Canadian Imperial Bank of Commerce, where she served as a lender in the 

 

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Bank’s Media Group and from 1986 to 1990 was employed by Bank of New England,N.A. in various capacities including as a lender in the CommunicationsGroup.  Ms. McClain is a director of theNational Association of Black Owned Broadcasters.  Ms. McClain received a Bachelor of Arts Degree in Economics fromBrown University in 1986.

 

Mr. Deushane has been our Chief Operating Officer since January 1,2003.  Mr. Deushane served as ourRegional Vice President — Midwest from 1998 to 2002.  Prior to his position as Regional Vice President – Midwest, Mr.Deushane served as President and General Manager of KSEE-TV during 1997 andPresident and General Manager of WEEK-TV from 1991 to 1996.  Mr. Deushane is a director of the New YorkState Broadcasters Association.  Mr.Deushane graduated magna cum laude from Bradley University with a Bachelor ofScience degree in broadcast management and journalism.

 

Mr. Greenwald has been a member of our Board of Directors sinceDecember 1988. Mr. Greenwald was the Chairman and Chief Executive Officerof Katz Communications, Inc. from May 1975 to August 1994 and has beenChairman Emeritus since August 1994. Mr. Greenwald has served as President of the Station RepresentativesAssociation and the International Radio and Television Society and VicePresident of the Broadcast Pioneers. Mr. Greenwald is a director of Paxson Communications Corp. and SourceMedia Inc.  Mr. Greenwald received aBachelor of Arts degree from Columbia University in 1949 and an HonoraryDoctorate Degree in Commercial Science from St. Johns University in 1980.

 

Mr. Martin Beck has been a member of our Board of Directors sinceDecember 1988.  Mr. Beck has servedas Chairman of Beck-Ross Communications, Inc., a New York-based group owner ofFM radio stations, from June 1966 until April 1995, at which time heretired.  Mr. Beck has served asPresident of the New York State Broadcasters Association, the Long IslandBroadcasters Association and the National Association of Broadcasters RadioBoard.  Mr. Beck received a Bachelor ofArts degree from Cornell University in 1938. Mr. Beck is the father of Stuart J. Beck.

 

Mr. Dugger has been a member of our Board of Directors 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 managementcompany, 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 our Board of Directors sinceJuly 1992.  Mr. Hamilton was apartner in the New York law firm of Battle Fowler LLP from 1983 to 2000.  On June 8, 2000 Battle Fowler LLPmerged with the law firm Paul, Hastings, Janofsky & Walker LLP, where he isa partner.  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. Settle has been a member of our Board of Directors sinceJuly 1992.  Mr. Settle founded andis currently a director of The Winchester Group, Inc., an investment advisoryfirm, since 1990.  Mr. Settle was thechief investment officer at Bernhard Management Corporation from 1985 to1989.  He was a Managing Director of FurmanSelz Capital Management from 1979 until 1985. Mr. Settle received a Bachelor of Arts Degree from Muskingum College in1963 and a Masters degree in Business Administration from Wharton GraduateSchool in 1965.

 

Mr. Brown has been a member of our Board of Directors sinceApril 1999.  Mr. Brown founded andhas been President of Aerodyne Capital, Inc., a California company specializingin the trading and leasing of commercial jet aircraft and high-bypass jet enginessince 1993.  Prior to founding Aerodyne,Mr. Brown was Senior Vice-President and Managing Director of Marketing forBlenhiem Aviation from 1989-1993.  Inaddition, Mr. Brown served as Vice-President at Goldman Sachs & Co.  While at Goldman Sachs & Co., Mr. Brownwas seconded to Freedom National Bank NA as its Senior Vice-President and ChiefFinancial Officer.  Mr. Brown isChairman of the Board of Directors 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 our Board of Directors sinceApril 1999.  Mr. Barfield has beenChairman, President and Chief Executive Officer of The Bartech Group, anengineering staffing and information technology firm, since 1997.  In addition, Mr. Barfield served as Chairmanand Chief Executive Officer of the Bartech Group from 1995 to 1997, and asPresident of The Bartech Group from 1981 to 1995.  Prior to joining The Bartech Group, Mr. Barfield practicedcorporate and securities law

 

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with the Chicago based law firm of Sidley, Austin, Brown and Wood from1977 to 1981.  Mr. Barfield is adirector of National City Corporation, BMC Software, Inc., Tecumseh ProductsCompany, Pantellos Group Limited Partnership, Inc., Blue Cross Blue Shield ofMichigan and Reading is Fundamental.  Heis also a Trustee Emeritus of Princeton University and a Trustee of The HenryFord and of Kettering University.  Mr.Barfield received a Bachelor of Arts degree from Princeton University in 1974and received a Juris Doctor degree from Harvard Law School in 1977.

 

Ms. Pollard has been a member of our Board of Directors sinceJanuary 2000.  Ms. Pollard is GroupVice 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 for African Art in New York, a director ofThe Doe Fund and a member of the Individual Investor Advisory Committee of theNew York Stock Exchange.  Ms. Pollardattended the University of Wisconsin for two years, received a Bachelor’sdegree from Boston University in 1966, and a Master’s degree from ColumbiaUniversity, Teachers College, in 1968.

 

Each member of our Board of Directors hold office until the next annualmeeting of our shareholders, unless such director resigns or is removed beforethen, or until such director’s successor is duly elected and qualified.  All officers are elected annually and serveat the discretion of the Board of Directors.

 

Directors are separately reimbursed by us for their travel expensesincurred in attending Board or committee meetings and receive securities undereach of our Non-Employee Directors Stock Plan and Director Stock Option Plan,together referred to herein as the Director Plans.

 

**Board Committees andMembership**

 

Below is a description of each committee of the Board of Directors. TheBoard of Directors has determined that each member of each committee, excludingthe Stock Option Committee, meets the applicable laws and regulations regarding“independence” and that each member is free of any relationship that wouldinterfere with his or her individual exercise of independent judgment.

 

*Audit Committee*.  The Audit Committee assists the Board of Directors in itsoversight of the quality and integrity of our accounting, auditing, andreporting practices. The Audit Committee’s role includes discussing withmanagement our processes to manage business and financial risk, and forcompliance with significant applicable legal, ethical, and regulatoryrequirements.  The Audit Committee isresponsible for the appointment, replacement, compensation, and oversight ofthe independent auditor engaged to prepare and issue audit reports on ourfinancial statements. The Audit Committee relies on the expertise and knowledgeof management, the internal auditors, and the independent auditor in carryingout its oversight responsibilities. The specific responsibilities and functionsof the Audit Committee are delineated in the Audit Committee Charter. The AuditCommittee Charter is reviewed annually and updated as necessary to reflectchanges in regulatory requirements, authoritative guidance, and evolvingpractices.  The Board of Directors hasdetermined that each Audit Committee member is independent and has sufficientknowledge in financial and auditing matters to serve on the Audit Committee.The Audit Committee held four meetings during 2003. The members of the AuditCommittee are Messrs. Hamilton (Chairman), Greenwald and Brown.  The Board has determined that Mr. Brown isan audit committee financial expert within the meaning of applicable regulationsof the U.S. Securities and Exchange Commission.

 

*Compensation Committee*.  The Compensation Committee consists of fourmembers of our Board of Directors that are independent directors.  The primary responsibilities of theCompensation Committee are to (a) review and recommend to the Board thecompensation of the Chief Executive Officer and other officers of our company,(b) review executive bonus plan allocations, (c) oversee and advise the Boardon the adoption of policies that govern our compensation programs, (d) overseethe administration of our equity-based compensation and other benefit plans,and (e) approve grants of stock options and stock awards to our officers andemployees under our equity plans, subject to certain limitations.  The Compensation Committee’s role includesproducing the report on executive compensation required by SEC rules andregulations. The specific responsibilities and functions of the CompensationCommittee are delineated in the Compensation Committee Charter. The CompensationCommittee Charter is reviewed annually and updated as necessary to reflectchanges in regulatory requirements, authoritative guidance, and evolvingpractices.  The Compensation Committeeheld four meetings during 2003. The members of the Compensation Committee areMs. Pollard and Messrs. Settle (Chairman), Hamilton and Barfield.

 

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*Management Stock Plan Committee*.  The responsibility of the Management StockPlan Committee is to administer our Management Stock Plan.  The Management Stock Plan Committee isappointed by our Board of Directors and consists of two members of the Board ofDirectors that are non-employee directors. The Management Stock Plan Committee, from time to time, selects eligibleemployees to receive a discretionary bonus of Bonus Shares or a PerformanceAward based upon such employee’s position, responsibilities, contributions andvalue to us and such other factors as the Management Stock Plan Committee deemsappropriate.  The Management Stock PlanCommittee has discretion to determine the date on which the Bonus Shares or PerformanceAwards allocated to an employee will be issued to such employee.  The Management Stock Plan Committee may, inits sole discretion, determine what part of an award of Bonus Shares orPerformance Awards is paid in cash and what part of an award is paid in theform of Common Stock (Nonvoting).  TheManagement Stock Plan Committee held two meetings during 2003. The members ofthe Management Stock Plan Committee are Messrs. Settle and Hamilton.

 

*Stock Option Committee*.  The Stock Option Committee consists of threemembers of the Board of Directors appointed by the Board.  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 our officers or holders of 10% or more of the Voting CommonStock.  The Stock Option Committee heldtwo meetings during 2003. The members of the Stock Option Committee areMessrs. Cornwell, S. Beck and Settle.

 

*Section 16(a) Beneficial Ownership Reporting Compliance*

 

Each of ourdirector and officer who is subject to Section 16 of the Securities ExchangeAct of 1934, as amended, or the Exchange Act, is required to report to theSecurities and Exchange Commission, by a specified date, his or her beneficialownership of, or certain transactions in, our securities.  Except as setforth below, based solely upon a review of such reports, we believe that allfiling requirements under Section 16 were complied with on a timely basis.

 

For fiscalyear 2003, For fiscal year 2003, Messrs. Barfield, M. Beck, Brown, Deushane,Dugger, Greenwald, Hamilton, Selwyn, Settle and Wills, Ms. McClain and Ms.Pollard did not report, on a timely basis, one transaction on one Form 4, Mr.S. Beck did not report on a timely basis one transaction on two Form 4s, andMr. Cornwell did not report, on a timely basis, one transaction on three Form4s.  All of the reports referred toabove have been filed.

 

*Code of Business Conduct and Ethics*

 

We have adopted a Code of BusinessConduct and Ethics that applies to all of our employees, including ourprincipal executive officer, principal financial officer and principalaccounting officer and the independent Board of Directors.  A copy of this code is available on our Website at www.granitetv.com. We intend to disclose any changes in or waivers fromour code of conduct that are required to be publicly disclosed by posting suchinformation on our Web site or by filing a Form 8-K.

 

**Item 11.**  **ExecutiveCompensation**

 

The following table sets forth the compensation paid to our ChiefExecutive Officer and each of its most highly compensated executive officerswhose total cash compensation exceeded $100,000 for each of the three years inthe period ended December 31, 2003:

 

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Summary Compensation Table

 
|                            |   |           |   | **Long-Term  Compensation  Awards** |    |                          |   |
|---------------------------------|--------|----------------|--------|-------------------------------------|---------|-------------------------------|--------|
| **Name and Principal Position** |   |           |   | **Bonus  ($) (1)**             |    | **Restricted  Stock  Awards** |   | **Securities  Underlying  Options/  SARs (#)** |   | **All Other  Compensation  ($)(2)** |   |
| **Annual Compensation**         |
| **Year**                        |   | **Salary ($)** |
|                            |   |           |   |                                |    |                          |   |   |   |   |   |   |   |
| W. Don Cornwell                 |   | 2003           |   | $                                   | 672,000 |                          | $      | 679,000 |   | $ | 96,000 | (3) | — |   | $ | 6,000 |   |
| Chief Executive Officer         |   | 2002           |   | 600,000                             |    | 553,191                       |   | 297,500 | (4) | 160,000 |   | 5,500 |   |
|                            |   | 2001           |   | 600,000                             |    | 420,600                       |   | 210,400 | (5) | — |   | 5,250 |   |
|                            |   |           |   |                                |    |                          |   |   |   |   |   |   |   |
| Stuart J. Beck                  |   | 2003           |   | $                                   | 672,000 |                          | $      | 656,829 |   | $ | 179,500 | (6) |   |   | $ | 15,600 |   |
| President                       |   | 2002           |   | 600,000                             |    | 391,319                       |   | 238,000 | (7) | 213,000 |   | 15,100 |   |
|                            |   | 2001           |   | 600,000                             |    | 302,000                       |   | 288,750 | (8) | — |   | 14,850 |   |
|                            |   |           |   |                                |    |                          |   |   |   |   |   |   |   |
| Robert E. Selwyn, Jr.           |   | 2003           |   | $                                   | 400,000 |                          | $      | 75,000 |   | $ | — |   | — |   | $ | 15,600 |   |
| Senior Operating Advisor        |   | 2002           |   | 396,250                             |    | 119,000                       |   | 17,850 | (9) | — |   | 15,100 |   |
|                            |   | 2001           |   | 386,250                             |    | 57,938                        |   | 54,375 | (10) | — |   | 14,850 |   |
|                            |   |           |   |                                |    |                          |   |   |   |   |   |   |   |
| Lawrence I. Wills               |   | 2003           |   | $                                   | 242,500 |                          | $      | 200,000 |   | $ | — |   | — |   | $ | 24,000 |   |
| Senior Vice President -         |   | 2002           |   | 206,000                             |    | 175,000                       |   | 23,800 | (11) | 10,000 |   | 23,500 |   |
| Chief Administrative Officer    |   | 2001           |   | 200,000                             |    | 100,000                       |   | — |   | — |   | 17,250 |   |
|                            |   |           |   |                                |    |                          |   |   |   |   |   |   |   |
| Ellen McClain                   |   | 2003           |   | $                                   | 242,500 |                          | $      | 200,000 |   | $ | — |   | — |   | $ | 24,000 |   |
| Senior Vice President -         |   | 2002           |   | 206,000                             |    | 175,000                       |   | 23,800 | (11) | 10,000 |   | 23,500 |   |
| Chief Financial Officer         |   | 2001           |   | 200,000                             |    | 100,000                       |   | — |   | — |   | 17,250 |   |
|                                 |        |                |        |                                     |         |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Represents cashbonuses for service rendered in 2000, 2001 and 2002 that were paid in thefollowing year.

 

(2)                                  Theamounts shown in this column consists of a matching contribution by us underour Employees’ Profit Sharing and Savings (401(k)) Plan and an annualperquisite allowance for Messrs. Beck and Selwyn of $9,600 each and $18,000each for Mr. Wills and Ms. McClain in 2002 and $12,000 each for Mr. Wills andMs. McClain in 2002 and 2003.

 

(3)                                  Representsthe market value on the date of award of 24,752 Bonus Shares awarded under ourManagement Stock Plan on January 9, 2003 for services rendered during theyear-ended December 31, 2002 and 25,000 Bonus Shares awarded under theManagement Stock Plan on January 5, 2004 for services rendered during theyear-ended December 31, 2003.

 

(4)                                  Representsthe market value on the date of award of 125,000 Bonus Shares awarded under ourManagement Stock Plan on April 23, 2002 for services rendered during theyear-ended December 31, 2001.  Mr.Cornwell deferred receipt of these shares to December 31, 2003.

 

(5)                                  Representsthe market value on the date of award of 80,000 Bonus Shares awarded under ourManagement Stock Plan on January 26, 2001 for services rendered during theyear-ended December 31, 2000.

 

(6)                                  Representsthe market value on the date of award of 88,861 Bonus Shares awarded under ourManagement Stock Plan on January 9, 2003 for services rendered during theyear-ended December 31, 2002.

 

(7)                                  Representsthe market value on the date of award of 100,000 Bonus Shares awarded under ourManagement Stock Plan on April 23, 2002 for services rendered during the yearended December 31, 2001.

 

(8)                                  Representsthe market value on the date of award of 110,000 Bonus Shares awarded under ourManagement Stock Plan on January 26, 2001 for services rendered during theyear-ended December 31, 2000.

 

(9)                                  Representsthe market value on the date of award of 7,500 Bonus Shares awarded under ourManagement Stock Plan on April 23, 2002.

 

(10)                            Representsthe market value on the date of award of 30,000 Bonus Shares awarded under ourManagement Stock Plan on January 5, 2001.

 

(11)                            Representsthe market value on the date of award of 10,000 Bonus Shares awarded under ourManagement Stock Plan on April 23, 2002.

 

**EmploymentAgreements and Compensation Arrangements**

 

Mr. Cornwelland Mr. Stuart Beck each have an employment agreement with us.  The agreements provide for a two-yearemployment term, which is automatically renewed for subsequent two-year termsunless advance notice of nonrenewal is given (the current term under suchagreements, which were renewed in 2003, expires September 19, 2005).  The agreements stipulate that Mr. Cornwelland Mr. Beck will devote their full time and efforts to our company and willnot engage in any business activities outside the scope of their employmentwith us unless approved by a majority of our 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),

 

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provided that such exchangedoes not jeopardize our status as a minority-controlled entity under FCCregulations and that, after such exchange is effected, there will continue tobe shares of our voting stock outstanding.

 

TheCompensation Committee of our Board of Directors annually develops acompensation model to determine salary and incentive compensation for Mr.Cornwell and Mr. Beck.  The base salarywas $600,000 for each of 2001 and 2002 and $672,000 for 2003.  Messrs Cornwell and Beck were eligible toreceive a salary increase for 2004 and incentive compensation for 2003 ifcertain corporate objectives were achieved. Those objectives included theattainment of broadcast cash flow targets, restructuring of our company’scapital structure and growth through acquisitions or other structures permittedby the FCC.  Incentive compensation caninclude cash bonuses, stock options, shares of Common Stock (Nonvoting) or acombination thereof. Based on the objectives set forth by the CompensationCommittee, Mr. Cornwell and Mr. Beck did not receive a salary increase for2004. Incentive compensation for 2003 totaling $725,000 was awarded to Mr.Cornwell on January 5, 2004, consisting of $679,000 in cash and $46,000 inshares of Common Stock (Nonvoting). Incentive compensation for 2003 totaling $656,879 was awarded to Mr.Beck on January 5, 2004, which was paid entirely in cash.

 

Mr. Selwyn hasan employment agreement with us.  Thecurrent employment term expires on December 31, 2005.  The agreement stipulates that Mr. Selwyn will devote his fulltime and effort to our company and will not engage in any business activitiesoutside of the scope of his employment with us other than permitted under theagreement.  In addition to his basesalary, Mr. Selwyn is eligible to receive a cash bonus if certain quantitativeand qualitative goals are achieved. He has been granted options to purchaseshares of Common Stock (Nonvoting) under our stock option plans and is eligibleto participate in our Employee Stock Purchase Plan. The annual base salarydetermined by the Compensation Committee of the Board of Directors was $386,250for 2001, $396,000 for 2002 and $400,000 for 2003.  Mr. Selwyn’s base salary for 2004 is $325,000.  (See “—Employee Stock Purchase Plan,”“—Stock Option Plan” and “—Management Stock Plan.”)

 

Under anemployment arrangement with us, Mr. Wills is eligible to receive an annual cashbonus based upon our financial performance and the achievement of certainqualitative and strategic goals during that year, such bonus to be determinedby Messrs. Cornwell and Beck.  Mr.Wills’ 2003 base salary was fixed at $242,500 and his base salary for 2004 is$250,000.

 

Under an employment arrangement with us, Ms. McClain is eligible toreceive an annual cash bonus based upon our financial performance and theachievement of certain qualitative and strategic goals during that year, suchbonus to be determined by Messrs. Cornwell and Beck.  Ms. McClain’s 2003 base salary was fixed at $242,500 and her basesalary for 2004 is $250,000.

 

*401(k) Profit Sharing and Savings Plan*

 

Effective January 1990, we adopted the Granite Broadcasting CorporationEmployees’ Profit Sharing and Savings (401(k)) Plan, or the 401(k) Plan for thepurpose of providing retirement benefits for substantially all of our employees.  We and our employees both make contributionsto the 401(k) Plan.  We match 50% ofthat part of an employee’s deferred compensation that does not exceed 5% ofsuch employee’s salary.  Company-matchedcontributions vest at a rate of 20% for each year of an employee’s service toour company.

 

We made anaggregate contribution to the 401(k) Plan of $451,645 during 2003.

 

*Employee Stock Purchase Plan*

 

On February 28, 1995, we adopted the Granite Broadcasting CorporationEmployee Stock Purchase Plan, or the Stock Purchase Plan, for the purpose ofenabling our employees to acquire ownership of shares of Common Stock(Nonvoting) at a discount, thereby providing an additional incentive to promotethe growth and profitability of our company. The Stock Purchase Plan enables our employees to purchase up to anaggregate of 1,000,000 shares of Common Stock (Nonvoting) at 85% of the thencurrent market price through application of regularly made payrolldeductions.  A Committee consisting ofnot less than two directors who are ineligible to participate in the StockPurchase Plan administers the Stock Purchase Plan.  The members of the Committee are currently Mr. Cornwell and Mr.Stuart J. Beck.  At the discretion ofthe Committee, 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.

 

 

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*Stock Option Plan*

 

In April 1990, we adopted a Stock Option Plan, or the Stock OptionPlan, providing for the grant, from time to time, of Options to key employeesand officers of our company or its affiliates to purchase shares of CommonStock (Nonvoting).  The Stock OptionPlan terminated on April 1, 2000. As of March 5, 2004, options granted underthe Stock Option Plan were outstanding for the purchase of 4,232,700 shares ofCommon Stock (Nonvoting).

 

*2000 Stock Option Plan*

 

On April 27, 2000, we adopted a new stock option plan, which providesfor the grant to employees, officers, directors and consultants of our companyor its affiliates, collectively known as Participating Persons, to purchase anaggregate of 4,000,000 shares of Common Stock (Nonvoting) of the following:

 

•                  Options intendedto qualify as Incentive Stock Options, or ISOs, as defined in Section 422 ofthe Code and

 

•                  Options which donot qualify as ISOs, or NQSOs.

 

On April 23, 2002, the Director Participantswere granted an option to purchase 50,000 shares Common Stock (Nonvoting) asadditional compensation for attendance at regular quarterly meetings during theperiod beginning on July 1, 2002 and ending on October 31, 2005 in lieu ofadditional cash compensation.  Of eachsuch grant, Options to purchase 5,000 shares of Common Stock (Nonvoting) becomeexercisable on the date of attendance in person or by telephonic means, of aDirector Participant at each regular quarterly meeting of the Board ofDirectors.

 

No Participating Person may be granted ISOs which, when firstexercisable in any calendar year (combined with ISOs under all incentive stockoption plans of our company and its affiliates) will permit such person topurchase stock of our company having an aggregate fair market value (determinedas of the time the ISO was granted) of more than $100,000.

 

The 2000 Stock Option Plan is administered by both the Stock OptionCommittee which consists of not less than three members of the Board ofDirectors appointed by the Board, and our Compensation Committee, whichconsists of not less than two members all of whom are non-employeedirectors.  We refer to the Stock OptionCommittee and the Compensation Committee collectively as the Committee.  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 our officers or holders of 10% or more of the Voting CommonStock.  The Compensation Committee isauthorized to make determinations with respect to all other persons.  Subject to the provisions of the 2000 StockOption Plan, the Committee is empowered to, among other things, grant Optionsunder the 2000 Stock Option Plan; determine which participating persons may begranted Options under the 2000 Stock Option Plan, the type of Option granted(ISO or NQSO), the number of shares subject to each Option, the time or timesat which Options may be granted and exercised and the exercise price thereof;construe and interpret the 2000 Stock Option Plan; determine the terms of anyoption agreement pursuant to which Options are granted, and amend any optionagreement with the consent of the recipient of Options, or Optionee.

 

The Board of Directors may amend or terminate the 2000 Stock OptionPlan at any time, except that approval of the holders of a majority of ouroutstanding Voting Common Stock is required for amendments that:

 

•                  decrease theminimum option price for ISOs;

 

•                  extend the termof the 2000 Stock Option Plan beyond 10 years or the maximum term of theOptions granted beyond 10 years;

 

•                  withdraw theadministration of the 2000 Stock Option Plan from the Committee;

 

•                  change the classof eligible employees, officers or directors; or

 

•                  increase theaggregate number of shares which may be issued pursuant to the provisions ofthe 2000 Stock Option Plan.

 

Notwithstanding the foregoing, our 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.

 

The exercise price per share for all ISOs may not be less than 100% ofthe fair market value of a share of Common Stock (Nonvoting) on the date onwhich the Option is granted (or 110% of the fair market value on the date ofgrant of an ISO if the 

 

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Optionee owns more than 10% ofthe total combined voting power of all classes of voting stock of our companyor any of its affiliates, who we refer to as a 10% Holder).  The exercise price per share for NQSOs maybe less than, equal to or greater than the fair market value of a share ofCommon 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.

 

The Committee may provide, at or subsequent to the date of grant of anyOption, that in the event the Optionee pays the exercise price for the Optionby tendering shares of Common Stock (Nonvoting) previously owned by theOptionee, the Optionee will automatically be granted a “reload option” for thenumber of shares of Common Stock (Nonvoting) used to pay the exercise priceplus the number of shares withheld to pay for taxes associated with the Optionexercise (a “Reload Option”).  TheReload Option has an exercise price equal to the fair market value of theCommon Stock (Nonvoting) on the date of grant of the Reload Option and remainsexercisable for the remainder of the term of the Option to which it relates.

 

Unless sooner terminated by the Board of Directors, the 2000 StockOption Plan will terminate on April 27, 2010, 10 years after its effectivedate.  Unless otherwise specificallyprovided in an Optionee’s Option Agreement, each Option granted under the 2000Stock Option Plan expires no later than 10 years after the date such Option isgranted (5 years for ISO’s granted to 10% Holders).  Options may be exercised only during the period that the originalOptionee has a relationship with us which confers eligibility to be grantedOptions and for:

 

•                    a period of 30days after termination of such relationship;

 

•                    a period of 3months after retirement by the Optionee with our consent; or

 

•                    a period of 12months after the death or disability of the Optionee.

 

As of March 5, 2004, options granted under the 2000 Stock Option Planwere outstanding for the purchase of 1,760,500 shares of Common Stock(Nonvoting).

 

*Management Stock Plan*

 

In April 1993, we adopted a Management Stock Plan, which provides forthe grant to all our salaried executive employees (including officers anddirectors, except for persons serving as directors only) from time to time ofthe following:

 

•                    awardsdenominated in shares of Common Stock (Nonvoting), which were refer to as  Bonus Shares, which may be settled in sharesof Common Stock (Nonvoting) or cash; and

 

•     stock or cash awards based onachievement of performance goals, which we refer to as Performance Awards.

 

The purpose ofthe Management Stock Plan is to keep senior executives in our employ and tocompensate such executives for their contributions to the growth and profits ofour company and its subsidiaries.

 

The ManagementStock Plan is administered by a committee appointed by the Board of Directorswhich consists of not less than two members of the Board of Directors, which werefer to as the Management Stock Plan Committee.  The Management Stock Plan Committee, from time to time, selectseligible employees to receive a discretionary bonus of Bonus Shares or aPerformance Award based upon such employee’s position, responsibilities,contributions and value to our company and such other factors as the ManagementStock Plan Committee deems appropriate. Receipt of awards granted under the Management Stock Plan may bedeferred.  The Management Stock PlanCommittee has discretion to determine the date on which the Bonus Shares orPerformance Awards allocated to an employee will be issued to suchemployee.  The Management Stock PlanCommittee may, in its sole discretion, determine what part of an award of BonusShares or Performance Awards is paid in cash and what part of an award is paidin the form of Common Stock (Nonvoting). Any cash settlement of an award denominated in shares of Common Stock(Nonvoting) will be made to such employee as of the date the correspondingshares of Common Stock (Nonvoting) would otherwise be issued to such employeeand shall be in an amount equal to the fair market value of such shares ofCommon Stock (Nonvoting) on that date.

 

The aggregate number of shares of Common Stock (Nonvoting) that may begranted under the Management Stock Plan is 2,000,000.

 

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As of March 5,2004, we had allocated a total of 1,758,425 shares of Common Stock (Nonvoting)pursuant to the Management Stock Plan, 1,470,025 of which had vested throughMarch 5 2004.

 

*Directors Stock Option Plan*

 

On March 1,1994, we adopted a Director Stock Option Plan, providing for the grant, fromtime to time, of Options that are NQSOs to our non-employee directors, who werefer to as Director Participants, to purchase shares of Common Stock(Nonvoting).  Non-employee directors mayalso receive grants of Options under the 2000 Stock Option Plan.  All such grants vest in increments inconnection with attendance by Director Participants at board or committeemeetings, as applicable.  Under theDirectors Stock Option Plan, the exercise price per share of all Options is thefair market value on the date of grant.

 

The followinggrants have been made under the Directors Stock Option Plan that are stillsubject to vesting:

 

•               On April 27, 1999,the Directors Stock 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. Of eachsuch grant, Options to purchase 3,125 shares of Common Stock (Nonvoting) becomeexercisable on the date of   attendance,in person or by telephonic means, of a Director Participant at each regularquarterly meeting of the Board of Directors.

 

•                  In addition,non-employee directors who serve on the Audit Committee or CompensationCommittee receive additional automatic grants of Options under the DirectorsStock Option Plan,.  Since February 25,2000, of each such grant, Options to purchase 625 shares of Common Stock(Nonvoting) (875 in the case of Committee chairs) become exercisable upon thedate of attendance, in person or by telephonic means, at each regular meetingof the Audit Committee and the Compensation Committee of any DirectorParticipant who is a member of such committees.

 

Non-employee directors elected or appointed during the course of athree-year or five year option period receive Options, in lieu of a cashcompensation, for the remaining portion of such period.

 

The Board ofDirectors may provide, at or subsequent to the date of grant of any Option,that in the event the Director Participant pays the exercise price for theOption by tendering shares of Common Stock (Nonvoting) previously owned by theDirector Participant, the Director Participant will automatically be granted aReload Option for the number of shares of Common Stock (Nonvoting) used to paythe exercise price plus the number of shares withheld to pay for taxesassociated with the Option exercise. The Reload Option has an exercise price equal to the fair market valueof the Common Stock (Nonvoting) on the date of grant of the Reload Option andremains exercisable for the remainder of the term of the Option to which itrelates.

 

Unless otherwise specifically provided in a Director Participant’sOption Agreement and except in the case of Reload Options as described above,each Option granted under the Directors Stock Option Plan expires no later than10 years after the date the Option is granted. Options may be exercised only during the period that the originaloptionee is a non-employee director and (i) for a period of 6 months after thedeath or disability of the Director Participant or (ii) for a period of 2 yearsafter termination of the Director Participant’s directorship for any otherreason.

 

The aggregate number of shares of Common Stock (Nonvoting) allocatedfor grant under the Directors Stock Option Plan is 1,500,000.  As of March 6, 2003, Options granted underthe Directors Stock Option Plan were outstanding for the purchase of 808,435shares of Common Stock (Nonvoting).

 

*Non-Employee Directors Stock Plan*

 

On April 29, 1997, we adopted a Non-Employee Directors Stock Plan  for the purpose of providing a means toattract and retain highly qualified persons to serve as our non-employeedirectors and to enable such persons to acquire or increase a proprietary interestin our company.  The Non-Employee DirectorsStock Plan currently provides that on January 1st of each calendaryear during the term of the Non-Employee Directors Stock Plan, our non-employeedirectors, who we refer to as Directors Stock Plan Participants, shall receivea number of shares of Common Stock (Nonvoting) equal to $50,000 divided by thefair market value per share on the date of grant; provided, that, any DirectorsStock Plan Participant may elect prior to the grant date to be paid up to$30,000 of such grant in cash in lieu of shares having an aggregate fair marketvalue equal to the amount of such cash payment. If a person first 

 

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becomes a non-employee directorafter January 1st of any calendar year, such a person receives a proratedgrant based on the number of regular board meetings scheduled from the date ofhis or her commencement of service as a director until December 31stof that year. Each Directors Stock Plan Participant may elect to defer thepayment of shares of Common Stock (Nonvoting) by filing an irrevocable writtenelection with our Secretary.

 

The Non-Employee Directors Stock Plan, unless earlier terminated byaction of the Board of Directors, will terminate at such time as no sharesremain available for issuance under the Non-Employee Directors Stock Plan andour company and the Directors Stock Plan Participants have no further rights orobligations under the Non-Employee Directors Stock Plan. The aggregate numberof shares of Common Stock (Nonvoting) issuable under the Non-Employee DirectorsStock Plan is 600,000.  As of March 5,2004, 532,698 shares had been granted under the Non-Employee Directors StockPlan.

 

There were no Options granted to our executive officers during 2003.

 

The followingtable sets forth, as of December 31, 2003, the number of options and the valueof unexercised options held by our executive officers that held options as ofthat date, and the options exercised and the consideration received thereforeby such persons during fiscal 2003:

 

 

Aggregated Option/SAR ExercisesIn Last Fiscal Year AndFY-End Option/SAR Values
| **Name**              |   | **Shares  Acquired  on Exercise  (#)** |            | **Value  Realized ($)** |              | **Number of  Securities Underlying  Unexercised Options  at December 31, 2003** |   | **Value of  Unexercised  in-the-Money Options  at December 31, 2003 ($)** |   |
|-----------------------|--------|----------------------------------------|-----------------|-------------------------|-------------------|---------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
| **Exercisable**       |   | **Unexercisable**                      | **Exercisable** |                    | **Unexercisable** |
|                  |   |                                   |            |                    |              |                                                                            |   |                                                                      |   |   |   |   |   |
| W. Don Cornwell       |   | —                                 |            | —                  |              | 1,266,000                                                                       |   | 736,000                                                                   |   | — |   | — |   |
|                  |   |                                   |            |                    |              |                                                                            |   |                                                                      |   |   |   |   |   |
| Stuart J. Beck        |   | —                                 |            | —                  |              | 1,145,900                                                                       |   | 642,200                                                                   |   | — |   | — |   |
|                  |   |                                   |            |                    |              |                                                                            |   |                                                                      |   |   |   |   |   |
| Robert E. Selwyn, Jr. |   | —                                 |            | —                  |              | 330,000                                                                         |   | 20,000                                                                    |   | 4,500 |   | 3,000 |   |
|                  |   |                                   |            |                    |              |                                                                            |   |                                                                      |   |   |   |   |   |
| Lawrence I. Wills     |   | —                                 |            | —                  |              | 131,750                                                                         |   | 49,500                                                                    |   | 10,013 |   | 6,675 |   |
|                  |   |                                   |            |                    |              |                                                                            |   |                                                                      |   |   |   |   |   |
| Ellen McClain         |   | —                                 |            | —                  |              | 134,000                                                                         |   | 116,800                                                                   |   | 10,350 |   | 10,350 |   |

 

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**CompensationCommittee Interlocks and Insider Participation**

 

During 2003, Thomas R. Settle, Charles J. Hamilton, Jr., VeronicaPollard and Jon E. Barfield served as members of the Compensation Committee ofour Board of Directors.

 

 

**BOARD OF DIRECTORSCOMPENSATION COMMITTEE REPORT**

**ON EXECUTIVECOMPENSATION**

 

**Compensation Philosophy**

 

The goal of the compensation arrangements of our company is to attract,retain, motivate and reward personnel critical to our long-term success. Asdescribed below, the various components of such compensation arrangements formanagement are tied to our performance, which in turn unites the interests ofmanagement with the interests of our stockholders.

 

**Components of Compensation**

 

The components of executive compensation in 2003 were (i) a basesalary, and (ii) incentive compensation opportunity.

 

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*Base Salary.*    In establishing the base salary for the Chief Executive Officer and the President,the Compensation Committee annually develops a formula for determining salaryincreases based on the attainment of certain broadcast cashflow targets. Nospecific formula was established to determine base salary for the otherexecutive officers, but rather the salary levels were determined by asubjective evaluation of the individual’s performance and accomplishments.

 

*IncentiveCompensation Opportunity.*    Incentivecompensation opportunities can consist of cash bonuses, stock options, sharesof common stock  or a combinationthereof. The Compensation Committee has decided to favor the issuance ofrestricted stock in lieu of stock options. The 2003 incentive compensation (paid in 2004) for the Chief ExecutiveOfficer and the President were determined based on our financial performance in2003  and  the achievement of certain corporate objectives.  2003 incentive compensation (paid in 2004)for the other executive officers was determined based on our financialperformance in 2003 and a subjective evaluation of the individual’s performanceand accomplishments during the 2003.

 

**Limitation of Deductions**

 

Section 162(m) of the Internal Revenue Code generally limits thecorporate tax deduction for compensation paid to executive officers named inthe Summary Compensation Table to $1 million, unless certain requirements aremet.  While the Compensation Committee’sgeneral policy is to preserve the deductibility of most compensation paid toour named executives, the Compensation Committee authorizes payments that maynot be deductible if it believes they are in the best interests of our companyand our shareholders.

 

By the Compensation Committee of the Board of Directors

 
| Thomas R. Settle         |
|--------------------------|
| Jon E. Barfield          |
| Charles J. Hamilton, Jr. |
| Veronica Pollard         |

 

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**Item 12.**  **SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

The following table sets forth certain information, as of March 5,2004, regarding beneficial ownership of our (i) Voting Common Stock by eachshareholder who is known by us 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) Common Stock (Nonvoting) (assumingexercise of all options for the purchase of Common Stock (Nonvoting), whichexercise is at the option of the holder within sixty (60) days) by eachdirector, each executive officer and all directors and officers as a group.  We also have 200,375 shares of our 12.75%Cumulative Exchangeable Preferred Stock outstanding, none of which are owned byany of our officers or directors. Except as set forth in the footnotes to the table, each shareholderlisted below has informed us that such shareholder has (i) sole voting andinvestment power with respect to such shareholder’s shares of stock, except tothe extent that authority is shared by spouses under applicable law and (ii)record and beneficial ownership with respect to such shareholder’s shares of stock.

 
|                                      |   | **Voting  Common Stock  Shares Beneficially Owned** |   | **Common  Stock (Nonvoting)  Shares Beneficially Owned** |   |
|-------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                      |   | **Number**                                          |   | **Percent**                                              |   | **Number** |   | **Percent(1)** |   |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| W. Don Cornwell                           |   | 98,250                                              |   | 55.0                                                     | %      | 1,954,252 | (2) | 9.5 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Stuart J. Beck                            |   | 80,250                                              |   | 45.0                                                     | %      | 1,662,353 | (3) | 8.2 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Robert E. Selwyn, Jr.                     |   |                                                |   |                                                     |   | 455,781 | (4) | 2.3 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Lawrence I. Wills                         |   |                                                |   |                                                     |   | 175,446 | (5) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Ellen McClain                             |   |                                                |   |                                                     |   | 167,644 | (6) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Martin F. Beck                            |   |                                                |   |                                                     |   | 379,113 | (7) | 2.0 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| James L. Greenwald                        |   |                                                |   |                                                     |   | 268,709 | (8) | 1.4 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Edward Dugger III                         |   |                                                |   |                                                     |   | 162,155 | (9) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Thomas R. Settle                          |   |                                                |   |                                                     |   | 361,340 | (10) | 1.9 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Charles J. Hamilton, Jr.                  |   |                                                |   |                                                     |   | 228,730 | (11) | 1.2 | % |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| M. Fred Brown                             |   |                                                |   |                                                     |   | 158,113 | (12) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Jon E. Barfield                           |   |                                                |   |                                                     |   | 163,044 | (13) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| Veronica Pollard                          |   |                                                |   |                                                     |   | 147,686 | (14) |   | * |
|                                      |   |                                                |   |                                                     |   |   |   |   |   |
| All directors and officers as a group(13) |   | 178,500                                             |   | 100.0                                                    | %      | 6,284,366 |   | 27.0 | % |

 

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*              Less than 1%.

 

(1)                                  Percentage figures assumethe exercise of options for the purchase of Common Stock (Nonvoting) held bysuch shareholder, which conversion or exercise is at the option of the holderwithin sixty days.

 

(2)                                  Includes 1,322,600shares issuable upon exercise of options granted to Mr. Cornwell under theStock Option Plan that are exercisable at the option of the holder within sixtydays and a total of 29,200 shares held by Mr. Cornwell’s immediatefamily.  Mr. Cornwell disclaimsbeneficial ownership with respect to such 29,200 shares.  The business address of Mr. Cornwell isGranite Broadcasting Corporation, 767 Third Avenue, 34th Floor, New York, NewYork, 10017.

 

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(3)                                  Includes 1,191,600shares issuable upon exercise of options granted to Stuart J. Beck under theStock Option Plan which are exercisable at the option of the holder withinsixty days and a total of 8,000 shares held in trust for Mr. Beck’schildren.  Mr. Beck disclaims beneficialownership with respect to such 8,000 shares. The business address of Mr. Stuart Beck is Granite BroadcastingCorporation, 767 Third Avenue, 34th Floor, New York, New York, 10017.

 

(4)                                  Includes 330,000shares issuable upon exercise of options granted to Mr. Selwyn under the StockOption Plan that are exercisable at the option of the holder within sixty days.

 

(5)                                  Includes 129,250shares issuable upon the exercise of options granted to Mr. Wills underthe Stock Option Plan that are exercisable at the option of the holder withinsixty days.

 

(6)                                  Includes 134,000shares issuable upon exercise of options granted to Ms. McClain under the StockOption Plan that are exercisable at the option of the holder within sixty days.

 

(7)                                  Includes 8,250 sharesheld by Mr. Beck’s wife, 29,264 shares held by the Martin F. Beck FamilyFoundation and 112,975 issuable upon exercise of options granted under theDirectors’ Stock Option Plan that are exercisable at the option of the holderwithin sixty days.  Mr. Beckdisclaims beneficial ownership with respect to shares held by his spouse and bythe Martin F. Beck Family Foundation.

 

(8)                                  Includes 136,875shares issuable upon exercise of options granted to Mr. Greenwald under theDirectors’ Stock Option Plan that are exercisable at the option of the holderwithin sixty days.

 

(9)                                  Includes 107,875shares issuable upon exercise of Options granted to Mr. Dugger under theDirectors’ Stock Option Plan that are exercisable at the option of the holderwithin sixty days.

 

(10)                            Includes 3,000 shares heldby Mr. Settle’s wife as custodian for his children and 144,475 sharesissuable upon exercise of options granted to Mr. Settle under the Directors’Stock Option Plan that are exercisable at the option of the holder within sixtydays.  Mr. Settle disclaimsbeneficial ownership with respect to the shares held by his spouse.

 

(11)                            Includes 2,800 shares heldby Mr. Hamilton’s wife as custodian for their minor children under the UGMA and156,800 shares issuable upon exercise of options granted to Mr. Hamilton underthe Directors’ Stock Option Plan, which are exercisable at the option of theholder within sixty days.  Mr. Hamiltondisclaims beneficial ownership with respect to the shares held by his spouse.

 

(12)                            Includes 200 shares held byMr. Brown’s children and 109,625 issuable upon exercise of options granted toMr. Brown under the Directors’ Stock Option Plan that are exercisable at theoption of the holder within sixty days.

 

(13)                            Includes 51,586 shares heldin trust and 107,500 shares issuable upon exercise of options granted to Mr. Barfieldunder the Directors’ Stock Option Plan that are exercisable at the option ofthe holder within sixty days.

 

(14)                            Includes 93,125 sharesissuable upon exercise of options granted to Ms. Pollard under the Directors’Stock  Option Plan that are exercisableat the option of the holder within sixty days.

 

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**Item 13.**  **CertainRelationships and Related Transactions**

 

Between 1995and 1998, we loaned Mr. Cornwell, Chief Executive Officer and Chairman of the Boardof Directors, $2,911,000 in four separate transactions to pay the exerciseprice on stock options exercises and certain personal income taxes.  On January 1, 2001, we loaned Mr. Cornwellan additional $375,000.  OnFebruary 15, 2001, we  agreedto consolidate the five loans into one loan 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 bearinterest, but interest at an annual rate of 6.75% will be imputed as additionalcompensation to the officer.  The newpromissory note allows for the loan to be forgiven in one-third increments ifour Common Stock (Nonvoting) trades for ten consecutive trading days at $15,$20, and $25, respectively, or if the per share consideration received by ourcommon stockholders in a Change of Control (as defined in the Indentures thatgoverned our senior subordinated notes) equals at least $15, $20 or $25,respectively.   In addition, on February15, 2001 we forgave $232,247 of interest accrued on Mr. Cornwell’s loans duringthe year ended December 31, 2000.

 

In 1995, we loaned Mr. Stuart Beck, President and a member of the Boardof Directors, $221,200 to pay for certain personal taxes. On February 15, 2001,we agreed to cancel this loan and issue a new loan in the same amount.  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 rate of 6.75% will be imputed as additionalcompensation to the officer.  The newpromissory note allows for the loan to be forgiven in one-third increments ifour Common Stock (Nonvoting) trades for ten consecutive trading days at $15,$20, and $25, respectively, or if the per share consideration received by ourcommon stockholders in a Change of Control (as defined in the Indentures thatgoverned tour senior subordinated notes) equals at least $15, $20 or $25,respectively.  In addition, on February15, 2001 we forgave $19,908 of interest accrued on Mr. Beck’s loan during theyear-ended December 31, 2000.

 

On February 25, 2003, the Compensation Committee recommended, and theBoard of Directors approved, an incentive award of $3,286,065 to each of Mr.Cornwell and Mr. Beck to be paid, subject to vesting terms, only upon theoccurrence of the refinancing with a maturity of at least two years of thesenior debt due April 15, 2004.  On December22, 2003, we issued $405 million aggregate principal amount of 9 3/4% SeniorSecured Notes, the proceeds of which we used in part to repay all outstandingborrowings (plus accrued interest) under our senior credit agreement, whichsatisfied the performance objective of the awards.  Mr. Cornwell’s award, which vests evenly over three years fromthe refinancing date, will be used to repay in full his outstanding loan fromus of $3,286,065 due January 25, 2006. Mr. Cornwell has irrevocably elected todefer all payments otherwise due until January 25, 2006 when his loan will berepaid. A portion of Mr. Beck’s award will be used to repay in full hisoutstanding loan from us of $221,200 due January 25, 2006, and the remainingamount of Mr. Beck’s incentive award will be paid, at the discretion of theBoard of Directors, in the form of cash or shares of our Common Stock(Nonvoting).  Mr. Beck has irrevocablyelected to defer all payments otherwise due until January 25, 2006 andthereafter all payments but $221,200 until the first to occur of January 31,2011, a change of control of our company or the termination of his employment.Mr. Beck’s award vests evenly over three years from the refinancing date, andthe amount of any Common Stock (Nonvoting) to be received will be valued on thedate of payment.

 

**Item 14.  Principal Accountant Feesand Services**

 

The followingtable sets forth the aggregate fees and related expenses for professionalservices provided by Ernst & Young LLP in each of the last two fiscalyears.

 
|               |   | **Fiscal  Year  December 31,** |    |
|--------------------|--------|--------------------------------|---------|
|               |   | **2002**                       |    | **2003** |   |
| Audit fees         |   | $                              | 426,010 |   | $ | 656,740 |   |
| Audit-related fees |   | 39,400                         |    | 18,500 |   |
| Tax fees           |   | 210,300                        |    | 253,690 |   |
| All other fees     |   | 3,900                          |    | 4,100 |   |
|               |   |                           |    |   |   |
| Total              |   | $                              | 679,610 |   | $ | 933,030 |   |

 

*Audit Fees:*Auditfees billed by Ernst & Young LLP related to the following services: 1)audit of our annual consolidated financial statements, 2) review of our interimconsolidated financial statements included in our Quarterly Reports on Form10-Q for

 

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the periods ended March 31st,June 30th and September 30th and 3) services associatedwith our offering of $405 million 9 3/4% Senior Secured Notes due 2010.  The fees related to the Senior Secured Notesoffering totaled $153,440.

 

*Audit-Related Fees:*Audit-relatedfees billed by Ernst & Young LLP related to the following services: 1)audit of our benefit plan 2) assistance with understanding Section 404 of theSarbanes Oxley Act of 2002 and 3) consultations for the accounting for proposedtransactions.

 

*Tax Fees:*Taxfees billed by Ernst & Young LLP related to the following services: 1) taxcompliance and 2) tax consulting.

 

*All Other Fees:*Otherfees billed by Ernst & Young LLP related to services provided in connectionwith the San Francisco Television Times Market Survey.

 

The AuditCommittee of our Board of Directors has established a practice that requiresthe committee to pre-approve any audit or permitted non-audit services to beprovided to us by our independent auditor, Ernst & Young LLP, inadvance of such services being provided to us.

 

Under the SEC rules, subject to certain de minimis criteria,pre-approval is required for all professional services rendered by ourprincipal accountant for all services rendered on or after May 6,2003.  In fiscal 2003, all of the feesincluded above were pre-approved by the Audit Committee.

 

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**PART IV**

 

**Item 15.****  Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 
| (a)1 |   | Financial  statements and the schedule filed as a part of this report are listed on the  “Index to Consolidated Financial Statements” at page 38 herein.  All other schedules are omitted because  they are not applicable to us. |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(a)3  Exhibits

 
| 3.1    |   | Third Amended and Restated Certificate of Incorporation of Granite  Broadcasting Corporation, as amended (incorporated by reference to Exhibit  3.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,  1994, filed on March 29, 1995).                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | Amended and Restated Bylaws of Granite Broadcasting Corporation  (incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 2000, filed on March 30, 2001).                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.3    |   | Certificate of Designations of the Powers, Preferences and Relative,  Participating, Optional and Other Special Rights of our 12-3/4%, Cumulative  Exchangeable Preferred Stock and Qualifications, Limitations and Restrictions  Thereof (incorporated by reference to Exhibit 3.3 to our Annual Report on  Form 10-K for the fiscal year ended December 31, 1996, filed on March 21,  1997). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Indenture, dated as of December 22, 2003, between Granite  Broadcasting Corporation and The Bank of New York, as Trustee, relating to  our $405,000,000 Principal Amount 9 3/4% Senior Secured Notes due December 1,  2010 (including form of note).                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Registration Rights Agreement, dated as of December 22, 2003, between  Granite Broadcasting Corporation and J.P. Morgan Securities Inc.                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | Indenture, dated as of January 31, 1997, between Granite Broadcasting  Corporation and The Bank of New York for our 12-3/4% Series A Exchange  Debentures and 12-3/4% Exchange Debentures due April 1, 2009 (incorporated by  reference to Exhibit 4.44 to our Annual Report on Form 10-K for the fiscal  year ended December 31, 1996, filed on March 21, 1997).                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Form of 12-3/4% Exchange Debenture due April 1, 2009 (included in the  Indenture filed as Exhibit 4.3).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5    |   | Warrant to purchase 753,491 shares of Common Stock (Nonvoting) of  Granite Broadcasting Corporation issued March 6, 2001 to Goldman Sachs &  Co. (incorporated by reference to Exhibit 4.55 to our Current Report on Form  8-K, filed on March 9, 2001).                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | Granite Broadcasting Corporation Stock Option Plan, as amended  through October 26, 1999 (incorporated by reference to Exhibit 10.1 to our  Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed  on March 30, 2000).                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Network Affiliation Agreement (WPTA-TV) (incorporated by reference to  Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 1995, filed on March 28, 1996).                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Employment Agreement dated as of September 20, 1991 between Granite  Broadcasting Corporation and W. Don Cornwell (incorporated by reference to  Exhibit 10.13 to our Registration Statement No. 33-43770 filed on November 5,  1991).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4   |   | Employment Agreement dated as of September 20, 1991 between Granite  Broadcasting Corporation and Stuart J. Beck (incorporated by reference to  Exhibit 10.14 to our Registration Statement No. 33-43770 filed on November 5,  1991).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5   |   | Granite Broadcasting Corporation Management Stock Plan, as amended  through January 1, 2003 (incorporated by reference to Exhibit 10.15 to our  Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed  on March 28, 2003).                                                                                                                                             |

 

 

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| 10.6   |   | Granite Broadcasting Corporation Directors’ Stock Option Plan, as  amended through October 26, 1999 (incorporated by reference to Exhibit 10.19  to our Annual Report on Form 10-K for the fiscal year ended December 31,  1999, filed on March 30, 2000).                                                                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Network Affiliation Agreement (WTVH-TV) (incorporated by reference to  Exhibit 10.20 to our Registration Statement No. 33-94862 filed on July 21,  1995).                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Granite Broadcasting Corporation Employee Stock Purchase Plan, dated  February 28, 1995 (incorporated by reference to Exhibit 10.25 to our Annual  Report on Form 10-K for the fiscal year ended December 31, 1994, filed on  March 29, 1995).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Network Affiliation Agreement (WKBW) (incorporated by reference to  Exhibit 10.28 to our Current Report on Form 8-K filed on July 14, 1995).                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Employment Agreement dated as of September 19, 1996 between Granite  Broadcasting Corporation and Robert E. Selwyn, Jr. (incorporated by reference  to Exhibit 10.30 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 1996, filed on March 21, 1997).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Non-Employee Directors Stock Plan of Granite Broadcasting  Corporation, as amended through December 2, 2002 (incorporated by reference  to Exhibit 10.31 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 2002, filed on March 28, 2003).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.12  |   | 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 (incorporated by reference  to Exhibit 10.38 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 1998, filed on March 31, 1999). |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Granite Broadcasting Corporation 2000 Stock Option Plan, dated as of  April 25, 2000 (incorporated by reference to Exhibit 10.46 to our Quarterly  Report on Form 10-Q for the quarter ended March 31, 2000, filed on May 15,  2000).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.14  |   | 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)  (incorporated by reference to Exhibit 10.51 to our Current Report on Form  8-K, filed on March 9, 2001).                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.15  |   | 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. (incorporated by reference to Exhibit  10.53 to our Current Report on Form 8-K, filed on December 19, 2001)                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.16  |   | Amendment to Network Affiliation Agreement (WKBW).                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 21.    |   | Subsidiaries of Granite Broadcasting Corporation.                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 23.    |   | Consent of Independent Auditors (Ernst & Young LLP).                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 32     |   | Certifications of Chief Executive Officer and Chief Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  § 1350)                                                                                                                                                                                    |

 

76

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(b)  Reports on Form 8-K.

 

Current Reporton Form 8-K filed November 12, 2003, disclosing the release of our earnings forthe third quarter of 2003.

 

Current Reporton Form 8-K filed November 24, 2003, disclosing our intent to issue$300,000,000 of senior secured notes due 2010.

 

Current Reporton Form 8-K filed December 11, 2003, disclosing the commencement of a tenderoffer and consent solicitation with respect to our outstanding 8 7/8% seniorsubordinated notes.

 

Current Reporton Form 8-K filed December 23, 2003, disclosing the completion of a$405,000,000 9.75% senior secured notes due December 2010 in a privateplacement.

 

77

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,as amended, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of New York,State of New York, on the 29th day of March, 2004.

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

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the Registrant in the capacitiesand on the dates indicated:

 
| **Signature**                |                                                                  | **Title**                                         |           | **Date** |
|------------------------------|-----------------------------------------------------------------------|---------------------------------------------------|----------------|----------|
|                         |                                                                  |                                              |
| /s/ W. DON CORNWELL          |                                                                  | Chief Executive Officer                           | March 29, 2004 |
| (W. Don Cornwell)            | (Principal Executive Officer) and Chairman of  the Board of Directors |                                              |
|                         |                                                                  |                                              |
| /s/ STUART J. BECK           |                                                                  | President and Secretary                           | March 29, 2004 |
| (Stuart J. Beck)             | and Director                                                          |                                              |
|                         |                                                                  |                                              |
| /s/  LAWRENCE I. WILLS  |                                                                  | Senior Vice President – Chief Administrative | March 29, 2004 |
| (Lawrence I. Wills)          | Officer (Principal Accounting Officer)                                |                                              |
|                         |                                                                  |                                              |
| /s/  ELLEN MCCLAIN      |                                                                  | Senior Vice President – Chief Financial      | March 29, 2004 |
| (Ellen McClain)              | Officer (Principal Financial Officer)                                 |                                              |
|                         |                                                                  |                                              |
| /s/ ROBERT E. SELWYN, JR.    |                                                                  | Senior Operating Advisor and Director             | March 29, 2004 |
| (Robert E. Selwyn, Jr.)      |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ MARTIN F. BECK           |                                                                  | Director                                          | March 29, 2004 |
| (Martin F. Beck)             |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ JAMES L. GREENWALD       |                                                                  | Director                                          | March 29, 2004 |
| (James L. Greenwald)         |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ EDWARD DUGGER III        |                                                                  | Director                                          | March 29, 2004 |
|  (Edward Dugger III)    |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ THOMAS R. SETTLE         |                                                                  | Director                                          | March 29, 2004 |
| (Thomas R. Settle)           |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ CHARLES J. HAMILTON, JR. |                                                                  | Director                                          | March 29, 2004 |
| (Charles J. Hamilton, Jr.)   |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ M. FRED BROWN            |                                                                  | Director                                          | March 29, 2004 |
| (M. Fred Brown)              |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ JON E. BARFIELD          |                                                                  | Director                                          | March 29, 2004 |
| (Jon E. Barfield)            |                                                                  |                                              |
|                         |                                                                  |                                              |
| /s/ VERONICA POLLARD         |                                                                  | Director                                          | March 29, 2004 |
| (Veronica Pollard)           |                                                                  |                                              |

 

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