**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

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

 

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F**or the fiscal year ended December 31, 2004**

 

**Commissionfile number 0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name ofregistrant 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 Section 12(b) of the Act:                                                       |
| **None**                                                                                                                     |
|                                                                                                                         |       |                                  |
| Securities  Registered Pursuant to Section 12(g) of the Act:                                                       |
| **Common  Stock (Nonvoting), $.01 par value per share**                                                                      |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes   ý   No   o

 

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

 

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

 

As of March 7, 2005,19,478,436 shares of Granite Broadcasting Corporation Common Stock (Nonvoting)were outstanding.  The aggregate marketvalue (based upon the last reported sale price on the Nasdaq Small Cap Marketon June 30, 2004) of the shares of Common Stock (Nonvoting) held bynon-affiliates was approximately $11,840,698 (For purposes of calculating thepreceding amounts only, all directors and executive officers of the registrantare assumed to be affiliates.)  As of March 7,2005, 98,250 shares of Granite Broadcasting Corporation Class A VotingCommon Stock were outstanding, all of which were held by an affiliate.

 

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**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**GRANITEBROADCASTING CORPORATION**

 

**Form 10-K**

**Table ofContents**

 
| PART I   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 4      |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| Item 1.       | Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 4      |
| Item  2.      | Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 21     |
| Item 3.       | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 22     |
| Item  4.      | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 22     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| PART II  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 23     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| Item  5.      | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 23     |
| Item 6.       | Selected Financial  Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 24     |
| Item  7.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 25     |
| Item  7A.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 44     |
| Item  8.      | Financial  Statements and Supplementary Data                                                                                                                     | 45     |
| Item  9.      | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 67     |
| Item 9A.      | Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 67     |
| Item 9B.      | Other Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 67     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| PART III |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 68     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| Item  10.     | Directors  and Executive Officers of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 68     |
| Item 11.      | Executive  Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 71     |
| Item  12.     | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 78     |
| Item  13.     | Certain  Relationships and Related Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 80     |
| Item  14.     | Principal  Accountant Fees and Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 81     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| PART IV  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 82     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| Item  15.     | Exhibits  and Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 82     |
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| SIGNATURES    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 85     |

 

Granite Broadcasting Corporation is a Delawarecorporation. As used in this Annual Report on Form 10-K and unless thecontext otherwise requires, (1) “Granite,” the “Company,” “we,” “us” and “our”refer to Granite Broadcasting Corporation, together with its direct andindirect subsidiaries, and (2) “Malara Broadcast Group” and “Malara” referto Malara Broadcast Group, Inc., together with its direct and indirectsubsidiaries.  Our principal executiveoffices are located at 767 Third Avenue, 34th Floor, New York, NY 10017, and ourtelephone number at that address is (212) 826-2530. Our web site is located athttp://www.granitetv.com. The information on our web site is not part of thisreport.

 

As of March 8, 2005,we have shared services agreements and advertising representation agreements(which we generally refer to as local service agreements) relating to the twotelevision stations owned by Malara Broadcast Group, but do not own any of theequity interests in Malara Broadcast Group. For a description of the relationship between us and Malara BroadcastGroup, see Item 1. “Business—Recent Developments.”

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. These are statements that relate to future periods and include statementsregarding our anticipated performance. Generally, the words anticipates, believes, expects, intends, estimates,projects, plans and similar expressions identify forward-looking statements.Although we believe that the forward-looking statements contained in thisreport are based upon reasonable assumptions, we can give no assurance that ourgoals will be achieved. The forward-looking statements contained in this reportinvolve known and unknown risks, uncertainties and other important factors thatcould cause our actual results, performance or achievements or industry resultsto differ materially from any future results, performance or achievementsexpressed or implied by these forward-looking statements. These risks,uncertainties and other important factors are disclosed under Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Riskfactors’’ and elsewhere in this report, including, without limitation, inconjunction with the forward-looking statements included in this report.  Important factors that could cause our actualresults to differ materially from our expectations include, without limitation:

 

•                                        inability toimplement our strategy, or, having implemented it, failure to realizeanticipated cost savings or revenue opportunities available throughimplementation of our strategy;

 

•                                        inability toeffect dispositions or acquisitions of television stations, which are animportant part of our strategy;

 

•                                        the effects ofgovernmental regulation of broadcasting, including adverse changes in, orinterpretations of, the exceptions to the Federal Communications Commission’sduopoly rule which could restrict, or eliminate, our ability to enter intooperating arrangements with in-market television stations and implement ouroperating strategy;

 

•                                        pricingfluctuations in national and local advertising;

 

•                                        volatility orincreases in programming costs;

 

•                                        restrictions onour operations due to, and the effect of, our significant leverage and limitedsources of liquidity;

 

•                                        the impact ofchanges in national and regional economies;

 

•                                        delay in anyeconomic recovery or the recovery not being as robust as might otherwise havebeen anticipated;

 

•                                        our ability toservice our outstanding debt;

 

•                                        successfulintegration of acquired television stations (including achievement of synergiesand cost reductions);

 

•                                        competition inthe markets in which the stations we own and the stations to which we provideservices are located;

 

•                                        loss of networkaffiliations or changes in the terms of network affiliation agreements uponrenewal; and

 

•                                        technologicalchange and innovation in the broadcasting industry.

 

This list of factors that may affect future performance and theaccuracy of forward-looking statements is illustrative, but by no meansexhaustive. Accordingly, all forward-looking statements contained in thisreport should be evaluated with the understanding of their inherentuncertainty. Given these uncertainties, prospective investors are cautioned notto place undue reliance on these forward-looking statements. Theforward-looking statements contained in this report are made as of the date ofthis report. We assume no obligation to update or revise them or providereasons why actual results differ, as applicable.

 

**AVAILABLEINFORMATION**

 

# **We make available free of charge,on or through the SEC Filings section of our web site *(http://www.granitetv.com/)*,our annual reports on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 as soon as reasonably practicable after we electronicallyfile such material with, or furnish it to, the SEC. All such filings on ourwebsite are available free of charge. Unless we are required to do so by lawthe Company assumes no obligation to update or revise any forward-lookingstatements in this annual report on Form 10-K, whether as a result of newinformation, future events or otherwise.**

 

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**PART I**

 

**Item 1.****           Business**

 

We are a televisionbroadcasting company, focused on developing and operating small tomiddle-market television broadcast stations in the United States.  We presently own and operate sixmiddle-market stations and, as of March 8, 2005, have shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) to provide advertising, sales, promotion andadministrative services, and selected programming to two additional stationsowned by Malara Broadcast Group, all of which Granite and Malara stations areaffiliated with either ABC, NBC or CBS, our Big Three Affiliates. In addition,we presently own two stations operating in top ten markets affiliated with theWarner Brothers Television Network, our WB Affiliates.  As of March 8, 2005, in two of the eightmarkets that we serve, we own, operate, program or provide sales and otherservices to more than one station. All of the Big Three Affiliates are leadingproviders of local news, weather and sports in their respective markets. Allbut one of the television stations we own are operated through separatewholly-owned subsidiaries.

 

The following table setsforth general information for each of the television stations that we own,operate, program or provide sales and other services to, as of March 8,2005:

 
| **TV  Station**            | ** ** | **Market  Area**                        | ** ** | **DMA   Rank(1)(2)** | ** ** | **Network  Affiliation** | ** ** | **Status(3)** | ** ** | **Households(2)** | ** ** | **Channel/  Frequency** | ** ** | **Other   Commercial  Stations   in DMA (4)** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|----------------------|------------|--------------------------|------------|---------------|------------|-------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| KBWB-TV                    |       | San  Francisco - Oakland - San Jose, CA |       | 6                    |       | WB                       |       | O&O       |       | 2,360,000         |       | 20/UHF                  |       | 18                                            |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WDWB-TV                    |       | Detroit, MI                             |       | 10                   |       | WB                       |       | O&O       |       | 1,944,000         |       | 20/UHF                  |       | 7                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WKBW-TV                    |       | Buffalo, NY                             |       | 46                   |       | ABC                      |       | O&O       |       | 652,000           |       | 7/VHF                   |       | 8                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| KSEE-TV                    |       | Fresno- Visalia, CA                     |       | 58                   |       | NBC                      |       | O&O       |       | 528,000           |       | 24/UHF                  |       | 11                                            |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WTVH-TV                    |       | Syracuse, NY                            |       | 77                   |       | CBS                      |       | O&O       |       | 395,000           |       | 5/VHF                   |       | 6                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WISE-TV  (5)               |       | Fort Wayne, IN                          |       | 104                  |       | NBC                      |       | O&O       |       | 272,000           |       | 33/UHF                  |       | 4                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WPTA-TV  (5) (6) |       | Fort Wayne, IN                          |       | 104                  |       | ABC                      |       | LSA           |       | 272,000           |       | 21/UHF                  |       | 4                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| WEEK-TV                    |       | Peoria - Bloomington,  IL               |       | 117                  |       | NBC                      |       | O&O       |       | 242,000           |       | 25/UHF                  |       | 4                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| KBJR-TV                    |       | Duluth, MN - Superior,  WI              |       | 136                  |       | NBC                      |       | O&O       |       | 175,000           |       | 6/VHF                   |       | 5                                             |       |
|                       |       |                                    |       |                 |       |                     |       |          |       |              |       |                    |       |                                          |       |
| KDLH-TV  (6)               |       | Duluth, MN - Superior,  WI              |       | 136                  |       | CBS                      |       | LSA           |       | 175,000           |       | 3/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”).

 

(2)                                 Source:Nielsen Media Research (www.nielsenmedia.com). These DMA ranks are for the 2004-2005 television season which started onSeptember 20, 2004.

 

(3)                                  O&Orefers to stations that we own and operate. LSA, or local service agreement, isthe general term we use to refer to a contract under which we provide servicesto a station owned and/or operated by an independent third party. Local serviceagreements include shared services and advertising representation agreements.For further information regarding the LSAs to which we are party, see “RecentDevelopments.”

 

(4)                                  “OtherCommercial Stations” refers to television broadcast station and does notinclude non-commercial stations, public broadcasting stations, religiousstations, cable program services or networks or stations other than that weown.

 

(5)                                  OnMarch 7, 2005, we sold WPTA-TV, UHF Channel 21, the ABC affiliate servingFort Wayne, Indiana, to Malara. On March 8, 2005, we acquired WISE-TV, UHFChannel 33, the NBC affiliate serving Fort Wayne, Indiana, from New VisionGroup, L.L.C.

 

(6)                                 OnMarch 8, 2005, we entered into a strategic arrangement with MalaraBroadcast Group, under which we will provide advertising sales, 

 

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promotion and administrativeservices, and selected programming to Malara Broadcast Group-owned stationsWPTA-TV and KDLH-TV in return for certain fees that will be paid by MalaraBroadcast Group to us.

 

**RecentDevelopments**

** **

On March 7, 2005, wecompleted the sale of WPTA-TV, the ABC affiliate serving Fort Wayne, Indiana (“WPTA-TV”),to a subsidiary of Malara Broadcast Group for approximately $45.4 million,pursuant to the terms and conditions of an asset purchase agreement, dated April 23,2004.  In addition, on March 8, 2005, we completed the purchase ofWISE-TV, the NBC affiliate serving Fort Wayne, Indiana, from New Vision Group,LLC (“New Vision Television”) for approximately $43.5 million, pursuant to theterms and conditions of a stock purchase agreement, dated April 23, 2004.

 

In addition, a subsidiaryof Malara Broadcast Group on March 8, 2005, acquired CBS affiliateKDLH-TV, Duluth, Minnesota-Superior, Wisconsin (“KDLH-TV”) from New VisionTelevision and certain of its subsidiaries for approximately $9.5 million, pursuantto the terms and conditions of an asset purchase agreement, dated April 23,2004. We currently own and operate KBJR-TV, the NBC affiliate servingDuluth-Superior.

 

On March 8, 2005, weentered into a strategic arrangement with Malara Broadcast Group, under whichwe will provide advertising sales, promotion and administrative services, andselected programming to Malara Broadcast Group-owned stations WPTA-TV andKDLH-TV in return for certain fees that will be paid by Malara Broadcast Groupto us.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of borrowingspursuant to a Malara Broadcast Group credit agreement (the “Malara BroadcastGroup Senior Credit Facility”).  The Malara Broadcast Group Senior CreditFacility provides for two term loans totaling $48.5 million and a revolvingloan of $5 million.  The $23.5 million Malara Broadcast Group Term Loan Ais secured by a letter of credit.  To secure the reimbursement obligationsin the event of a draw on the letter of credit, we pledged $25 million of U.S.Government Securities.  To the****extent theTerm Loan A is amortized, the letter of credit shall be proportionately reducedand we shall be permitted to proportionately reduce the amount of the pledgedU.S. Government Securities.  The $25million Malara Broadcast Group Term Loan B and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on anunsecured basis by Granite Broadcasting Corporation.

 

We do not own MalaraBroadcast Group or its television stations. However, as a result of GraniteBroadcasting Corportion’s guarantee of the obligations incurred under MalaraBroadcast Group’s Senior Credit Facility with respect to the Term Loan B andthe revolving loan and due to our arrangements under the local serviceagreements and put or call option agreements, under Generally AcceptedAccounting Principles in the United States (“U.S. GAAP”), specifically,Financial Accounting Standards Board (“FASB”) Interpretation No. 46,Consolidation of Variable Interest Entities (“Interpretation 46”) we arerequired to consolidate Malara Broadcast Group’s financial position, results ofoperations and cash flows as of December 31, 2004. As we will continue toconsolidate WPTA-TV in accordance with the provisions of Interpretation 46, wewill not account for the sale of assets of WPTA-TV to Malara Broadcast Groupand no gain or loss will be recognized in the consolidated statements ofoperations.

 

**Operating Strategy**

 

We seek to increaseoperating profitability through the following strategies:

 

*Strategicallyrealign station group.*We actively seek strategic assetacquisitions and dispositions in order to increase net revenue.  Ideally, these transactions will result inoperating more than one television station in a market or geographic region,thereby enabling us to realize substantial near term cost savings and longerterm revenue enhancements.  Owning and/orproviding services to more than one station in a market is expected to enableus to enhance our revenue share, broaden our audience share and achievesignificant operating efficiencies through streamlining our overall coststructure in these markets.  Throughcontractual agreements with Malara Broadcast Group, as of March 8, 2005,we provide advertising, sales, promotion and administrative services, andselected programming to Malara Broadcast Group stations in two of our existingmarkets. Malara Broadcast Group is 100% owned by an independent third party. Inorder for both Malara Broadcast Group and us to continue to comply with FederalCommunications Commission (“FCC”) regulations, Malara Broadcast Group mustmaintain complete control over its own stations, including ultimate controlover all operations of the stations, such as programming, finances, andpersonnel.  In addition, we continue toexplore selling certain assets, including the WB stations which we believe havesignificant asset value due to their locations in the sixth and tenth largestDMAs.

 

*Emphasizelocal news, weather and sports. *Thetelevision stations that we own, operate, program or provide sales and otherservices to 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 stations 

 

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strong local newsdifferentiates us from other media alternatives and helps to attract a loyalaudience, which is appealing to advertisers. In addition, the cost of producing local news is generally lower thanthe cost of syndicated programming and incremental local news programming canbe added with relatively small increases in operating costs.

 

*Growlocal revenues.  *Thestations that we own employ highly skilled and experienced sales managers, withan average of 25 years of television advertising sales experience, who seek toincrease local advertising revenue through creative and unique salespropositions that appeal to the needs of local advertisers.  The commissioned sales teams consist ofbetween 8 and 12 account executives per station who utilize a sophisticatedinventory management system, conduct research and introduce special projects,all designed to develop new local business.

 

*Implementingand maintaining cost controls. *Weemphasize strict control of station operating expenses through a detailedannual budgeting and monthly forecasting process. We also maintain tightcontrol over staffing levels and capital expenditures.  Through the normal course of maintaining andupdating the stations’ technical operations and infrastructure, certainprocesses will be automated in order to reduce long term operating costs.  During 2004, we began to implement new costcontrol initiatives at our corporate and station levels. These cost controlinitiatives began at our Buffalo, New York station and corporate office, whichis expected to result in annualized savings of more than $850,000 and$2,000,000 per year, respectively. These new cost control initiatives arescheduled to be implemented at all of our stations during 2005 and 2006, and weplan to continually monitor and review each location to ensure we maintain ourcost controls. In developing the selection of syndicated programs, we evaluatea program’s cost and projected profitability and its potential relative toother programming alternatives.  Weanticipate our annual programming obligations to decrease at our Big Three andWB affiliates by 20% and 50%, respectively, in 2007 from our 2003 levels.

 

***TheStations and Markets***

* *

The stations that we ownand the stations to which we provide services under local services agreementsoperate in geographically diverse markets, which minimize the impact ofregional economic downturns.  Withrespect to the stations we own, as of March 8, 2005, two stations arelocated in the west region (KBWB—San Francisco, California and KSEE—Fresno,California), four stations are located in the mid-west region (WDWB— Detroit,Michigan, WEEK—Peoria, Illinois, WISE—Fort Wayne, Indiana and KBJR—Duluth,Minnesota) and two stations are located in the northeast region (WKBW—Buffalo,New York and WTVH— Syracuse, New York). As of March 8, 2005, four of theeight stations we own are affiliated with NBC, one is affiliated with ABC, oneis affiliated with CBS and two are affiliated with the WB Network.  Both of the stations to which we provideservices under local services agreements, as of March 8, 2005, are locatedin the mid-west region (WPTA-Fort Wayne, Indiana and KDLH-Duluth,Minnesota).  WPTA is affiliated with ABCand KDLH is affiliated with CBS.

 

**OwnedStations.**  Thefollowing is a description of each of the television stations we own, as of March 8,2005:

 

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

# ** **

KBWB commencedbroadcasting in 1968 and became a WB affiliate in 1995. We acquired KBWB fromPacific FM, Incorporated in July 1998. San Francisco-Oakland-San Jose is currently the 6th largestDMA in the country, comprising ten counties and approximately 2.4 milliontelevision households, according to Nielsen.

 

KBWB is a WB Networkaffiliate that attracts teens, young adults and families.  KBWB’s prime time line up includes popular WBprograms such as *Gilmore Girls, Smallville, Everwood, 7th Heaven,Charmed, One Tree Hill* and *Reba*.  The station’s syndicated programming includestalk-relationship shows such as *Jerry Springer and BlindDate*and situation comedies such as *Dharma andGregg,**King of the Hill,**The Drew Carey Show,**Home Improvement and FreshPrince of Bel-Air.*

 

The SanFrancisco-Oakland-San Jose DMA is one of the most ethnically diverse DMAs inthe country and almost half of its population is under 35 years of age, theyoung demographic targeted in part by the WB Network.  The Bay Area has the fourth highest EffectiveBuying Income, or EBI, with an average household EBI of $69,500, according toestimates provided by the BIA Investing in Television 2004 Market Report (the “BIAReport”).  Studies show Bay Arearesidents have the third-highest discretionary income in the UnitedStates.  The Bay Area economy is centeredon apparel, banking and finance, biosciences, engineering and architecture,high technology, telecommunications, tourism, and wineries.  Leading employers in the area include SafewaySupermarkets, Hewlett-Packard, Seagate Technology, The Gap, Intel, ChevronTexaco Corp., Oracle and Levi-Strauss. The Bay Area is also home to several universities, including theUniversity of California Berkeley, San Francisco State University, San JoseState University, Stanford University, Santa Clara University, University ofSan Francisco and California State University East Bay.

 

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

# ** **

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

 

 

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Detroit is currently the10th largest DMA in the country, comprising nine counties andapproximately 1.9 million television households.

 

WDWB is a WB Networkaffiliate that targets an audience of young adults, teens, families withchildren.  WDWB’s prime time line upincludes popular WB programs such as *7th Heaven,Everwood, Gilmore Girls, Smallville, One Tree Hill, Jack & Bobby,Charmed* and *Reba*.  The station’s syndicated programming includesprime time reality hit *Fear Factor,*relationshipshows such as *Blind Date, Cheaters* and *5th Wheel*, and situation comedies such as *Will & Grace, Home Improvement, Cheers*, *Fresh Prince of Bel-Air*and *Who’s theBoss.*

 

In October 2004, WDWBbecame the new broadcast home for the reigning NBA World Champions, the DetroitPistons. The multi-year deal includes game carriage, ancillary programs andspecials, promotional opportunities and community affairs projects.

 

The Detroit DMA is anethnically diverse DMA and almost half of its population is under 35 years ofage, the same demographic that is targeted by the WB Network.  Detroit ranks tenth in total EBI, with anaverage Detroit household EBI of $55,100, according to estimates provided inthe BIA Report.  Detroit also ranks thirdamong the top ten DMAs in percentage of Households Using Television, orHUT.  Well known as the home of the threemajor U.S. automobile manufacturers (General Motors, Ford and DaimlerChrysler), Detroit is also home to their advertising agencies (LCI Media,MindShare, and Pentamark/PHD/BBDO).  TheDetroit economy has increasingly diversified and headquarters many majorcompanies, as well as 60 hospitals, two world-renowned medical research centersand over 35 institutions of higher education. A large number of influential advertising agencies serve theseinstitutions, including Young & Rubicam, Doner, Maroch and Chiat/Dayand, as a leading voice in the Detroit market, WDWB has a high degree ofvisibility with all of them.

 

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

# ** **

WKBW commencedbroadcasting in 1958 and is an ABC Network affiliate.  We acquired WKBW from Queen CityBroadcasting, Incorporated in June 1995.

 

Buffalo is currently the46th largest DMA in the country, comprising ten counties andapproximately 652,000 television households.

 

WKBW has a strong newsorganization and broadcasts 6.5 hours of locally produced programming perweekday.  The station’s morning show, “AMBuffalo” is the only locally produced program of its kind in the market and hasbeen airing at 10 am for 25 years.  In September 2002,the station launched the market’s first locally produced information andentertainment program at 4:00 p.m. called “*PM Buffalo”*(formerly known as “*Western New York Live”)*,which is often the second most watched program in its time period. The station’ssyndicated programming includes shows such as *Live withRegis and Kelly,**Wheel of Fortune*and *Jeopardy*.  WKBW consistently achieves prime time ratingsthat are higher than the ABC prime time national average.

 

The Buffalo economy iscentered on manufacturing, government, health services and financialservices.  The average householdeffective buying income, or EBI, in the DMA was $39,700, according to estimatesprovided in the BIA Report.  Leadingemployers in the area include General Motors, Ford Motor Company, American Axleand Manufacturing, M&T Bank, HSBC Bank, Roswell Park Cancer Institute,Buffalo General Hospital, Tops Markets 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-Visalia iscurrently the 58th largest DMA in the country, comprising sixcounties and approximately 528,000 television households.

 

KSEE is a strong numbertwo news station which has been slowly gaining on the long-time news leaderKSFN, an ABC owned and operated station. KSEE broadcasts 5 hours of local newsper 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,**The Insider* and*Access Hollywood.*

 

The Fresno-Visalia marketis a diverse and growing populace which is expected to grow by 1.7% through2008. Although agriculture is the backbone of the market, new businesscontinues to expand to the market to take advantage of the growing population 

 

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and the low cost ofliving for a major California city. No single employer or industry dominatesthe local economy.  The average householdEBI in the DMA was $39,700, according to estimates provided in the BIAReport.  The Fresno-Visalia DMA is alsothe home of several universities, including California State University-Fresno.

 

*WTVH,Syracuse, New York*

 

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

 

Syracuse is currently the77th largest DMA in the country, comprising seven counties andapproximately 395,000 television households. The station’s prime timeprogramming generally ranks first or second in the adults’ 25-54 ratingscategory.

 

WTVH broadcasts 4.5 hoursof locally produced programming per weekday. In addition, WTVH broadcasts 1.5hours of news per day (7.5 hours per week) for WSYT (FOX) as part of a sharedservices agreement.  The station’ssyndicated programming includes shows such as *StartingOver*, *Wheel of Fortune and**Jeopardy.*

 

The Syracuse economy iscentered on manufacturing, education and health services,trade/transport/utilities and government. The average household EBI in the DMA was $40,800, according to estimatesprovided in the BIA Report.  Leadingemployers located in the area include SUNY Health Science Center, SyracuseUniversity, Wegmans, St. Joseph’s Hospital Health Center, Carrier Corporation,P&C Food Markets, Niagara Mohawk, Lockheed-Martin and Crouse Hospital.  The Syracuse DMA is also the home of severaluniversities, including Syracuse University, Cornell University, ColgateUniversity and SUNY Oswego.

 

*WISE,Fort Wayne, Indiana*

 

WISE commencedbroadcasting in 1953 and is an NBC affiliate. We acquired WISE from New Vision Television in March 2005.

 

Fort Wayne is currentlythe 104th largest DMA in the country, comprising twelve counties andapproximately 272,000 television households.

 

The station’s syndicatedprogramming includes shows such as *Live with Regis and Kelly,**Access Hollywood, The Insider and Friends.*

 

The Fort Wayne economy iscentered on manufacturing, healthcare, communications, insurance, financialservices and aerospace.  The averagehousehold EBI in the DMA was $45,100, according to estimates provided in theBIA Report.  Leading employers located inthe area include Lincoln National Life Insurance, General Electric, GeneralMotors, Sirva/North American Van Lines, Verizon, Dana, Uniroyal Goodrich andITT Aerospace.  Fort Wayne is also thehome of several universities, including the joint campus of Indiana Universityand Purdue University at Fort Wayne.  Twomajor hospital 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-Bloomingtonis currently the 117th largest DMA in the country, comprising tencounties and approximately 242,000 television households.  The station’s newscasts and prime timeprogramming rank number 1 in the adults 25-54 ratings category.

 

WEEK is the perennialmarket news leader, broadcasting 4.5 hours of local news per weekday andranking number one in every newscast and in every key time period.  For four of the last six years, the IllinoisBroadcaster’s Association has named WEEK Station of the Year. The station’ssyndicated programming includes shows such as *Dr. Phil,**Oprah,* and *Seinfeld*.

 

The Peoria economy iscentered on heavy equipment manufacturing and agriculture but has achieveddiversification with the growth of service-based industries such asconventions, healthcare and telecommunications. Prominent corporations located in Peoria include Caterpillar, CentralIllinois Light Company, Commonwealth Edison Company, Komatsu Mining Systems,and IBM. In addition, the United States Department of Agriculture’s secondlargest research facility is located in Peoria, and the area has become a majorregional healthcare center.

 

The economy ofBloomington is focused on insurance, education, agriculture and manufacturing.Leading employers located 

 

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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 of Medicine.  The average household EBI in the DMA was$46,300, 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, WIis currently the 136th largest DMA in the country, comprising twelvecounties and approximately 175,000 television households.  The station’s newscasts and prime timeprogramming generally rank number 1 in the adults 25-54 ratings category.

 

KBJR is a strongcompetitor in the market, broadcasting 3.5 hours of local news perweekday.  The station’s syndicatedprogramming includes shows such as *The Tony Danza Show*,*Dr. Phil, Jeopardy* and *Wheel of Fortune*.  We alsoown Channel 11 License, Inc., the licensee of television station KRII,Channel 11, Chisholm, Minnesota, a satellite station that transmits the signalof KBJR into the northern section of the DMA. Although KRII predominantlyrebroadcasts the KBJR signal, KRII broadcasts unique news and weather content,as well as certain commercials, separately to this region. KBJR also airsUnited Paramount Networks, or UPN, programming over its DTV signal that iscarried by virtually all cable operators in the DMA.

 

The area’s primaryindustries include mining, fishing, food products, paper, medical, shipping,tourism and timber.  The averagehousehold EBI in the DMA was $37,900, according to estimates provided in theBIA Report. Duluth is one of the major ports in the United States out of whichiron ore, coal, limestone, cement, grain, paper and chemicals are shipped.Duluth is also a regional banking, retail, medical and cultural center withleading employers including St. Mary’s/Duluth Clinic, St. Luke’s Hospital, Uniprise(United HealthCare), Allete (Minnesota Power), DM&IR (Duluth Mesabi andIron Range Railway Co.), Cirrus Design, Grandma’s Restaurants and the MinnesotaAir National Guard.  The Duluth-Superiorarea is also the home of numerous educational institutions such as theUniversity of Minnesota-Duluth, the University of Wisconsin-Superior and theCollege of St. Scholastica.

 

**Stationsowned by Malara Broadcast Group to which we provide services.**  The following is a description of each of thetelevision stations to which we provide services under local serviceagreements, as of March 8, 2005:

 

*WPTA,Fort Wayne, Indiana*

 

WPTA commencedbroadcasting in 1957 and is an ABC affiliate. Malara Broadcast Group acquired WPTA from us on March 7, 2005.  We entered into local services agreementswith respect to WPTA on March 8, 2005.

 

The station’s newscastsrank number 1 in the adults 25-54 ratings category.  WPTA has been the long-time news leader inthe market, broadcasting 4 hours of local news per weekday.   The station’s syndicated programmingincludes shows such as *Oprah,**Everybody Loves Raymond and Entertainment Tonight*.

 

Fort Wayne is currentlythe 104th largest DMA in the country, comprising twelve counties andapproximately 272,000 television households. See the description of television station WISE-TV above for additionalinformation on the Fort Wayne, Indiana area.

 

*KDLH,Duluth, Minnesota-Superior, Wisconsin*

 

KDLH commencedbroadcasting in 1954 and is a CBS affiliate. Malara Broadcast Group acquired KDLH from New Vision Television in March 2005.  We entered into local services agreementswith respect to KDLH on March 8, 2005.

 

The station’s syndicatedprogramming includes shows such *Montel Williams*,*Judge Judy*, *Oprah,Seinfeld**and Access Hollywood*.

 

Duluth, MN-Superior, WIis currently the 136th largest DMA in the country, comprising twelvecounties and approximately 175,000 television households.  See the description of television stationKBJR-TV above for additional information on the *Duluth,Minnesota-Superior, Wisconsin* area

 

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**Employees**

 

As of March 7,2005, we employed 699 persons, comprised of 683 full-time and 16 part-time ortemporary employees, of whom 256 are represented by three unions pursuant toagreements expiring at various times in 2005, 2006, 2007 and 2008.  We believe our relations with our employeesare good.

 

**NetworkAffiliation**

** **

The nature of atelevision station’s revenues, expenses and operations is largely dependent onwhether or not a station is affiliated with one of the major networks.  Affiliates of the major networks, whichinclude NBC, ABC, CBS and Fox, receive a significant portion of theirprogramming 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, fullyindependent stations purchase or produce all of their programming, resulting inhigher programming costs, but allowing independent stations to retain entireadvertising inventory and revenue. However, barter and cash-plus-barterarrangements are becoming increasingly popular. Under these arrangements, a national program distributor typicallyretains up to 50% of the available advertising time for programming itsupplies, in exchange for reduced fees for such programming from theindependent stations.

 

We have entered intoaffiliation agreements with networks for each of the stations we own.  KSEE, WEEK, WISE (acquired March 8,2005) and KBJR are affiliated with NBC, WKBW is affiliated with ABC, WTVH isaffiliated with CBS, and KBWB and WDWB stations are affiliated with WB.  WPTA, which we sold on March 7, 2005 toMalara Broadcast Group, is affiliated with ABC. With respect to the two stations that are owned by Malara BroadcastGroup to which, as of March 8, 2005, we provide services under localservices agreements, KDLH is affiliated with CBS and WPTA is affiliated withABC.

 

The affiliationagreements with the major networks provide the stations with the right tobroadcast all programs transmitted by the traditional network with which it isaffiliated. In exchange, the network has the right to sell a significant amountof 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 the affiliationagreements with the WB network, KBWB and WDWB each pays an affiliation fee forthe programming each station receives pursuant to its affiliation agreement.

 

The network affiliationagreements expire on the following dates:

 
| **Station** | ** ** | **Network  affiliation** | ** ** | **Status  (1)** | ** ** | **Affiliation  agreement  expiration date** |
|-------------|------------|--------------------------|------------|-----------------|------------|---------------------------------------------|
| WDWB        |       | WB                       |       | O&O         |       | May 31,  2007                          |
| WKBW        |       | ABC                      |       | O&O         |       | June 30,  2005                         |
| WPTA        |       | ABC                      |       | LSA (2), (3)    |       | July 3,  2005                          |
| WISE        |       | NBC                      |       | O&O (2)     |       | January 1,  2011                       |
| WTVH        |       | CBS                      |       | O&O         |       | December 31,  2005                     |
| KBWB        |       | WB                       |       | O&O         |       | January 9,  2008                       |
| KSEE        |       | NBC                      |       | O&O         |       | December 31,  2011                     |
| WEEK        |       | NBC                      |       | O&O         |       | December 31,  2011                     |
| KBJR        |       | NBC                      |       | O&O         |       | December 31,  2011                     |
| KDLH        |       | CBS                      |       | LSA (3)         |       | June 30,  2005                         |

 

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(1)            O&O refers tostations that we own and operate. LSA, or local service agreement, is thegeneral term we use to refer to a contract under which we provide services to astation owned and/or operated by an independent third party. Local serviceagreements include shared services and advertising representationagreements.  For further informationregarding the LSAs to which we are party, see “Recent Developments.”

 

(2)            On March 7, 2005,we sold WPTA-TV, UHF Channel 21, the ABC affiliate serving Fort Wayne, Indiana,to Malara Broadcast Group. On March 8, 2005, we acquired WISE-TV, UHFChannel 33, the NBC affiliate serving Fort Wayne, Indiana, from New VisionGroup, L.L.C.

 

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(3)            On March 8, 2005,we entered into a strategic arrangement with Malara Broadcast Group, underwhich we will provide advertising sales, promotion and administrative services,and selected programming to Malara Broadcast Group-owned stations WPTA-TV andKDLH-TV in return for certain fees that will be paid by Malara Broadcast Groupto us.

 

Under each of theaffiliation agreements, the networks may terminate the agreement upon advancewritten notice under the circumstances specified in the agreements.  Under the ownership of the Company or MalaraBroadcast Group, none of the stations that we own, operate, program or providesales and other services to has received a termination notice from itsrespective network.  We have no reason tobelieve that the network affiliation agreements will not be renewed when theyexpire.

 

**IndustryOverview**

** **

Commercial televisionbroadcasting began in the United States on a regular basis in the 1940s.  Currently, there are a limited number ofchannels available for broadcasting in any one geographic area and the license tooperate 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 over televisionstations that broadcast over the ultra-high frequency, or UHF, band of thespectrum because VHF stations usually have better signal coverage and operateat a lower transmission cost. In television markets in which all local stationsare UHF stations, such as Fort Wayne, Indiana, Peoria-Bloomington, Illinois andFresno- Visalia, California, there is no competitive disadvantage tobroadcasting over a UHF band.

 

Television stationrevenues are primarily derived from local, regional and national advertisingand, to a lesser extent, from network compensation and revenues from studiorental and commercial production activities. Advertising rates are based upon a program’s popularity among theviewers an advertiser wishes to attract, the number of advertisers competingfor the available time, the size and demographic make-up of the market servedby the station, and the availability of alternative advertising media in themarket area. Because broadcast television stations rely on advertisingrevenues, declines in advertising budgets, particularly in recessionaryperiods, adversely affect the broadcast industry, and as a result maycontribute to a decrease in the value of broadcast properties.

 

**Competition**

** **

The financial success ofour television stations is dependent on audience ratings and advertisingrevenues 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 mailand local cable systems.  Somecompetitors are part of larger companies with substantially greater financialresources than us.

 

Competition in the broadcastingindustry occurs primarily in individual markets. Generally, a televisionbroadcasting station in one market does not compete with stations in othermarket areas.  Our television stationsare located in highly competitive markets.

 

A television station’sability to successfully compete in a given market depends upon several factors,including:

 

•                  managementexperience;

 

•                  signalcoverage;

 

•                  localprogram acceptance;

 

•                  networkaffiliation;

 

•                  audiencecharacteristics;

 

•                  assignedfrequency; and

 

•                  strengthof local competition.

 

The broadcasting industryis continuously faced with technological change and innovation, the possiblerise in popularity of competing entertainment and communications media, andchanges in labor conditions, any of which could have an adverse effect on ouroperations and results.  For example,digital video recorders, which permit consumers to digitally record televisionprogramming and then play back that programming, often without commercialadvertisement, are increasing in popularity and could have an adverse 

 

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effect on the our abilityto generate advertising revenue.

 

Alternate programming,entertainment and video distribution systems can increase competition for a broadcastingstation by bringing distant broadcasting signals into its market which are nototherwise available to the station’s audience and also by serving asdistribution systems for non-broadcast programming.  Programming is now being distributed to cabletelevision systems by both terrestrial microwave systems and by satellite.  Our stations also compete with homeentertainment systems, including video cassette recorders and playback systems,video discs and television game devices, the Internet, multi-point distributionsystems, multi-channel multi-point distribution systems, video programmingservices available through the Internet and other video delivery systems.

 

Our television stationsalso face competition from direct broadcast satellite services which transmitprogramming directly to homes equipped with special receiving antennas and fromvideo signals delivered over telephone lines. Satellites may be used not onlyto distribute non-broadcast programming and distant broadcasting signals butalso to deliver local broadcast programming which otherwise may not beavailable to a station’s audience.  Ourstations may also face competition from wireless cable systems, includingmulti-channel distribution services, or MDS. Two four-channel MDS licenses have been granted in most televisionmarkets.  MDS operations can providecommercial programming on a paid basis. A similar service also can be offered using the instructional televisionfixed service, or ITFS.  The FCC allowsthe educational entities that hold ITFS licenses to lease their excess capacityfor commercial purposes.  Themulti-channel capacity of ITFS could be combined with either an existing singlechannel MDS or a newer multi-channel multi-point distribution service toincrease the number of available channels offered by an individual operator.

 

In addition, videocompression techniques, now in use with direct broadcast satellites and indevelopment for cable, are expected to permit a greater number of channels tobe carried within existing bandwidth. These compression techniques, as well asother technological developments, are applicable to all video delivery systems,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 unable to predictthe effect that these or other technological changes will have on our businessor 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 theprohibition on the provision of cable television services by telephonecompanies in their own telephone areas subject to regulatory safeguards andpermits telephone companies to own cable systems under certaincircumstances.  We cannot predict theimpact of any future relaxation or elimination of the existing limitations onthe ownership of cable systems by telephone companies on the stations.  The elimination or further relaxation of therestriction, however, could increase the competition the stations face fromother distributors of video programming.

 

**FCCRegulation of Television Broadcasting**

** **

Television broadcastingis subject to the jurisdiction of the FCC under the Communications Act of 1934,as amended.  The Communications Actprohibits the operation of television broadcasting stations except under alicense issued by the FCC and empowers the FCC to issue, revoke and modifybroadcasting licenses, determine the locations of stations, regulate theequipment used by stations, adopt regulations to carry out the provisions ofthe Communications Act and impose penalties for violation of such regulations.  The Telecommunications Act of 1996 wasenacted on February 8, 1996 and amends major provisions of theCommunications Act.

 

*License Issuance and Renewal*

 

Television broadcastinglicenses are typically granted and renewed for a period of eight years, but maybe renewed for a shorter period upon a finding by the FCC that the “publicinterest, convenience and necessity” would be served by a license for a shorterperiod. When a station applies for renewal of its television license, partiesin interest as well as members of the public may apprise the FCC of the servicethe station has provided during the preceding license term and urge the grantor denial of the renewal application.  Acompeting application for authority to operate a station and replace theincumbent licensee may not be filed against a renewal application andconsidered by the FCC in deciding whether to grant a renewal application.

 

The FCC grants a renewalapplication upon a finding that the licensee:

 

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•                hasserved the public interest, convenience, and necessity;

 

•                hascommitted no serious violations of the Communications Act or the FCC’s rules;and

 

•                hascommitted no other violations of the Communications Act or the FCC’s rules whichwould constitute a pattern of abuse.

 

If the FCC cannot makethis finding, it may deny a renewal application, and accept other applicationsto operate the station of the former licensee. In the vast majority of cases, the FCC renews broadcast licenses evenwhen petitions to deny are filed against broadcast license renewalapplications.  All of our existinglicenses are in effect and are subject to renewal during 2005, 2006 and2007.  The main station licenses for ourtelevision stations expire on the following dates:

 
| **Station** | ** ** | **Status(1)** | ** ** | **License  expiration date** |
|-------------|------------|---------------|------------|------------------------------|
| WPTA        |       | LSA (2)(4)    |       | August 1, 2005          |
| WISE        |       | O&O (2)   |       | August 1, 2005          |
| WDWB        |       | O&O       |       | October 1, 2005         |
| WEEK        |       | O&O       |       | December 1, 2005        |
| KBJR        |       | O&O       |       | December 1, 2005        |
| KRII (3)    |       | O&O       |       | April 1, 2006           |
| KDLH        |       | LSA (4)       |       | April 1, 2006           |
| KSEE        |       | O&O       |       | December 1, 2006        |
| KBWB        |       | O&O       |       | December 1, 2006        |
| WTVH        |       | O&O       |       | June 1, 2007            |
| WKBW        |       | O&O       |       | June 1, 2007            |

 

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(1)                                 O&Orefers to stations that we own and operate. LSA, or local service agreement, isthe general term we use to refer to a contract under which we provide servicesto a station owned and/or operated by an independent third party. Local serviceagreements include shared services and advertising representation agreements.For further information regarding the LSAs to which we are party, see “RecentDevelopments.”

 

(2)                                 OnMarch 7, 2005, we sold WPTA-TV, UHF Channel 21, the ABC affiliate servingFort Wayne, Indiana, to Malara Broadcast Group. On March 8, 2005, weacquired WISE-TV, UHF Channel 33, the NBC affiliate serving Fort Wayne,Indiana, from New Vision Group, L.L.C.

 

(3)                                  KRII, Channel 11, Chisholm,Minnesota, is a satellite station that transmits the signal of KBJR into thenorthern section of 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 UPN programming over its DTV signalthat is carried by virtually all cable operators in the DMA.

 

(4)                                 OnMarch 8, 2005, we entered into a strategic arrangement with MalaraBroadcast Group, under which we will provide advertising sales, promotion andadministrative services, and selected programming to Malara BroadcastGroup-owned stations WPTA-TV and KDLH-TV in return for certain fees that willbe paid by Malara Broadcast Group to us.

 

Although there can be noassurances that our licenses will be renewed, we are not aware of any facts orcircumstances that would prevent us from having our licenses renewed.

 

*Ownership Restrictions*

 

The Communications Actalso prohibits the assignment of a license or the transfer of control of alicensee without prior approval of the FCC. In its review process, the FCC considers financial and legalqualifications of the prospective assignee or transferee and also determineswhether the proposed transaction complies with rules limiting the commonownership of certain attributable interests in broadcast, cable, and newspapermedia on a local and national level.  TheFCC’s restrictions on multiple ownership could limit the acquisitions andinvestments that we make or the investments other parties make in us.  However, none of our officers, directors orholders of voting common stock currently has attributable or non-attributableinterests that violate the FCC’s ownership rules currently in effect. Asdiscussed below, the FCC released a comprehensive media ownership order on July 2,2003 in which it revised many of its media ownership rules followingcompletion of a biennial review proceeding commenced in 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 theConsolidated Appropriations Act of 2004, which, among other things, amended Section 202(h) ofthe Telecommunications Act of 1996 to provide that the FCC need only conductits regular reviews of its media ownership rules on a quadrennial, ratherthan biennial, basis.

 

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On June 2, 2003, theFCC modified its media ownership rules. The revised media ownership rules were to become effective on September 4,2003.  However, on September 3,2003, the U.S. Court of Appeals for the Third Circuit stayed the effectivenessof the new rules.  On June 24, 2004,the Third Circuit issued a decision finding virtually all of the modified mediaownership rules without support and remanding the proceeding back to theFCC for further consideration.  The stayof the modified media ownership rules remains in effect pending the FCC’sreview on remand except with respect to the FCC’s revised definition of localradio market.  The modified mediaownership rules also are subject to pending petitions for reconsiderationfiled with the FCC.  In addition, on January 31,2005, the National Association of Broadcasters and several industry partiesrequested the United States Supreme Court to review the Third Circuit’sdecision.  The request for Supreme Courtreview remains pending.  We are unable topredict the eventual outcome of the reconsideration petitions, the outcome ofthe FCC’s review on remand, whether the Supreme Court will hear the appeal, orthe outcome of any Supreme Court review. We are unable to predict the potential effect any changes would have onour business.

 

*Attribution*

 

Ownership of televisionlicensees is attributed to officers, directors and shareholders who own 5% ormore of the outstanding voting stock of a licensee, except that certaininstitutional investors who exert little or no control or influence over alicensee may own up to 20% of a licensee’s outstanding voting stock beforeattribution results.  Under the FCC’s “equity-debtplus” rule, a party’s interest will be deemed attributable if the party ownsequity, including all stockholdings, whether voting or non-voting, common orpreferred, and debt interests, in the aggregate, exceeding 33% of the totalasset value, including debt and equity, of the licensee and it either provides15% of the station’s weekly programming or owns an attributable interest inanother broadcast station, cable system or daily newspaper in the samemarket.  In contrast, debt instruments,non-voting stock and certain limited partnership interests, provided the licenseecertifies that the limited partners are not materially involved in themedia-related activities of the partnership, will not result in attribution.

 

# **In December 2000, the FCCrevised its rules to eliminate the single majority shareholder exceptionfrom the broadcast attribution rules.  Underthat exception, the interest of a minority voting shareholder would not beattributable if one person or entity held more than 50% of the combined votingpower of the common stock company holding or controlling a broadcast license.  Any minority voting stock interest in acompany with a single majority shareholder was grandfathered asnon-attributable if the interest was acquired before December 14, 2000.The FCC’s decision eliminating the single majority shareholder exception as itapplies to cable system ownership was appealed to the United States Court ofAppeals for the District of Columbia Circuit, and in March 2001, the courtreversed the FCC’s decision and remanded the case to the FCC.  In December 2001, the FCC suspended itsrepeal of the single majority shareholder exception for broadcast attributionrules, effectively reinstating the exception, until it could act on the courtremand.  As a result, the single majorityshareholder exception from the broadcast attribution rules currently is ineffect.  The media ownership orderreleased by the FCC on July 2, 2003, did not address the majorityshareholder exception.**

# ** **

In addition, for purposesof its national and local multiple ownership rules, the FCC attributes localmarketing agreements in which the broker provides more than 15% of the brokeredstation’s weekly program time.  Thismeans that, if an entity owns one television station in a market and has aqualifying local marketing agreement with another station in the same market,this arrangement must comply with all of the FCC’s ownership rules includingthe television duopoly rule. Local marketing agreements entered into prior to November 5,1996 are grandfathered until the FCC initiates a future proceeding when theirstatus will be reviewed on a case by case basis.  Local marketing agreements entered into on orafter November 5, 1996 were grandfathered temporarily until August 2001only.  We do not operate any stationspursuant to a grandfathered local marketing agreement.

 

In its recent media ownershiporder, the FCC concluded that a radio joint advertising sales agreement inwhich a same-market radio station was the broker for more than 15 percent ofthe brokered radio station’s weekly advertising time would constitute anattributable interest for the broker in the brokered radio station.  As a result, the FCC would count the brokeredradio station towards the broker’s permissible ownership totals under therevised radio ownership rules.  The FCCdid not attribute same-market joint sales agreements for television stations inits media ownership order. However, on August 2, 2004, the FCC initiated aproceeding to seek comment on whether to attribute same-market television jointsales agreements.  We cannot predictwhether the FCC will decide to attribute television joint sales agreements.

 

The Company has enteredinto shared services and advertising representation agreements with MalaraBroadcast Group of Duluth Licensee LLC, the licensee of television stationKDLH, Duluth, Minnesota, and Malara Broadcast Group of Fort Wayne Licensee LLC,the licensee of television station WPTA, Fort Wayne, Indiana.  Under these agreements, the Company providesup to 15% of the stations’ weekly programming and also sells all of thestations’ available advertising time.  Apetition to deny the Malara application to acquire KDLH was filed with the FCCjointly by two competing television station licensees in the Duluthmarket.  On December 14, 2004, theFCC’s Media Bureau (“Bureau”) released a decision in which it denied the jointpetition and consented to the assignment of KDLH’s license to Malara.  In reaching this decision, the Bureaudetermined the agreements do not give the Company *de facto*control of KDLH or result in the Company’s having an attributable interest inKDLH under the FCC’s existing attribution 

 

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rules.  In January 2005, the petitioningbroadcasters filed an application for review seeking Commission-level review ofthe Bureau’s decision.  Malara filed anopposition to the application for review, and the petitioning broadcastersfiled a response to that opposition.  TheFCC has not yet ruled on the application for review.  Although we believe that the application forreview is without merit and anticipate that the FCC will affirm the grant ofthe assignment application for KDLH, it is not possible to predict how the FCCwill rule on the application for review. It also is not possible to predict any remedial action that may beimposed by the FCC in the event that it grants the application for review.  FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, L.L.C., or a sale byMalara of its ownership of KDLH.

 

*National Ownership Rules*

 

Prior to the 2002biennial 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 June 2, 2003 mediaownership order, the FCC raised the national ownership cap from 35% to 45% andmaintained the UHF discount.  Thesedecisions were appealed before the Third Circuit and, as a result, the revised rules werestayed pending the court’s review.  However,the Consolidated Appropriations Act of 2004 amended Section 202(c) ofthe Telecommunications Act of 1996 by increasing the national ownership cap to39 percent.  This statute furtherprovides that the national ownership cap is not subject to the same quadrennialreview process as the Commission’s other media ownership rules.  As a result, the Third Circuit determinedthat challenges to the FCC’s decision to raise the cap to 45% and to retain theUHF discount were rendered moot.  Priorto the Third Circuit’s June 24, 2004 decision, on February 19,2004,  the FCC  sought comment on whether to modify oreliminate the UHF discount.  The court’sdecision did not foreclose further FCC consideration of the UHF discount, butthe FCC has not yet taken action on the comments it received.  We are unable to predict the outcome of  this proceeding.

 

*Television Duopoly Rule*

 

Prior to the 2002biennial 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 subsequentlyfalls below eight, or if either of the two jointly-owned stations later isranked among the top four stations in the market; however, the multipletelevision station owner can sell the television combination to a third partyonly if the joint ownership is in compliance with the duopoly rule at thetime of the sale to the third party.

 

The FCC revised theduopoly rule in the media ownership order. Pursuant to the revised duopoly rule, a single entity may own anattributable interest in two television stations in the same designated marketarea provided that one of the stations is not among the top-four rated stationsin the market based on audience share.  Astation’s rank is determined by using the station’s most recent all-dayaudience share, as measured by Nielsen, at the time the transfer or assignmentapplication is filed with the FCC.  Inaddition, the media ownership order provides that an entity may own anattributable interest in three television stations in the same designatedmarket area if the proposed acquisition does not involve one of the top-fourrated stations and there are at least 18 independent television station voicesin the designated market area.  Under therevised duopoly rule, the multiple television station owner can sell thetelevision combination to a third party only if the joint ownership is incompliance with the revised duopoly rule at the time of the sale to thethird party. Both commercial and non-commercial broadcast television stationsare counted to determine the number of television stations that are in adesignated market area.

 

Under its previous rules,the FCC could grant a waiver of the television duopoly rule if one of thetwo television stations was a failed or failing station, if the proposedtransaction would result in the construction of an unbuilt television stationor if compelling public interest factors were present, provided that a waiverapplicant 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, atthe 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.

 

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Prior to the 2002biennial review, satellite stations authorized to rebroadcast the programmingof a parent station located in the same designated market area were exempt fromthe duopoly rule.  The FCC retained thissatellite exemption in the media ownership order.  As a result, our common ownership of KBJR andKRII is fully consistent with the television duopoly rule under theprevious or modified rules.

 

On June 24, 2004,the FCC’s media ownership order, including revisions made to the duopoly rule,was remanded back to the FCC for further consideration by the U.S. Court ofAppeals for the Third Circuit.  Pursuantto the stay issued by the Third Circuit, the FCC’s previous duopoly rule andwaiver standard remain in effect pending the FCC’s review on remand.  We are unable to predict the  outcome of the FCC’s consideration of itsmedia ownership rules on remand..

 

*Cross-Ownership Rules*

 

The FCC’s rules previouslyprohibited the holder of an attributable interest in a television station fromalso holding an attributable interest in a cable television system serving acommunity located within the coverage area of that television station. On February 26,2003, the FCC released an order repealing the broadcast/cable cross-ownershiprule, pursuant to a 2002 United States Court of Appeals for the District ofColumbia Circuit decision vacating the FCC’s previous broadcast/ cablecross-ownership rule.

 

Prior to the 2002biennial review, the FCC’s broadcast/newspaper cross-ownership rule furtherprohibited the common ownership of a broadcast television station and a dailynewspaper in the same local market.  TheFCC’s radio/television cross-ownership rule also restricted the commonownership of television and radio stations in the same market.  Under the previous rules, one entity couldown up to two television stations and six radio stations in the same marketprovided that:

 

•                  20independent media voices, including certain newspapers and a single cablesystem, would remain in the relevant market following consummation of theproposed transaction, and

 

•                  theproposed combination would be consistent with the television duopoly and localradio ownership rules.

 

If fewer than 20 but morethan 9 independent media voices would remain in a market following a proposedtransaction, and the proposed combination was otherwise consistent with the FCC’srules, a single entity could hold attributable interests in up to twotelevision stations and up to four radio stations.  If neither of these “independent media voice”tests was met, a party generally could have an attributable interest in no morethan one television station and one radio station in a market.

 

The FCC revised itscross-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 andthe prior radio/television cross-ownership rule.  The new cross-media ownership rules permitcross-media combinations according to the number of television stations withina market.  In markets with nine or moretelevision stations, there are no cross-media ownership limits.  In markets with between four and eighttelevision stations, one of the following combinations is permitted:

 

•                  adaily newspaper, one television station, and up to half of the radio stationlimit for that market;

 

•                  adaily newspaper and up to the radio station limit for that market; or

 

•                  twotelevision stations and up to the radio station limit for that market.

 

In markets with three orfewer television stations, no cross-ownership among television, radio, andnewspapers is permitted; however, an entity may obtain a waiver of this ban byshowing that the television station and the cross-owned media do not serve thesame area.  In addition, the new rule definesthe local market according to the number of television stations within thearea, not independent voices.

 

On June 24, 2004,the FCC’s media ownership order, including revisions made to thecross-ownership rules, was remanded back to the FCC for further considerationby the U.S. Court of Appeals for the Third Circuit.  Pursuant to a stay issued by the ThirdCircuit, the FCC’s previous cross-ownership rules remain in effect pendingthe FCC’s review on remand.  We areunable to predict the outcome of the FCC’s consideration of its media ownershiprules on remand.

 

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*Antitrust Review*

 

The Department of Justiceand the Federal Trade Commission have the authority to determine that atransaction presents antitrust concerns. These agencies have increased their scrutiny of the television and radioindustries, and have indicated their intention to review matters related to theconcentration of ownership within markets, including local marketingagreements, even when the ownership or local market agreement in question ispermitted under the regulations of the FCC. In March 2002, the Department of Justice and Federal Trade Commissionreached an agreement through which the Department of Justice would assumeprimary control over all merger reviews in the media and entertainmentindustries, however, the Senate Commerce committee has stated an intention toformally review this decision to assign media mergers to the Department ofJustice.  There can be no assurance that future policy and rulemaking activities ofthe Antitrust Agencies will not impact our operations.

 

*Alien Ownership*

 

Foreign governments,representatives of foreign governments, non-citizens, representatives ofnon-citizens, and corporations or partnerships organized under the laws of aforeign nation are barred from holding broadcast licenses.  Non-citizens, however, may own up to 20% ofthe capital stock of a licensee and up to 25% of the capital stock of a UnitedStates corporation that, in turn, owns a controlling interest in alicensee.  A broadcast license may not begranted 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-citizensmay serve as officers and directors of a broadcast licensee and any corporationcontrolling, directly or indirectly, such licensee.  As a result, we are restricted by theCommunications Act from having more than one-fourth of our capital stock ownedby non-citizens, foreign governments or foreign corporations, but not fromhaving an officer or director who is a non-citizen.

 

*Equal Employment Opportunity*

 

On November 20,2002, the FCC released a new set of equal employment opportunity rules whichbecame effective on March 10, 2003. The new rules require us tocomply with certain recruiting, outreach, record keeping and reportingrequirements in addition to complying with the general prohibition againstemployment discrimination.  On February 6,2003, interested parties filed a joint petition for partial reconsideration ofthe FCC’s new rules, which remains pending. In addition, on June 4, 2004, the FCC released an order reinstatingthe requirement that certain stations prepare and file annual employmentreports with the FCC and seeking comment on whether employment data submittedto the FCC should be withheld from public inspection.  On July 23, 2004, interested partiesfiled a joint petition for reconsideration or clarification of thisrequirement.  We are unable to predictthe resolution of the petitions for reconsideration.  The new rules remain in effect pendingthe resolution of these petitions for reconsideration.

 

*Indecency*

 

In 2004, the FCC imposedsubstantial fines on television broadcasters for the broadcast of indecentmaterial in violation of the Communications Act and its rules. The FCC alsorevised its indecency review analysis to more strictly prohibit the use ofcertain language on  television stations.Because our and Malara Broadcast Group’s stations’ programming is in large-partcomprised of programming provided by the networks with which the stations areaffiliated, we and Malara Broadcast Group do not have full control over what isbroadcast on our stations, and we and Malara Broadcast Group may be subject tothe imposition of fines if the FCC finds such programming to be indecent. Inaddition, Congress currently is considering legislation that will substantiallyincrease the maximum amount the FCC can fine broadcasters for the broadcast ofindecent programming and may consider permitting the FCC to institute licenserevocation proceedings against any station which repeatedly violates theindecency regulations.

 

*Must Carry/Retransmission Consent*

 

The Cable TelevisionConsumer Protection and Competition Act of 1992, or Cable Act, and the FCC’simplementing regulations give television stations the right to control the useof their signals on cable television systems. Under the Cable Act, at three year intervals beginning in June 1993,every qualified television station is required to elect whether it wants toavail itself of must-carry rights or, alternatively, to grant retransmissionconsent.  Whether a station is qualifieddepends on factors such as the number of activated channels on a cable system,the location and size of a cable system, the amount of duplicative programmingon a broadcast station and the signal quality of the station at the cablesystem’s head end.  If a television stationelects retransmission consent, cable systems are required to obtain the consentof that television station for the use of its signal and could be required topay the television station for such use. The Cable Act further requires mandatory cable carriage of all qualifiedlocal television stations electing their must-carry rights or not exercisingtheir retransmission rights.  Under theFCC’s rules, television stations were required to make their latest periodicelection between must-carry and retransmission consent status by October 1,2002, for the period from January 1, 2003 through December 31,2005.  Television stations that failed tomake an election by the specified deadline are deemed 

 

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to have electedmust-carry status for the relevant three-year period.  For the three year period beginning January 1,2003, each of our stations has either elected its must-carry rights, enteredinto retransmission consent agreements, or obtained an extension to permit usto continue negotiating a retransmission consent agreement with substantiallyall cable systems in its designated market area.

 

On February 25,2005, the FCC released an order resolving the scope of the cable systems’carriage obligations with respect to digital broadcast signals during andfollowing the national transition from analog to digital television, or DTV,service.  In its order, the FCC affirmedits earlier tentative conclusion that broadcasters will not be entitled tomandatory carriage of both their analog and DTV signals.  In addition, the FCC affirmed its priordetermination that cable operators are not required to carry more than a singledigital programming stream from a DTV broadcast station.  As a result, cable systems are required tocarry only the primary DTV programming streams of each of our stations.  However, our stations remain free tonegotiate for carriage of additional DTV programming streams on cable systems.

 

*Satellite Home Viewer Improvement Act and Satellite Home ViewerExtension Reauthorization Act*

 

Under the Satellite HomeViewer Improvement Act, or SHVIA, a satellite carrier generally must obtainretransmission consent before carrying a television station’s signal.Specifically, SHVIA:

 

•                  providesa statutory copyright license to enable satellite carriers to retransmit alocal television broadcast station into the station’s local market;

 

•                  permitsthe continued importation of network signals that originate outside of asatellite subscriber’s local television market or designated market areas forcertain existing 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 markets are definedin SHVIA to include both a station’s designated market area and its county oflicense.

 

SHVIA permits satellitecarriers to provide distant or nationally broadcast programming to subscribersin “unserved” households.  Households areunserved by a particular network if they do not receive a signal of at least aspecified intensity from a station affiliated with that network or may qualifyas unserved pursuant to other limited circumstances.  However, satellite television providers canretransmit the distant signals of no more than two stations per day for eachtelevision network.  As of January 1,2002, a satellite carrier retransmitting the signal of any local broadcaststation into the station’s local market generally must carry all stationslicensed to the carried station’s local market upon request. The portion ofSHVIA that grants satellite carriers a compulsory copyright license to providedistant network signals to unserved households was set to expire at the end of2004. On December 8, 2004, the President signed into law the SatelliteHome Viewer Extension Reauthorization Act of 2004, or SHVERA.  SHVERA reauthorizes and extends the term ofthe satellite compulsory copyright license to December 31, 2009.  In addition, among other things, SHVERA:

 

•                  permitsthe importation of network digital signals that originate outside of asatellite subscriber’s local television market or designated market area forcertain eligible subscribers; and

 

•                  enablessatellite carriers to offer “significantly viewed” analog and digitaltelevision signals pursuant to the satellite compulsory license to subscribersunder certain circumstances.

 

The FCC has initiated anumber of proceedings in order to implement the provisions of SHVERA.  First, on January 25, 2005, the FCCinitiated an inquiry to seek comment on the impact that the FCC’s currentretransmission consent, network nonduplication, syndicated exclusivity, andsports blackout rules have on competition in the market for delivery ofmultichannel video programming.  The FCCmust issue a report to Congress by September 8, 2005 regarding itsconclusions in this inquiry.  Second, theFCC commenced a proceeding on February 7, 2005, seeking comment onproposed rules to implement the provisions of SHVERA regardingsignificantly-viewed signals.  Lastly, onMarch 7, 2005, the FCC released a notice of proposed rulemaking requestingcomment on implementation of the provisions of SHVERA imposing reciprocal goodfaith bargaining obligations on broadcasters and multichannel video programmingdistributors, such as satellite carriers. We are unable to predict the outcome of these FCC proceedings.

 

Pursuant to the satellitecompulsory license, satellite carriers have begun to offer local broadcastsignals to subscribers in some of the nation’s large and mid-sized televisionmarkets.  As of March 2005,satellite carriers DirecTV and EchoStar both carried the signals of ourstations KBWB, WDWB, WKBW, KSEE and KBJR.

 

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*Digital Television*

 

Pursuant to theTelecommunications Act of 1996, the FCC has adopted rules authorizing andimplementing digital television, or DTV, service, technology that shouldimprove the quality of both the audio and video signals of television stations.The FCC has “set aside” channels within the existing television spectrum forDTV and limited initial DTV eligibility to existing television stations andcertain applicants for new television stations. The FCC has adopted a DTV table of allotments as well as service andlicensing rules to implement DTV service. The DTV allotment table provides a channel for DTV operations for eachexisting broadcaster and is intended to enable existing broadcasters toreplicate their existing analog service areas. The affiliates of CBS, NBC, ABC and Fox in the ten largest U.S.television markets were required to initiate commercial DTV service with adigital signal by May 1, 1999. Affiliates of these networks located in the 11th through the 30thlargest U.S. television markets were required to begin DTV operation by November 1,1999.  All other commercial stations wererequired to construct DTV facilities by May 1, 2002.  In November 2001, the FCC modified itsdigital television transition rules in an effort to ease the burden of therequired build out. Among other changes, the FCC relaxed its build outrequirements by allowing stations to seek special temporary authorizations toconstruct the minimum DTV facilities required to serve their respectivecommunity of license.  Stations operatingpursuant to such special temporary authorizations are considered to have mettheir respective DTV construction deadline.

 

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

 

•                  oneor more of the stations in the station’s market licensed to or affiliated withone of the top four largest national television networks are not broadcasting adigital television signal, and the FCC finds that each such station hasexercised due diligence and satisfies the conditions for an extension of theapplicable construction deadlines for digital television service in thatmarket;

 

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

 

•                  15%or more of the television households in the station’s market either, do notsubscribe to a multi-channel video programming distributor that carries the DTVchannels offered in that market; or do not have either at least one televisionreceiver capable of receiving DTV service or at least one television receiverof analog service signals equipped with digital-to-analog converter technology.

 

On September 7,2004, the FCC completed its second periodic review of its rules andpolicies affecting the national transition to digital television.  In the order, the FCC established deadlinesby which DTV stations are required to replicate their respective analog serviceareas.  DTV stations in the top 100television markets which are affiliated with the top-four networks (*i.e.*, ABC, CBS, Fox, and NBC) are required to replicatetheir respective analog service areas by July 1, 2005, or risk losinginterference protection to their unreplicated service areas.  All other DTV stations must replicate theirrespective analog service areas by July 1, 2006, or risk losinginterference protection to their unreplicated service areas.  In addition, in the second periodic revieworder, the FCC instituted a DTV channel election process under which televisionstations, including satellite television stations, must select the DTV channelon which they plan to operate digitally at the end of the DTV transitionperiod.  This DTV channel electionprocess is being implemented in several rounds. The first round of DTV channel elections occurred on February 10,2005.  The second round of DTV channelelections has been tentatively scheduled to occur in July 2005.  Following the conclusion of the final roundof DTV channel elections, the FCC will issue a new DTV table of allotments.

 

The FCC also has adopted rules thatpermit DTV licensees to offer ancillary or supplementary services on their DTVchannels under certain circumstances. The FCC rules further require DTV licensees to pay a fee of 5% ofthe gross revenues received from any ancillary or supplemental uses of the DTVspectrum for which the company charges subscription fees or other specifiedcompensation.  No fees will be due forcommercial advertising revenues received from free over-the-air broadcastingservices.  The FCC recently adopted rules intendedto protect digital television transmissions from unauthorized redistribution.Specifically, the FCC adopted use of a mechanism known as the “broadcast flag”to protect digital transmissions from unauthorized redistribution and alsoestablished rules to ensure that equipment on both the transmission andreception side is capable of giving effect to the broadcast flag.  The FCC also has initiated a notice ofinquiry to examine whether additional public interest obligations should beimposed on DTV licensees.  Variousproposals in this proceeding would require DTV stations to increase theirprogram diversity, focus more programming and resources on addressing localissues and political discourse, increase access for disabled viewers andimprove emergency warning systems.  Thisproceeding remains pending.  On November 24,2004, the FCC released an order requiring DTV stations to provide children’seducational and informational programming on their primary DTV program streamand on any additional DTV program streams. The FCC also has sought comment on adopting regulations governing theuse of interactive 

 

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technologies duringchildren’s television programming.  On February 2,2005, interested parties filed petitions for reconsideration of certain aspectsof the order imposing children’s television programming obligations on DTVbroadcasters.  We are unable to predictthe resolution of the petitions for reconsideration.

 

KBWB, WEEK and KSEE haveinitiated full-power operation of their DTV facilities pursuant to an FCClicense.  WDWB has constructed full-powerDTV facilities, begun full-power operation pursuant to automatic program testauthority, and filed an application for a license to cover this operation,which application remains pending.  Inthe first round of DTV channel elections, KBWB, WEEK and KSEE selected channels20, 25 and 38, respectively, for their post-transition DTV operations.

 

Pursuant to the FCC’srelaxed DTV build out requirements, WISE, KBJR, WTVH and WKBW completedconstruction of their DTV facilities and operate their DTV facilities pursuantto special temporary authorizations for reduced power operation, which expireon June 21, 2005, May 31, 2005, January 19, 2005, and March 15,2005 respectively.  WTVH and WKBW havefiled requests for further extension of their special temporary authorizations,which requests remain pending.  WTVH andWKBW may continue to operate pursuant to their special temporary authorizationduring the pendency of their extension request. We may request additional six-month extensions of WISE’s, KBJR’s, WTVH’sand WKBW’s special temporary authorizations as necessary, which we believe arelikely to be granted under the FCC’s current rules.  In the first round of DTV channel elections,WISE, KBJR, WTVH and WKBW selected channels 19, 19, 47 and 38, respectively,for their post-transition DTV operations.

 

As discussed above, KRII, is a satellitetelevision station that transmits the signal of KBJR into the northern section ofthe Duluth, Minnesota DMA.  Unlike ourother stations, KRII was not allotted a paired DTV channel in the FCC’s initialDTV table of channel allotments because the station had not yet received ananalog construction permit or license at the time the table was issued.  However, in its second DTV periodic revieworder, the FCC determined that satellite television stations like KRII will bepermitted to switch, or “flash cut,” from analog to DTV transmissions on theirexisting channel at the end of the DTV transition period.  In the first round of DTV channel elections,KRII selected its existing analog channel 11 for its post-transition DTVoperations.

 

*Class A Television Stations*

 

In November 1999,Congress enacted the Community Broadcasters Protection Act, which created a newClass 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 protectionfrom future displacement by modifications to full-power television stationsunder certain 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 stationsare required to provide interference protection to previously authorizedfull-power television stations, these new facilities are not expected toadversely affect the operations of our television stations.

 

*Proposed Legislation and Regulations*

 

The FCC currently hasunder consideration, and the Congress and the FCC may in the future considerand adopt, new or modified laws, regulations and policies regarding a widevariety of matters that could, directly or indirectly, affect the operation,ownership, and profitability of our broadcast properties, result in the loss ofaudience share and advertising revenues for our stations, or affect our abilityto acquire additional stations or finance acquisitions.  Such matters include but are not limited to:

 

•                  penaltiesfor the broadcast of indecent programming;

 

•                  broadcastownership limits;

 

•                  expeditingthe digital television transition;

 

•                  minorityand female involvement in the broadcasting industry;

 

•                  publicinterest obligations of broadcasters;

 

•                  technicaland frequency allocation matters;

 

•                  changesto broadcast technical requirements;

 

We cannot predict whethersuch changes will be adopted or, if adopted, the effect that such changes wouldhave on our business.

 

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**Item 2.****           Properties**

 

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

 

The types of propertiesrequired to support each of the stations include offices, studios, transmittersites and antenna sites.  A station’sstudios are generally housed with its offices in downtown or businessdistricts.  The transmitter sites andantenna sites are generally located so as to provide maximum market coverage.  The following table contains certaininformation describing the general character of the properties as of March 8,2005:

 
| **Station** |   | **Status  of  Station (1)** |   | **Metropolitan  Area and Use**                          |   | **Property    Owned or  Leased** |   | **Approximate  Size  (square feet)** |   | **Expiration    of Lease** |   |
|-------------|--------|-----------------------------|--------|---------------------------------------------------------|--------|----------------------------------|--------|--------------------------------------|--------|----------------------------|--------|
| ** **  |   | ** **                  |   | ** **                                              |   | ** **                       |   | ** **                           |   | ** **                 |   |
| WTVH        |   | O&O                     |   | Syracuse, New York Office and Studio                    |   | Owned                            |   | 41,500                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
|        |   |                        |   | Onondaga, New York Tower Site                           |   | Owned                            |   | 2,300                                |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| KSEE        |   | O&O                     |   | Fresno, California Office and Studio                    |   | Owned                            |   | 32,000                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
|        |   |                        |   | Bear Mountain, Fresno County, CaliforniaTower Site      |   | Leased                           |   | 9,300                                |   | 3/22/51                    |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
|        |   |                        |   | Meadow Lake, CaliforniaTower Site                       |   | Leased                           |   | 1,000                                |   | 5/16/13                    |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| WISE        |   | O&O (2)                 |   | Fort Wayne, Indiana Office, Studio and  Tower Site      |   | Owned                            |   | 14,822                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| WPTA        |   | LSA (2), (3)                |   | Fort Wayne, Indiana Office, Studio and  Tower Site      |   | Owned                            |   | 18,240                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| WEEK        |   | O&O                     |   | Peoria, Illinois   Office, Studio and Tower Site   |   | Owned                            |   | 20,000                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| KBJR        |   | O&O                     |   | Duluth, Minnesota, Superior, WisconsinOffice and Studio |   | Owned                            |   | 20,000                               |   | —                     |   |
|        |   |                        |   | Tower Site                                              |   | Owned                            |   | 3,300                                |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| KDLH        |   | LSA (3)                     |   | Duluth, Minnesota, Superior, WisconsinOffice and Studio |   | Owned                            |   | 44,845                               |   | —                     |   |
|        |   |                        |   | Tower Site                                              |   | Owned                            |   | 2,100                                |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| KBWB        |   | O&O                     |   | San Francisco, California   Office and Studio      |   | Leased                           |   | 25,777                               |   | 8/31/12                    |   |
|        |   |                        |   | Tower Site                                              |   | Leased                           |   | 2,750                                |   | 2/28/10                    |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| WKBW        |   | O&O                     |   | Buffalo, New York   Office and Studio              |   | Owned                            |   | 32,000                               |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
|        |   |                        |   | Colden, New York   Tower Site                      |   | Owned                            |   | 3,406                                |   | —                     |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| WDWB        |   | O&O                     |   | Southfield, Michigan Office                             |   | Leased                           |   | 8,850                                |   | 12/31/05                   |   |
|        |   |                        |   | Studio and Tower Site                                   |   | Leased(4)                        |   | 30,000                               |   | 9/30/06                    |   |
|        |   |                        |   |                                                    |   |                             |   |                                 |   |                       |   |
| KRII        |   | O&O                     |   | Chilsom, Minnesota Tower Site                           |   | Owned                            |   | 1,250                                |   | —                     |   |

 

----

(1)                                 O&Orefers to stations that we own and operate. LSA, or local service agreement, isthe general term we use to refer to a contract under which we provide servicesto a station owned and/or operated by an independent third party. Local serviceagreements include shared services and advertising representation agreements.For further information regarding the LSAs to which we are party, see “RecentDevelopments.”

 

21

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(2)                                 OnMarch 7, 2005, we sold WPTA-TV, UHF Channel 21, the ABC affiliate servingFort Wayne, Indiana, to Malara Broadcast Group. On March 8, 2005, weacquired WISE-TV, UHF Channel 33, the NBC affiliate serving Fort Wayne,Indiana, from New Vision Group, L.L.C.

 

(3)                                 OnMarch 8, 2005, we entered into a strategic arrangement with MalaraBroadcast Group, under which we will provide advertising sales, promotion andadministrative services, and selected programming to Malara BroadcastGroup-owned stations WPTA-TV and KDLH-TV in return for certain fees that willbe paid by Malara Broadcast Group to us.

 

(4)                                  Weown a 3,400 square foot building on the property.

 

**Item 3. Legal Proceedings**

 

In May 2004, anapplication was filed with the FCC seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between Malara and theCompany.  The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application in December 2004.  In January 2005, the petitioningbroadcasters filed an application for review seeking Commission-level review ofthe Bureau’s decision.  Malara filed anopposition to the application for review, and the petitioning broadcastersfiled a response to that opposition.  TheFCC has not yet ruled on the application for review.  Although we believe that the application forreview is without merit and anticipate that the FCC will affirm the grant ofthe assignment application for KDLH, it is not possible to predict how the FCCwill rule on the application for review. It also is not possible to predict any remedial action or possiblesanction that may be imposed by the FCC in the event that it grants theapplication for review.  An FCC grant ofthe application for review ultimately could result in a reformation orrescission of these agreements, the assignment of the KDLH license back to NewVision Group, L.L.C., or a sale by Malara of its ownership of KDLH.

 

In addition, we are fromtime to time involved in various claims and lawsuits that are incidental to itsbusiness.  Except as discussed above, weare not aware of any pending or threatened litigation, arbitration or administrativeproceedings involving claims or amounts that, individually or in the aggregate,we believe are likely to materially harm our business, financial condition orfuture results of operations.  Anylitigation, however, involves risk and potentially significant litigationcosts, and therefore we cannot give any assurance that any litigation which mayarise in the future will not materially harm our business, financial conditionor future results of operations.

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

 

On May 5, 2004, theholders of all of our Voting Common Stock adopted resolutions by unanimouswritten consent in lieu of an annual meeting electing W. Don Cornwell, StuartJ. Beck, James L. Greenwald, Martin F. Beck, Edward Dugger III, Thomas R.Settle, Charles J. Hamilton, Jr., Robert E. Selwyn, Jr., Jon E.Barfield, Milton Frederick Brown and Veronica Pollard as directors.  Effective November 15, 2004, Martin F.Beck retired from the Board of Directors of Granite.

 

22

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**PART II**

 

**Item 5.  Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

Our Common Stock(Nonvoting) is traded on the Over-the-Counter Bulletin Board (OTCBB) under thestock symbol GBTVK.  As of March 7,2005, the approximate number of record holders of Common Stock (Nonvoting) was263.

 

The following table setsforth the closing market price ranges per share of Common Stock (Nonvoting)during 2004 and 2003, as reported by the over-the-counter bulletin board andNASDAQ markets. The quotations represent prices on the over-the-counterbulletin board and NASDAQ between dealers in securities, do not include retailmarkup, markdown or commission, and do not necessarily represent actualtransactions.

 
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
|            |       |     |       |    |       |
| 2004            |       |     |       |    |       |
| First  Quarter  |       | $        | 1.97       |    | $          | 1.52 |   |
| Second  Quarter |       | 1.90     |       | .70     |       |
| Third  Quarter  |       | .72      |       | .13     |       |
| Fourth  Quarter |       | .50      |       | .23     |       |
|            |       |     |       |    |       |
| 2003            |       |     |       |    |       |
| First  Quarter  |       | 2.21     |       | 1.40    |       |
| Second  Quarter |       | 3.70     |       | 1.44    |       |
| Third  Quarter  |       | 3.15     |       | 2.31    |       |
| Fourth  Quarter |       | 2.69     |       | 1.33    |       |
|                 |            |          |            |         |            |  |  |

 

As of March 7, 2005the closing price per share for our Common Stock (Nonvoting), as reported bythe over-the-counter bulletin board was $0.32 per share.

 

There is no established publictrading market for our Class A Voting Common Stock, par value $.01 pershare, our Voting Common Stock.  TheVoting Common Stock and the Common Stock (Nonvoting) are referred to hereincollectively as the Common Stock.  As of March 7,2005, the number of record holders of Voting Common Stock was one.  Granite is a Controlled Company as defined byNasdaq Marketplace Rule 4350(c)(5).

 

We have never declared orpaid a cash dividend on our Common Stock and do not anticipate paying adividend 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 APreferred Stock were converted into Common Stock (Nonvoting) in August 1995.  Accrued dividends on the Series APreferred Stock, which totaled $262,844 at December 31, 2004, are payableon the date on which such dividends may be paid under our existing debtinstruments.

 

**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     |       | 7,034,341                                                                                           |       | $                                                                                   | 5.85       |                                                                | 2,492,859  |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                              |       | —                                                                              |       | —                                                              |       |
| Total                                                       |       | 7,034,341                                                                                           |       | $                                                                                   | 5.85       |                                                                | 2,492,859  |   |

 

On December 22,2003, we completed a $405,000,000 offering of our 9 3/4% Senior Secured Notesdue December 1, 2010.  The SeniorSecured Notes have been registered and declared effective as of June 10,2004 under the Securities Act of 1933. The registered notes are not listed on any securities exchange.

 

23

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**Item 6. Selected Financial Data**

 

The information set forthbelow should be read in conjunction with the consolidated financial statementsand notes thereto included at Item 8 herein. The selected consolidated financial data has been derived from ouraudited Consolidated Financial Statements.

 

Our acquisitions anddispositions of operating properties during the periods reflected in thefollowing selected financial data materially affect the comparability of suchdata from one period to another.

 
|                                                                                         | ** ** | **Years  Ended December 31,**                | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars  in thousands except per share data)** | ** ** |
| Statement of Operations Data:                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                                 |       | $                                                 | 113,765    |   | $ | 108,544 |   | $ | 135,344 |   | $ | 113,075 |   | $ | 140,070 |   |
| Station operating expenses                                                                   |       | 90,227                                            |       | 92,033 |   | 103,963 |   | 116,374 |   | 104,396 |   |
| Depreciation                                                                                 |       | 6,430                                             |       | 6,285 |   | 5,897 |   | 6,076 |   | 5,725 |   |
| Amortization of intangible assets                                                            |       | 7,893                                             |       | 9,976 |   | 21,965 |   | 26,735 |   | 26,865 |   |
| Impairment of Goodwill (b)                                                                   |       | 15,491                                            |       | — |   | — |   | — |   | — |   |
| Corporate expense                                                                            |       | 13,532                                            |       | 11,715 |   | 9,536 |   | 9,687 |   | 10,392 |   |
| Performance award expense                                                                    |       | 3,415                                             |       | 52 |   | — |   | — |   | — |   |
| Corporate separation agreement expense                                                       |       | 1,406                                             |       | — |   | — |   | — |   | — |   |
| Non-cash compensation expense                                                                |       | 697                                               |       | 896 |   | 1,508 |   | 1,473 |   | 1,974 |   |
| Operating (loss)                                                                             |       | (25,326                                           | )     | (12,413 | ) | (7,525 | ) | (47,270 | ) | (9,282 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                        |       | 38,379                                            |       | 30,024 |   | 33,812 |   | 45,923 |   | 28,975 |   |
| Non-cash interest expense                                                                    |       | 4,199                                             |       | 4,969 |   | 13,031 |   | 7,951 |   | 3,008 |   |
| Non-cash preferred stock dividend                                                            |       | 25,548                                            |       | 12,774 |   | — |   | — |   | — |   |
| Gain on sale of assets                                                                       |       | —                                            |       | — |   | (192,406 | ) | — |   | — |   |
| Gain from insurance claim                                                                    |       | —                                            |       | — |   | — |   | — |   | (1,247 | ) |
| Loss (gain) on extinguishment of debt (a)                                                    |       | —                                            |       | 3,215 |   | 15,097 |   | 2,012 |   | (6,184 | ) |
| Other expenses                                                                               |       | 1,554                                             |       | 584 |   | 869 |   | 1,141 |   | 2,079 |   |
| (Loss) income before income taxes and cumulative  effect of a change in accounting principle |       | (95,006                                           | )     | (63,979 | ) | 122,072 |   | (104,297 | )  | (35,913 | ) |
| (Benefit) provision for income taxes                                                         |       | (11,714                                           | )     | (17,032 | ) | 53,161 |   | (27,550 | )  | (8,404 | ) |
| (Loss) income before cumulative effect of a change  in accounting principle                  |       | (83,292                                           | )     | (46,947 | ) | 68,911 |   | (76,747 | )  | (27,509 | ) |
| Cumulative effect of a change in accounting  principle, net of tax benefit                   |       | —                                            |       | — |   | 150,479 |   | — |   | — |   |
| Net (loss) income                                                                            |       | $                                                 | (83,292    | )  | $ | (46,947 | ) | $ | (81,568 | ) | $ | (76,747 | ) | $ | (27,509 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Net (loss) income attributable to common  shareholders                                       |       | $                                                 | (83,292    | )  | $ | (59,828 | ) | $ | (80,745 | ) | $ | (109,311 | ) | $ | (56,345 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Per common share:                                                                            |       |                                              |       |   |   |   |   |   |   |   |   |
| Basic (loss) income before cumulative effect of a  change in accounting principle            |       | $                                                 | (4.30      | )  | $ | (3.15 | ) | $ | 3.72 |   | $ | (5.89 | )  | $ | (3.10 | ) |
| Basic net (loss) income                                                                      |       | $                                                 | (4.30      | )  | $ | (3.15 | ) | $ | (4.31 | ) | $ | (5.89 | ) | $ | (3.10 | ) |
| Weighted average common shares outstanding                                                   |       | 19,366                                            |       | 18,991 |   | 18,749 |   | 18,569 |   | 18,203 |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Net (loss) income attributable to common  shareholders – assuming dilution              |       | $                                                 | (83,292    | )  | $ | (59,828 | ) | $ | (80,745 | ) | $ | (109,311 | ) | $ | (56,345 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Per common share:                                                                            |       |                                              |       |   |   |   |   |   |   |   |   |
| Diluted (loss) income cumulative effect of a change  in accounting principle                 |       | $                                                 | (4.30      | )  | $ | (3.15 | ) | $ | 3.65 |   | $ | (5.89 | )  | $ | (3.10 | ) |
| Diluted net (loss) income                                                                    |       | $                                                 | (4.30      | )  | $ | (3.15 | ) | $ | (4.23 | ) | $ | (5.89 | ) | $ | (3.10 | ) |
| Weighted average common shares outstanding –  assuming dilution                         |       | 19,366                                            |       | 18,991 |   | 19,098 |   | 18,569 |   | 18,203 |   |

 

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(a)                                  InJanuary 2003, we retroactively adopted Statement of Financial AccountingStandards No. 145, Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.  This statement eliminates the requirement toclassify all gains and losses related to the extinguishment of debt asextraordinary items.  Accordingly, prioryears were reclassified to reflect extraordinary (gain) loss as a component ofincome from continuing operations.

 

(b)                                 Wecompleted our annual impairment test as of December 31, 2004 in accordancewith Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“Statement 142”), andrecorded an impairment charge on the carrying value of goodwill ofapproximately $15,491,000.

 

24

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| ** **                           | ** ** | **As  of December 31,** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Selected  Balance Sheet Data:        |       |                         |       |   |   |   |   |   |   |   |   |
| Total  assets (b)                    |       | $                            | 429,929    |   | $ | 504,097 |   | $ | 472,184 |   | $ | 731,097 |   | $ | 732,091 |   |
| Total  debt                          |       | 400,791                      |       | 400,087 |   | 312,791 |   | 401,206 |   | 311,391 |   |
| Total  long-term liabilities (b)     |       | 320,390                      |       | 312,247 |   | 108,473 |   | 116,081 |   | 133,050 |   |
| Redeemable  preferred stock (a)      |       | —                       |       | — |   | 198,125 |   | 272,109 |   | 239,545 |   |
| Stockholders’  (deficit) equity |       | (332,090                     | )     | (249,432 | )  | (190,295 | ) | (98,144 | ) | 7,816 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                  Weadopted****Statement of Financial AccountingStandards No. 150, Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity. Accordingly, the redeemable preferred stock ($198,481) has beenclassified as a long-term liability at December 31, 2003.

 

(b)                                 Inthe second quarter 2004, the Company adjusted its Goodwill and Deferred TaxLiability balances by approximately $14,926,000 to appropriately reflect thetax basis of certain assets acquired in prior years’ acquisitions.  These adjustments have been reflected in 2004and 2003 Balance Sheets disclosed herein.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussionand analysis of our financial condition and results of operation should be readin conjunction with our consolidated financial statements and the accompanyingnotes that appear under Item 8 in this Form 10-K.

 

**Executive Summary**

 

We own and operate eightnetwork affiliated television stations in geographically diverse marketsreaching over 6% of the nation’s television households.  As of December 31, 2004, three stationsare affiliated with NBC, two with ABC and one with CBS, our Big ThreeAffiliates, and two stations are affiliated with the Warner Brothers TelevisionNetwork, our WB Affiliates.  The NBC affiliatesare KSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois,and KBJR-TV, Duluth, Minnesota and Superior, Wisconsin.  The ABC affiliates are WKBW-TV, Buffalo, NewYork and WPTA-TV, Fort Wayne, Indiana, which we sold on March 7, 2005, asdiscussed below.  The CBS affiliate isWTVH-TV, Syracuse, New York.  The WBaffiliates are KBWB-TV, San Francisco, California and WDWB-TV, Detroit,Michigan.  As discussed below, on March 8,2005, we completed the acquisition of WISE-TV, the NBC affiliate serving FortWayne, Indiana.  Our consolidatedfinancial statements and accompanying notes that appear under Item 8 of this Form 10-K,unless otherwise indicated, reflect our financial condition and results ofoperations based on the stations owned by us on December 31, 2004.

 

On January 1, 2002,KNTV switched from an independent station to the NBC affiliate for the SanFrancisco - Oakland - San Jose television market until its sale on April 30,2002.  Comparisons of our consolidatedfinancial statements between the years ended December 31, 2003 and 2002have been affected by the sale of KNTV and a reduction in amortization expenseof certain goodwill and other indefinite lived intangible assets in accordancewith Statement of Financial Accounting Standards No. 142, Goodwill andOther Intangible Assets, or Statement 142, which was effective January 1,2002.

 

We believe that inflationhas not had a material impact on our results of operations for each of thethree years in the period ended December 31, 2004.  However, there can be no assurance thatfuture inflation would not have an adverse impact on our operating results andfinancial condition.

 

Our operating revenuesare generally lower in the first calendar quarter and generally higher in thefourth calendar quarter than in the other two quarters, due in part toincreases in retail advertising in the fall months in preparation for theholiday season, and in election years due to increased political advertising.

 

Our revenues are derivedprincipally from local and national advertising and, to a lesser extent, fromnetwork compensation for the broadcast of programming and revenues from studiorental and commercial production activities. The primary operating expenses involved in owning and operating televisionstations are employee salaries, depreciation and amortization, programming,advertising and promotion.  Amountsreferred to in the following discussion have been rounded to the nearestthousand.

 

Set forth below are theprincipal types of television revenues received by the television stations weown for the periods 

 

25

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indicated and thepercentage contribution of each to the gross television revenues of ourtelevision stations.

 

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

(dollars in thousands)

 
| ** **            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **            | ** ** | **Amount**                        | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Local/Regional        |       | $                                 | 66,075     |   | 49.2 | % | $ | 66,126 |   | 50.8 | % | $ | 77,730 |   | 47.6 | % |
| National              |       | 52,340                            |       | 39.0 | % | 54,785 |   | 42.1 | % | 66,673 |   | 40.9 | % |
| Network  Compensation |       | 3,059                             |       | 2.3 | % | 3,205 |   | 2.5 | % | 3,093 |   | 1.9 | % |
| Political             |       | 8,778                             |       | 6.5 | % | 1,882 |   | 1.5 | % | 10,882 |   | 6.7 | % |
| Other                 |       | 4,033                             |       | 3.0 | % | 4,048 |   | 3.1 | % | 4,772 |   | 2.9 | % |
| Gross  Revenue        |       | 134,285                           |       | 100 | % | 130,046 |   | 100.0 | % | 163,150 |   | 100.0 | % |
| Agency  Commissions   |       | 20,520                            |       |   |   | 21,502 |   |   |   | 27,806 |   |   |   |
| Net  Revenue          |       | $                                 | 113,765    |   |   |   | $ | 108,544 |   |   |   | $ | 135,344 |   |   |   |

 

Automotive advertisingconstitutes our single largest source of gross revenues, accounting forapproximately 20% of our total gross revenues in 2004.  Gross revenues from restaurants and paidprogramming accounted for approximately 16% of our total gross revenues in2004.  Each other category of advertisingrevenue represents less than 5% of our total gross revenues.

 

**CriticalAccounting Policies**

** **

Our accounting policiesare described in Note 2 of the consolidated financial statements in Item8.  We prepare our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States, which require us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the year.  Actual results could differ from thoseestimates.  We consider the followingpolicies, which were discussed with the Audit Committee of the Board ofDirectors, to be most critical in understanding the judgments involved inpreparing our consolidated financial statements and the uncertainties thatcould affect our results of operations, financial condition and cash flows.

 

*Revenuerecognition*

 

Our primary source ofrevenue 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 $2,024,000, $1,894,000and $1,922,000 for the years ended December 31, 2004, 2003 and 2002respectively.  Barter expense totaled$1,456,000, $1,572,000 and $1,090,000 for the years ended December 31,2004, 2003 and 2002 respectively.

 

*FilmContract Rights*

 

Film contract rights arerecorded as assets at gross value when the license period begins and the filmsare available for broadcasting.  Filmcontract rights are amortized on an accelerated basis over the estimated usageof the films, and are classified as current or non-current on that basis.  Our accounting for long-lived film contractassets requires judgment as to the likelihood that such assets will generatesufficient revenue to cover the associated expense.  We review our film contract rights forimpairment by projecting the amount of revenue the program will generate overthe remaining life of the contract by applying average historical rates andsell-out percentages for a specific time period and comparing it to the program’sexpense.  If circumstances were tochange, such as the projected future revenue of a program is less than itsfuture expense and/or the expected broadcast period is shortened or cancelleddue to poor ratings, we would be required to write-off the exposed value of theprogram rights ratably or potentially immediately. We have written down thevalue of certain film contract rights by $ 3,800,000, $3,000,000 and $5,600,000during the years ended December 31, 2004, 2003 and 2002 respectively.  Film contract rights payable are classifiedas current or non-current in accordance with the payment terms of the variouslicense agreements.  Film contract rightsare reflected in the consolidated balance sheet at the lower of unamortizedcost or estimated net realizable value. As of December 31, 2004, theamounts of current film contract rights and non-current film contract rightswere $11,606,000 and $5,180,000, respectively.

 

26

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*Goodwilland Intangible Assets*

 

We have made acquisitionsin the past for which a significant portion of the purchase price was allocatedto goodwill and other identifiable intangible assets.

 

In accordance withStatement 142, goodwill and other intangible assets deemed to have indefinitelives are no longer being amortized, but instead are subject to annualimpairment tests. We and our independent appraisers perform annual impairmenttests using a discounted cash flow model. We and our independent appraisers 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-livesintangible assets could be impaired if future events result in a conclusionthat market conditions have declined or discount rates have increased.  Any resulting impairment loss could have amaterial adverse impact on our financial condition and results of operations.We adopted the new rule on accounting for goodwill and other intangibleassets beginning on January 1, 2002. We recorded a charge to reduce thecarrying value of its goodwill and other indefinite-lived assets by $95,000,000and $114,000,000, respectively during the first quarter of 2002. The annualimpairment testing required by Statement 142 was completed as of December 31,2004 and resulted in a write down of the carrying value of our goodwill by$15,491,000, as a result of decreases in projected future cash flows fromoperations at certain stations.  Duringthe second quarter of 2004, we adjusted our goodwill and related deferred taxliability balances by approximately $14,926,000 to appropriately reflect thetax basis of certain assets acquired in prior years’ acquisitions. As of December 31,2004, we had $174,734,000 in goodwill and other intangible assets withindefinite lives net of accumulated amortization.

 

We and our independentappraisers determine the value of our FCC licenses using discounted cash flowvaluation method assuming a hypothetical independent station whose onlyidentifiable asset is the FCC license. We believe that our FCC licenses have anindefinite life based on the historical basis to renew such licenses.

 

In previous years we andour independent appraisers tested the impairment of our FCC licenses at selectlocations where their may be potential indicators of a potential impairment.However, commencing in 2004, we tested the impairment of all of our FCClicenses annually or whenever events or changes indicate that such assets maybe impaired. The impairment test consists of a comparison of the fair value ofthe FCC licenses with their carrying amount on a station-by-station basis usinga discounted cash flow model.  The annualimpairment testing for FCC licenses was completed as of December 31, 2004and did not result in any additional write down of the carrying value of ourlicenses.

 

*Long-LivedAssets*

 

We review our long-livedassets for impairment whenever events or changes in circumstances indicate thatthe 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 forthe Impairment 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 employ an expectedpresent value technique, which utilizes multiple cash flow scenarios that reflectthe range of possible outcomes and an appropriate discount rate.  If circumstances were to change, such as adecreased cash flow scenarios, we would be required to record impairmentcharges of the exposed value of the long-lived assets which were not previouslyrecorded.

 

*Allowancefor Doubtful Accounts*

 

We must make estimates ofthe uncollectibility of our accounts receivable.  We specifically review historical write-offactivity by market, large customer concentrations, customer credit worthiness,and changes in our customer payment terms when evaluating the adequacy of theallowance for doubtful accounts.  Ourexperience has been that the level of customer defaults has been predictableand that the allowance for doubtful accounts has been adequate to cover such defaults.  If circumstances change, such as higher thanexpected defaults or an unexpected material adverse change in an agency’sability to meet its financial obligation to us, our estimates of therecoverability of amounts due our company could be reduced by a materialamount. As of December 31, 2004 and 2003, our allowance for doubtfulaccounts totaled approximately $896,000 and $1,319,000, respectively.

 

**Resultsof Operations**

** **

***Overview***

 

Net revenue for oureight-station group increased 4.8% due primarily to increased politicalspending in a presidential -election year. Net political revenue was $7,461,000 in 2004, comprising approximately7% of net revenue as compared to net political revenue of $1,600,000 in 2003.  Excluding political revenue, net revenuedecreased by less than 1% in 2004.  Localnon-political 

 

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revenueexperienced approximately 2% growth during the first nine months of the yearbefore finishing the year unchanged.  Wecontinue to focus on our strong news brands and targeted sales initiatives asour foundation for local performance and growth.  National non-political revenues decreasedapproximately 4.5% during the year. National non-political revenue at our BigThree affiliates increased approximately 3.4% during the year, which was offsetby decreases in national non-political revenues at our WB affiliates ofapproximately 16.6%.   Overall,automotive, our largest revenue category remained essentially flat.  We experienced growth in several other majorcategories, such as instruction schools, home remodeling and financial serviceswhich were offset by decreases in categories such as fast foods, entertainment(movies and amusement parks) and department stores. Our WB affiliates experienceddecreases in non-political national revenue of 16.6% primarily due to declinesin two of our WB station’s top categories, movies and paid programming.

 

Operating expensesconsist primarily of personnel-related costs such as compensation and benefitsand the cost of programming.  Risinghealthcare costs, compensation increases, increased power costs resulting fromthe launch of digital broadcasting in all eight of our markets, increased salesand promotional expenses and restructuring charges at our Buffalo, New Yorkstation were offset, in part, by lower film amortization expense primarilyresulting from the write-downs of certain film contract rights over the pastthree years and the replacement of expensive, unprofitable programs at our WBaffiliates with less expensive, profitable programs.  During 2005, we expect continued increases inhealthcare costs and power costs, which will be offset by decreased filmamortization expense.

 

In the fourth quarter of2003, we completed a refinancing of our debt capital structure through theoffering of $405,000,000 of our 9 3/4 % Senior Secured Notes due 2010.  The proceeds from this offering were used inpart to eliminate all of our then existing debt and provide us with more flexibilityto achieve our strategic vision, which includes selling or swapping our WBaffiliated stations for news-oriented stations and to capitalize on theoperating efficiencies that consolidation provides by providing services undervarious shared service agreements to third party stations within the samemarket where we currently own and operate an existing station thereby creating “marketplatforms” in some of our current markets.

 

Comparisons ofresults for the twelve-months ended December 31, 2003 versus December 31,2002 are impacted by the disposition of KNTV on April 30, 2002.   In order to better highlight the performanceof the eight stations group we currently operate, we present certaininformation on a “same station” basis, which removes the operating results ofKNTV from 2002.

 

***Yearsended December 31, 2004 and 2003***

 

Net revenue increased$5,221,000 or 4.8% to $113,765,000 for the year ended December 31, 2004,from $108,544,000 for the year ended December 31, 2003.   The increase was primarily due to anincrease in political advertising revenue of $6,896,000 offset, in part, bydecreases in non-political national revenues of $2,444,000.  The declines in non-political nationalrevenue were primarily due to decreases in entertainment, telecommunicationsand financial services categories. Non-political local revenue remained essentially flat during 2004.

 

Station operatingexpenses decreased $1,806,000 or 2.0% to $90,227,000 for the year ended December 31,2004, from $92,033,000 for the same period a year earlier. The decrease was primarilydue to lower film amortization expense due to the effects of write-downs ofcertain film contract rights over the past three years and the replacement ofexpensive, unprofitable programs at our WB affiliates with less expensive,profitable programs.  This decrease wasoffset, in part, by increases in healthcare costs, compensation increases,increases in power costs resulting from the launch of digital broadcasting inall eight of our markets, increased sales and promotional expenses, andrestructuring charges at our Buffalo, New York station.

 

*Big ThreeAffiliates*

 

**GROSSREVENUES, BY CATEGORY,**

**FOROUR BIG THREE STATIONS**

(dollars inthousands)

 
| ** **            | ** ** | **2004**   | ** ** | **2003** | ** ** |
|-----------------------|------------|------------|------------|----------|------------|
| ** **            | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|                  |       |       |       |     |       |   |   |   |   |
| Local/Regional        |       | $          | 45,160     |     | 47.7       | % | $ | 44,887 |   | 51.6 | % |
| National              |       | 34,357     |       | 36.3     | %          | 33,231 |   | 38.3 | % |
| Network  Compensation |       | 3,059      |       | 3.2      | %          | 3,205 |   | 3.7 | % |
| Political             |       | 8,379      |       | 8.9      | %          | 1,818 |   | 2.1 | % |
| Other                 |       | 3,720      |       | 3.9      | %          | 3,730 |   | 4.3 | % |
| Gross  Revenue        |       | 94,675     |       | 100      | %          | 86,871 |   | 100.0 | % |
| Agency  Commissions   |       | 14,175     |       |     |       | 13,538 |   |   |   |
| Net  Revenue          |       | $          | 80,500     |     |       |   | $ | 73,333 |   |   |   |

 

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Net revenue at our BigThree affiliates increased $7,167,000 or 9.8% to $80,500,000 primarily due toan increase in political advertising and non-political national revenues of$6,561,000 and $1,126,000, respectively. The non-political national revenue increase was due to growth in thepaid programming, food stores and department stores categories. Non-politicallocal revenue was essentially flat. Excluding political, net revenue increased 2.2%.  During 2004 and 2003, the Big Threeaffiliates contributed 71% and 67%, respectively, to net revenues.

 

Station operatingexpenses at our Big Three affiliates increased $2,829,000 or 5.3% to$56,101,000 due primarily to increases in healthcare costs, compensation,increases in power costs resulting from the launch of digital broadcasting inall of our markets, increased sales and promotional expenses and arestructuring charge at our Buffalo, New York station. We anticipate realizingsavings in future periods as a result of reduced personnel in connection withour one-time restructuring charge at Buffalo, New York.

 

*WBAffiliates*

 

**GROSSREVENUES, BY CATEGORY,**

**FOROUR WB AFFILIATES**

(dollars inthousands)

 
| ** **          | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------|------------|------------|------------|----------|------------|
| ** **          | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|                |       |       |       |     |       |   |   |   |   |
| Local/Regional      |       | $          | 20,915     |     | 52.8       | % | $ | 21,239 |   | 49.2 | % |
| National            |       | 17,983     |       | 45.4     | %          | 21,555 |   | 50.0 | % |
| Political           |       | 399        |       | 1.0      | %          | 64 |   | .1 | % |
| Other               |       | 313        |       | 0.8      | %          | 317 |   | .7 | % |
| Gross  Revenue      |       | 39,610     |       | 100      | %          | 43,175 |   | 100.0 | % |
| Agency  Commissions |       | 6,345      |       |     |       | 7,964 |   |   |   |
| Net  Revenue        |       | $          | 33,265     |     |       |   | $ | 35,211 |   |   |   |

 

Net revenue at our WBaffiliates decreased $1,946,000 or 5.5% to $33,265,000.  Non-political local revenue decreased 1.5%due to declines in the fast foods, department stores and amusement parkscategories. Non-political national revenues decreased 16.6% due to declines inthe automotive, paid programming and movies categories. The WB affiliates donot generate meaningful political revenue, as they do not broadcast local news.  During 2004 and 2003, the WB affiliatescontributed 29% and 33%, respectively, to net revenues.

 

Station operatingexpenses at our WB affiliates decreased $4,635,000 or 12% to $34,126,000primarily due to lower film amortization expense due to the effects ofwrite-downs of certain film contract rights over the past three years, thereplacement of expensive, unprofitable programs with less expensive, profitableprograms decreased bad debt expenses due to our improved collections anddeceased general and administrative expenses.  We wrote film assets down to net realizable value in 2004 and 2003 by$3,800,000 and $3,000,000, respectively.

 

Amortization expensedecreased $2,083,000 or 21% during the twelve months ended December 31,2004 compared to the same period a year earlier. The decrease was primarily dueto the completion of amortization expense of a covenant not to compete as of July 2003.Depreciation expense increased $145,000 or 2% during the twelve months ended December 31,2004 compared to the same period a year earlier.  The increase was primarily due to increasedcapital expenditures in 2003 for the conversion to digital broadcasting.

 

In accordance withStatement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets (“Statement 142”), we completed our annual impairment test asof December 31, 2004 and recorded an impairment charge on the carryingvalue of goodwill of approximately $15,491,000. We performed our annualimpairment test as of December 31, 2003 and 2002 and concluded that nowrite down of goodwill and other indefinite lived intangible assets wasrequired for either year.

 

Corporate expense totaled$13,532,000 an increase of $1,817,000 or 15.5% compared to same period a yearearlier.  The primary increase was due toincreased professional fees relating to the implementation, documentation andtesting for Sarbanes-Oxley Section 404 compliance.  Increased healthcare costs and timing ofyear-end accruals also contributed to our increased corporate expense. The performanceaward expense for the twelve months ended December 31, 2004 totaled$3,415,000 as compared to 

 

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$52,000 in the sameperiod a year earlier.  This wasprimarily due to the expensing of the unvested portion of a performance awardearned in 2003 by an executive who departed the Company in September 2004.  The corporate separation agreement expensefor the twelve months ended December 31, 2004 totaled $1,406,000 andrelates primarily to severance and other benefits payable to an executive whodeparted our Company in September 2004 pursuant to the terms of aseparation agreement.  Non-cashcompensation expense decreased $199,000 or 22% primarily due to the forfeituresof stock awards granted certain personnel in prior years who are no longeremployed by us as of December 31, 2004.

 

Interest expense totaled$39,541,000; an increase of $8,236,000 or 26% compared to $31,305,000 for thetwelve months ended December 31, 2003. The increase was primarily due to our 9 3/4 % Senior Secured Notes beingoutstanding for a full year.  Interestincome totaled $1,162,000; a decrease of $119,000, or 9% compared to the twelvemonths ended December 31, 2003.  Thedecrease was primarily due to the recognition of interest income on an interestrate hedge related to the 8 7/8% Senior Subordinated Notes in 2003.  Non-cash interest expense totaled $4,199,000;a decrease of $770,000 or 15.5% primarily due to reduced amortization ofdeferred financing fees.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $25,548,000 during the twelve months ended December 31, 2004 andtotaling $12,774,000 for the same period a year earlier as required byStatement of Financial Accounting Standards No.150. For the six months ended June 30,2003, dividends on the Preferred Stock were treated as a reduction ofstockholders’ equity.

 

We recorded a $3,215,000loss on the early extinguishment of debt in 2003 due to the write-off ofunamortized deferred financing fees associated with the debt repaid.

 

We recorded a deferredtax benefit of $11,714,000 in 2004, compared to a current and deferred taxbenefit of $17,032,000 in 2003.   Thedecline in the tax benefit is primarily due to recording additional valuationallowance against net operating loss carry forwards, which may not be utilizedin future periods.

 

***Yearsended December 31, 2003 and 2002***

 

Net revenue decreased$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.  Netrevenues from KNTV for the four months ended April 30, 2002 were$25,295,000.  Same station net revenuedecreased $1,505,000 or 1.4% due primarily to a $7,340,000 decrease inpolitical advertising offset, in part, by increases in local and nationalnon-political advertising.  Same stationnon-political local advertising increased 6.5% or $4,059,000 and non-politicalnational increased 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%.

 

Station operatingexpenses decreased $11,930,000 or 11.5% to $92,033,000 for the year ended December 31,2003, from $103,963,000 for the same period a year earlier. The decrease wasprimarily due to the sale of KNTV on April 30, 2002.  KNTV’s operating expenses for the four monthsended 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.

 

*Big ThreeAffiliates — Same Station*

 

Net revenue at our BigThree affiliates decreased $2,800,000 or 3.7% to $73,258,000 from $76,058,000primarily due to a $7,139,000 decrease in political advertising offset, inpart, by increases in local non-political revenue of $2,757,000.  Non-political national revenue was essentiallyflat.  Excluding political, net revenueincreased a healthy 4.8%.  The Big Threeaffiliates contributed 67% to net revenue during the year.

 

Operating expenses at ourBig Three affiliates increased $3,033,000 or 8.4% to $53,213,000 from$50,180,000 due primarily to rising healthcare costs, higher sales expense andincreased power costs resulting from the onset of digital broadcasting at fourstations.

 

*WBAffiliates*

 

Net revenue at our WBaffiliates increased $1,304,000 or 3.6% to $35,211,000 from $33,907,000 onhealthy local and national non-political increases.  Non-political local increased 6.2% whilenon-political national increased 5.1%. The WB affiliates do 

 

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not generate meaningfulpolitical revenue, as they do not broadcast local news.  The WB affiliates contributed 33% to netrevenue during the year.

 

Operating expenses at ourWB affiliates decreased $2,265,000 or 5.7% to $38,761,000 from $41,026,000primarily due to reduced film amortization driven by lower film writedowns.   We wrote film assets down to netrealizable value in 2002 and 2003 by $4,500,000 and $3,000,000, respectively.

 

Amortization expensedecreased $11,988,000 or 55% during the twelve months ended December 31,2003 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 remainingstations decreased $2,955,000 or 23% due to a reduction in amortization of acovenant not to compete.  Depreciationexpense increased $388,000 or 7% during the twelve months ended December 31,2003 compared to the same period a year earlier.  Included in the twelve months ended December 31,2002 is $525,000 of depreciation related to KNTV.  Depreciation expense at the remainingstations increased $913,000 or 17% due to increased capital expenditures forthe conversion to digital television.

 

Corporate expense totaled $11,715,000; an increase of$2,179,000 or 23% compared to $9,536,000 for the twelve months ended December 31,2002.  The increase was primarily due anincrease in compensation, professional fees and officers’ and directors’liability insurance.  Non-cashcompensation expense decreased $613,000 or 41% due to a reduction in stockawards granted to certain executives.

 

Interest expense totaled$31,305,000; a decrease of $3,584,000 or 10% compared to $34,889,000 for thetwelve months ended December 31, 2002. The decrease was primarily due to lower average debt balances and lowerinterest rates on then our outstanding senior credit agreement.  Interest income totaled $1,281,000; anincrease of $204,000, or 19% compared to the twelve months ended December 31,2002.  The increase was primarily due tothe recognition of interest income on an interest rate hedge related to the 87/8% Senior Subordinated Notes.  Non-cashinterest expense totaled $4,969,000; a decrease of $8,061,000 or 62% primarilydue to the imputation of interest related to KNTV’s NBC affiliation agreement,until its sale on April 30, 2002, offset in part by reduced amortizationof deferred financing fees.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $12,774,000 during the six months ended December 31, 2003 asrequired by Statement of Financial Accounting Standards No.150.  See Recent Accounting Pronouncements.

 

We recorded a $3,215,000loss on the early extinguishment of debt in 2003 due to the write-off ofunamortized deferred financing fees associated with the debt repaid.  We recorded a $15,097,000 loss on the earlyextinguishment of debt in 2002 due to the write-off of unamortized deferredfinancing fees associated with the then outstanding senior credit facility

 

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

 

We recorded a benefit forincome taxes of $17,032,000 in 2003, consisting of a current benefit of$16,111,000 and a deferred benefit of $921,000 compared to a provision for incometaxes of $53,162,000 in 2002.

 

Upon adoption ofStatement 142 as of January 1, 2002, we recorded a one-time, non-cashcharge of $150,479,000, net of a tax benefit of $58,351,000, to reduce thecarrying value of our goodwill and other indefinite-lived intangibleassets.  The decline in the carryingvalue of goodwill and other indefinite-lived intangible assets relates solelyto our WB affiliates.  Such charge isnon-operational in nature and is reflected as a cumulative effect of anaccounting change in the accompanying consolidated statement ofoperations.  We completed our annualimpairment test as of December 31, 2003 as required by Statement 142 andconcluded that no additional write down of goodwill and other indefinite livedintangible assets is required.  Weperformed detailed fair value determinations and concluded that no additionalwrite down of the carrying value of goodwill and other indefinite-livedintangible assets is required.

 

***Restructuringand Severance Charges***

 

During 2004, we recognizeda $1,406,000 restructuring charge related to severance and other benefits foran executive and administrative support personnel who left our company in 2004.

 

During the second quarterof 2004, we conducted an extensive review of the operating and cost structureat our Buffalo, New York station. As a result of this review, we haveeliminated certain functional job positions through a combination of voluntaryand involuntary employee terminations and reduced certain non-personnel relatedoperating expenses. In connection with the elimination of the employmentpositions, we recognized a $526,000 restructuring charge as of June 30,2004 related to severance and earned 

 

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vacation, payroll taxesand health insurance costs.  In addition,during the third quarter of 2004, we recorded an additional $95,000 ofrestructuring charges as a result of our continued review of our Buffalo, NewYork station related to the severance and earned vacation, payroll taxes and healthinsurance costs as of September 30, 2004.

 

At December 31,2004, the restructuring charges were included in “other accrued liabilities” onthe consolidated Balance Sheets and the related expense for the charges at theBuffalo, New York television station are included in “station operatingexpenses” and the related expense for the corporate charges are included in “corporateseparation agreement expenses” on the consolidated Statement of Operations.These costs were recognized in accordance with the provisions of Statement ofFinancial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

The following is areconciliation of the aggregate liability recorded for restructuring charges asof December 31, 2004:

 
| ** **         | ** ** | **Year Ended December 31, 2004** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **December 31, 2003**            | ** ** | **Provision** | ** ** | **Payments** | ** ** | **December 31, 2004** | ** ** |
|               |       |                                  |       |   |   |   |   |   |   |
| Buffalo,  New York |       | $                                     | —     |   | $ | 621,000 |   | $ | 371,000 |   | $ | 250,000 |   |
| Corporate          |       | —                                |       | 1,406,000 |   | 192,000 |   | 1,214,000 |   |
|               |       |                                  |       |   |   |   |   |   |   |
| Total              |       | $                                     | —     |   | $ | 2,027,000 |   | $ | 563,000 |   | $ | 1,464,000 |   |

 

The liability for therestructuring charges will be paid in accordance with the provisions of theseverance agreements and payments are expected to be completed at various timesthrough March 2006.

 

**RecentDevelopments**

 

On March 7, 2005, wecompleted the sale of  WPTA-TV, the ABCaffiliate serving Fort Wayne, Indiana (“WPTA-TV”), to a subsidiary of MalaraBroadcast Group for approximately $45.4 million, pursuant to the terms andconditions of an asset purchase agreement, dated April 23, 2004.  Inaddition, on March 8, 2005, we completed the purchase of WISE-TV, the NBCaffiliate serving Fort Wayne, Indiana, from New Vision Group, LLC (“New VisionTelevision”) for approximately $43.5 million, pursuant to the terms andconditions of a stock purchase agreement, dated April 23, 2004.

 

In addition, a subsidiaryof Malara Broadcast Group on March 8, 2005, acquired CBS affiliateKDLH-TV, Duluth, Minnesota-Superior, Wisconsin (“KDLH-TV”) from New VisionTelevision and certain of its subsidiaries for approximately $9.5 million,pursuant to the terms and conditions of an asset purchase agreement, dated April 23,2004. We currently own and operate KBJR-TV, the NBC affiliate servingDuluth-Superior.

 

On March 8, 2005, weentered into a strategic arrangement with Malara Broadcast Group, under whichwe will provide advertising sales, promotion and administrative services, andselected programming to Malara Broadcast Group-owned stations WPTA-TV andKDLH-TV in return for certain fees that will be paid by Malara Broadcast Groupto us.  The fees payable to us will be paid after current debt service aswell as certain other expenses Malara Broadcast Group incurs directly aresatisfied.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of borrowingspursuant to the Malara Broadcast Group Senior Credit Facility.  The MalaraBroadcast Group Senior Credit Facility provides for two term loans totaling$48.5 million and a revolving loan of $5 million.  The $23.5 millionMalara Broadcast Group Term Loan A is secured by a letter of credit.  Tosecure the reimbursement obligation in the event of a draw on the letter ofcredit, we pledged $25 million of U.S. Government Securities which arerestricted and not available for working capital or any other purposes. To the****extent the Term Loan A is amortized,the letter of credit shall be proportionately reduced and we shall be permittedto proportionately reduce the amount of the pledged U.S. GovernmentSecurities.  The $25 million MalaraBroadcast Group Term Loan B and the $5 million revolving loan are secured bythe assets of WPTA-TV and KDLH-TV, and guaranteed on an unsecured basis byGranite Broadcasting Corporation.

 

We do not own MalaraBroadcast Group or its television stations. However, as a result of GraniteBroadcasting Corporation’s guarantee of the obligations incurred under MalaraBroadcast Group’s Senior Credit Facility with respect to the Term Loan B andthe revolving loan and due to our arrangements under the local serviceagreements and put/call option agreements, under Generally Accepted AccountingPrinciples in the United States (“U.S. GAAP”), specifically, FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, Consolidationof Variable Interest Entities (“Interpretation 46”) we are required toconsolidate Malara Broadcast Group’s financial position, results of operationsand cash flows, as of December 31, 2004. As we will continue toconsolidate WPTA-TV in accordance with the provisions of Interpretation 46, wewill not account for the sale of assets of WPTA-TV to Malara Broadcast Groupand no gain or loss will be recognized therefrom in the consolidated statementsof operations.

 

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**Liquidityand Capital Resources**

 

As of March 16,2005, we had approximately $61,807,000 of cash and marketable securities onhand, of which $25,000,000 is pledged to support the reimbursement obligationsin the event of a draw on the letter of credit that serves as collateral forthe Term Loan A under Malara Broadcast Group’s Senior Credit Facility, which isdescribed below and is restricted and not available for working capital or anyother purposes.  To the****extent the Term Loan A is amortized, the letter of creditshall be proportionately reduced and we shall be permitted to proportionatelyreduce the amount of the U.S. Government Securities pledged against the letterof credit.  Absent changes to our capitalstructure and station ownership, we will not have enough liquidity to serviceour existing obligations over the next twelve months.  In order to improve our existing liquidityposition, we are currently exploring the sale of assets and the raising ofadditional capital. However, under our Indenture, our use of the net proceedsfrom the sale of assets is restricted. Of the net proceeds received in an asset sale, $5 million may be usedfor working capital purposes and the remainder must be used either:

 

•                  tomake an investment in properties and assets that replace the properties andassets that were the subject of such asset sale or in properties and assetsthat will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, aPermitted Business Acquisition or enter into a definitive agreement toeffectuate such acquisition; provided that (A) the primary purpose of suchacquisition of Replacement Assets or Permitted Business Acquisition is toacquire, and there is acquired, a television station with a Big-4 (ABC, CBS,NBC or Fox) network affiliation agreement in place or the creation (throughownership by the Company and its Restricted Subsidiaries) of a “duopoly” in amarket and (B) that the Company shall use all reasonable best efforts topromptly dispose of any other assets acquired in such acquisition or PermittedBusiness Acquisition (as such terms are defined in the Indenture); or

 

•                  tomake an offer to all holders of the Notes to purchase such amount of the Notesless any such net proceeds used to acquire qualifying Replacement Assets or tomake a Permitted Business Acquistion .

 

Assuming we aresuccessful in selling assets and raising additional capital, we believe thatthe available proceeds together with the cash and marketable securities on handand internally generated funds from operations will be sufficient to satisfyour cash requirements for our existing operations for the next twelve months.  There can be no assurance that we will besuccessful in selling assets and raising additional capital and a lack ofliquidity would have a material adverse effect on our business strategy andtherefore affect our ability to continue as a going concern. The 2004 financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

We have established aninvestment policy for investing cash that is not immediately required forworking capital purposes.  Our investmentobjectives are to preserve capital, maximize our return on investment and toensure we have appropriate liquidity for our cash needs. The investments areconsidered to be available-for-sale as defined under Statement of FinancialAccounting Standards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. As of December 31,2004, we had approximately $60,859,000 of cash and cash equivalents and$5,604,000 of marketable securities. The marketable securities, which includedirect obligations of the U.S. Government, domestic commercial paper anddomestic certificates of deposits, have maturities of one year or less and haveactive markets to ensure portfolio liquidity.

 

***TheCompany’s 9 3/4 % Senior Secured Notes***

 

On December 22,2003, we completed a $405,000,000 offering of our 9 3/4 % Senior Secured Notes(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, whichcommenced on June 1, 2004.  We used thenet proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under our senior credit agreement, (ii) redeemat par, plus accrued interest, all of our 9 3/8 % and 10 3/8 % seniorsubordinated notes due May and December 2005, respectively, and (iii) torepurchase at par, plus accrued interest, all of our 8 7/8 % seniorsubordinated notes due May 2008. The remaining proceeds were invested in short-term securities as well asbeing used for general working capital purposes.

 

The Notes are our seniorsecured obligations. The Notes are guaranteed by each of our domesticrestricted subsidiaries. The Notes and the guarantees are secured bysubstantially all of our assets.  We mayredeem some or all of the Notes at any time on or after December 1, 2006.We may also redeem up to 35% of the aggregate principal amount of the Notesusing the proceeds of one or more equity offerings on or before December 1,2005.

 

 

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The Indenture,which governs our Notes, restricts our ability and the ability of ourrestricted subsidiaries to, among other things: (i) incur additional debtand issue preferred stock; (ii) make certain distributions, investmentsand other restricted payments; (iii) create certain liens; (iv) enterinto transactions with affiliates; (v) enter into agreements that restrictour restricted subsidiaries from making payments to us; (vi) merge,consolidate or sell substantially all of our assets; (vii) limit theability of our subsidiaries to issue preferred stock; (viii) sell oracquire assets; and (ix) enter into new lines of business.

 

Under the Indenture, theMalara Broadcast Group companies to which we provides services pursuant to thelocal services agreements are subject to the terms of the Indenture applicableto Restricted Subsidiaries that are not Guarantors, as such terms are definedin the Indenture.

 

***MalaraBroadcast Group’s Senior Credit Facility***

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV in March 2005 with theproceeds of the Malara Broadcast Group Senior Credit Facility, consisting oftwo terms loans totaling $48.5 million and a revolving loan of $5 million. The$23.5 million Malara Broadcast Group Term Loan A is secured by a letter ofcredit. To secure the reimbursement obligations in the event of a draw on theletter of credit, pursuant to the terms and conditions of an Application andAgreement for Standby Letter of Credit, we pledged $25 million of U.S.Government Securities. To the****extent theTerm Loan A is amortized, the letter of credit shall be proportionately reducedand we shall be permitted to proportionately reduce the amount of the pledgedU.S. Government Securities.  The $25million Malara Broadcast Group Term Loan B and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on anunsecured basis by Granite Broadcasting Corporation pursuant to a guarantyagreement (the “Granite Guaranty”).

 

The Malara Broadcast Group Senior Credit Facility contains covenants restricting the ability of Malara Broadcast Group and its subsidiaries to, among other things, (i) incur additional debt, (ii) incur liens, (iii) make loans and investments, (iv) incur contingent obligations (including hedging arrangements), (v) declare dividends or redeem or repurchase capital stock or debt, (vi) engage in certain mergers, acquisitions and asset sales, (vii) engage in transactions with affiliates, (viii) engage in sale-leaseback transactions and (ix) change the nature of its business and the business conducted by its subsidiaries.  Malara Broadcast Group is also required to comply with financial covenants with respect to a minimum interest coverage ratio, minimum consolidated available cash flow, a maximum leverage ratio and minimum consolidated net revenue and limits on capital expenditures.

 

Interest rates associatedwith the Term Loan A are based, at Malara Broadcast Group’s option, at either (i) thehigher of the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, assuch terms are defined in the Malara Broadcast Group Senior CreditFacility.  Interest rates associated withthe Term Loan B and Revolving Loan are based, at Malara Broadcast Group’soption, at either (i) the Base Rate plus 4.625% per annum or (ii) theAdjusted Eurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Term Loan B and Revolving Loan at a rate of 3% per annum.Additionally, Malara Broadcast Group is required to pay monthly commitment feeson the unused portion of its revolving loan commitment at a rate of 0.50% perannum.  Cash interest payments arepayable monthly.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan B as follows: (i) $125,000payable at the end of each month from June 1, 2006 through March 31,2007, (ii) $158,333.33 payable at the end of each month from April 1,2007, through March 31, 2008, and (iii) $216,667 payable at the endof each month from April 1, 2008, through February 1, 2010.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan A and theRevolving Loan equal to the product of (i) the Repayment Percentage (whichis 25% unless there is an Event of Default or the Consolidated Loan to StickValue is less than 70%, in which case the Repayment Percentage is 100%) and (ii) theConsolidated Excess Free Cash Flow for the month preceding the month in whichsuch installment is due, as such terms are defined in the Malara BroadcastGroup Senior Credit Facility.  “ConsolidatedExcess Free Cash Flow” means, for any period, an amount (if positive) equal to (i) ConsolidatedNet Revenues; minus (ii) the sum, without duplication, of the amounts forsuch period of (a) Consolidated Station Expenses, (b) all paymentobligations due and payable during such period with respect to the Obligationsunder the Malara Broadcast Group Senior Credit Facility, (c) CapitalExpenditure Reserves established during such period, and (d) ConsolidatedCapital Expenditures paid in cash during such period, but only to the extentsuch Consolidated Capital Expenditures exceed the aggregate amount ofaccumulated Capital Expenditure Reserves as of such period; minus (iii) GraniteActual Incremental Station Expenses for such period not to exceed certainthresholds; provided that, if the Consolidated Loan to Stick Value Ratio isequal to or greater than 70% at any time during such period, Granite ActualIncremental Station Expenses shall not be deducted in the calculation ofConsolidated Excess Free Cash Flow for such period to the extent necessary toreduce such ratio to less than 70% (up to the full amount of all such GraniteActual Incremental Station Expenses); provided, further, that if an Event ofDefault involving (1) a breach or default by any subsidiary of MalaraBroadcast Group of any of the terms of the Indenture, if the effect of any suchbreach or default is to cause or permit such indebtedness or Notes to becomedeclared due and payable prior to stated maturity, (2) a failure of MalaraBroadcast Group perform or comply with financial covenants in the MalaraBroadcast Group Senior Credit Facility or (3) a failure of GraniteBroadcasting 

 

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Corporation to perform orcomply with the Granite Guaranty, has occurred and is continuing, then GraniteActual Incremental Station Expenses shall not be deducted in the calculation ofConsolidated Excess Free Cash Flow unless and until, in the case of an Event ofDefault involving a failure of Malara Broadcast Group perform or comply withfinancial covenants only, Malara Broadcast Group shall have delivered aCompliance Certificate for a period subsequent to that during which the Eventof Default occurred certifying compliance with the financial covenants for suchsubsequent period, as all such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  All suchpayments shall be applied first to repay the outstanding Revolving Loanto the full extent thereof (without a corresponding reduction in the RevolvingLoan Commitment Amount) and second to repay the outstanding Term Loan Ato the full extent thereof; provided that, if the Repayment Percentagefor such monthly installment is 100%, the excess 75% of such monthlyinstallment shall be applied first to repay the outstanding RevolvingLoan to the full extent thereof and second to repay the outstanding TermLoan B to the full extent thereof.

 

***TheCompany’s 12 3/4 % Cumulative Exchangeable Preferred Stock***

 

Under the terms of theCertificate of Designations for our 12 3/4 % Cumulative Exchangeable PreferredStock (the “Preferred Stock”), we were required to make the semi-annualdividends on such shares in cash beginning October 1, 2002.  The cash payment of dividends had beenrestricted by the terms of our previous senior credit agreement and indenturesand is prohibited under the Indenture, which governs our Notes.  Consequently we have not paid the semi-annualdividend due to the holders since October 1, 2002.  Since three or more semi-annual dividendpayments have not been paid, the holders of the Preferred Stock have the rightto elect the lesser of two directors or that number of directors constituting25% of the members of the Board of Directors. The right of the holders of the Preferred Stock to elect members of theBoard of Directors as set forth above will continue until such time as allaccumulated dividends that are required to be paid in cash and that are inarrears on the Preferred Stock are paid in full in cash.  We are restricted from paying cash dividendsunder the Indenture, which governs our Notes, and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.

 

***FilmPayments***

 

As part of an overalleffort to reduce station operating expenses, we have continued to make progressreplacing expensive unprofitable programming with less expensive, profitableprogramming.

 

Film payments at our WBaffiliates were $18.8 million for the year ended December 31, 2004 ascompared to $20.1 million for the year ended December 31, 2003. Based oncompleted negotiations for the purchase of programming and our continued focuson contracting for competitive, but less expensive programming, we expectannual film payments at the WB affiliates to decline by approximately 50% by2007 from our 2003 levels.

 

Film payments at our BigThree affiliates were $5.3 million for the year ended December 31, 2004 ascompared to $5.2 million for the year ended December 31, 2003.  Based on completed negotiations for thepurchase of programming, we expect annual film payments at the Big Threeaffiliates to decline by approximately 20% by 2007 from our 2003 levels.

 

***NetCash Used in Operating, Investing and Financing Activities***

 

Net cash used inoperating activities was $18,723,000 during the year ended December 31,2004 compared to $20,775,000 during the year ended December 31, 2003.  The change in 2004 from 2003 was primarilydue to the receipt of a $16,000,000 income tax refund, offset in part byincreased payments of interest expense and changes in net assets.

 

Net cash used ininvesting activities was $10,307,000 during the year ended December 31,2004 compared to $12,653,000 during the year ended December 31, 2003.  The change in 2004 from 2003 was primarilydue to the purchase of marketable securities, offset by a reduction in capitalexpenditures due to the completion of our conversion to digitaltechnology.  We spent $4,811,000 and$12,653,000 on capital expenditures during 2004 and 2003, respectively,primarily related to the implementation of digital technology.

 

Net cash used infinancing activities was $325,000 during the year ended December 31, 2004compared to net cash provided in financing activities of $69,321,000 during theyear ended December 31, 2003.  Thechange in 2004 from 2003 was primarily due to the net cash provided as a resultof the issuance of our Notes in December 2003.

 

***NoOff-Balance Sheet Arrangements***

 

At December 31,2004, 2003, and 2002, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or variable interest entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.

 

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***Capitaland Commercial Commitments***

 

The following table anddiscussion reflect our significant contractual obligations and other commercialcommitments as of December 31, 2004:

 
| ** **                                                                        | ** ** | **Payment Due by Period** | ** **    |
|-----------------------------------------------------------------------------------|------------|---------------------------|---------------|
| **Capital  Commitment**                                                           | ** ** | **Total**                 | ** **    | **1 Year** | ** ** | **2-3 years** | ** ** | **4-5 years** | ** ** | **After  5 years** | ** ** |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| 9  3/4% Senior Secured Notes due 2010                                             |       | $                         | 405,000,000   |   | $ | — |   | $ | — |   | $ | — |   | $ | 405,000,000 |   |
| Interest  on Senior Secured Notes                                                 |       | 233,634,000               |          | 39,487,000 |   | 78,975,000 |   | 78,975,000 |   | 36,197,000 |   |
| Program  contract commitments - current                                           |       | 42,503,000                |          | 24,527,000 |   | 15,376,000 |   | 2,600,000 |   | — |   |
| Program  contract commitments – future                                       |       | 33,281,000                |          | 1,481,000 |   | 11,458,000 |   | 12,218,000 |   | 8,124,000 |   |
| WB  Affiliation                                                                   |       | 7,366,000                 |          | 2,523,000 |   | 4,843,000 |   | — |   | — |   |
| Operating  leases                                                                 |       | 14,001,000                |          | 1,906,000 |   | 3,104,000 |   | 3,164,000 |   | 5,827,000 |   |
| 12  3/4% Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000               |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring  and severance                                                      |       | 1,464,000                 |          | 1,272,000 |   | 192,000 |   | — |   | — |   |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| Total  capital and commercial commitments                                         |       | $                         | 1,114,919,000 |   | $ | 71,196,000 |   | $ | 113,948,000 |   | $ | 474,627,000 |   | $ | 455,148,000 |   |

 

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(a)                                 Asof December 31, 2004, the Cumulative Exchangeable Preferred Stock,including accrued dividends totaled $269,092,000. The table above includes thebalance as of December 31, 2004 and the expected accrued dividends throughApril 2009, the date of redemption. Payment of cash dividends arerestricted by the terms of the Indenture, which governs our existing SeniorSecured Notes.

 

**RecentAccounting Pronouncements**

 

In December 2004,FASB issued Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, or Statement 123(R). Statement 123(R)addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Statement 123(R) requires an entity torecognize the grant-date fair-value expense of stock options or other equitybased compensation issued to employees in the statement of operations. Therevised Statement generally requires that an entity account for those transactionsusing the fair-value-based method, and eliminates the intrinsic value method ofaccounting in Accounting Principles Board No. 25, *Accountingfor Stock Issued to Employees*, or APB 25.   The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial position, results ofoperations or cash flows.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first interim or annual reporting period that begins afterJune 15, 2005. All public companies must use either the modifiedprospective or modified retrospective transition method. Early adoption ofStatement 123(R) for interim or annual periods for which financial statementsor interim reports have not been issued is encouraged but not required. We havenot fully evaluated the impact, if any, of adopting this pronouncement whichmust be adopted in the third quarter of 2005, but we believe that the adoptionof this Statement will not have a significant accounting impact.

 

In September 2004,Emerging Issues Task Force (“EITF”) issued Topic No. D-108, *Use of the Residual Method to Value Acquired Assets Other than Goodwill*,or Topic D-108. Topic D-108 requires that a direct value method be used tovalue intangible assets acquired in business combinations completed after September 29,2004. Topic D-108 also requires that an impairment test using a direct valuemethod on all intangible assets that were previously evaluated using theresidual method be performed no later than the beginning of the first fiscalyear beginning after December 15, 2004 (2005 for the Company). Anyimpairments arising from the initial application of a direct value method wouldbe reported as a cumulative effect of accounting change. We have not fullyevaluated the impact of, if any, of adopting this pronouncement which must beadopted for the year ended 2005, but we believe that the adoption of thisStatement will not have a significant accounting impact.

 

In December 2003,the FASB issued Interpretation No. 46(R), *Consolidationof Variable Interest Entities*, or Interpretation 46.  Interpretation 46 addresses when a companyshould include in its financial statements the assets, liabilities andactivities of another entity. Interpretation 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.  We adopted 

 

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Interpretation 46 for theyear ended December 31, 2003 and the application of Interpretation 46 didnot have a material impact on our financial position, results of operations, orcash flows.

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth 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 effectivebeginning with the first interim period after June 15, 2003.  We adopted Statement 150 during the sixmonths ended December 31, 2003.  Our12 3/4 % Cumulative Exchangeable Preferred Stock, which we refer to as thePreferred Stock, was reclassified on our consolidated balance sheet as along-term liability and the accrual of dividends for the six months ended December 31,2003 and we recorded as a charge to expense on the consolidated statement ofoperations.  The impact of adoptingStatement 150 reduced income before income taxes by $25,548,000 and $12,774,000for the years ended December 31, 2004 and 2003, respectively.  Prior to June 15, 2003, dividends on thePreferred Stock were treated as a reduction of shareholders’ equity.

 

**Risk Factors**

 

We cannot identify norcan we control all circumstances that could occur in the future that mayadversely affect our business and results of operations.  Some of the circumstances that may occur andmay impair our business are described below. If any of the following circumstances were to occur, our business couldbe 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 of available liquidity is our cash andmarketable securities (approximately $61,807,000 million as of March 16,2005, of which $25 million is pledged to support the reimbursement obligationsin the event of a draw on the letter of credit that supports the Term Loan Aunder Malara Broadcast Group’s Senior Credit Facility, which is describedabove).  Absent changes to our capitalstructure and station ownership we will not have enough liquidity to serviceour existing obligations on an ongoing basis. Lack of liquidity would have a material adverse effect on our ability toimplement our business strategy and affect our ability to make payments on theNotes.

 

**Our principal strategy, seeking growth throughacquisitions of television stations and operating arrangements with in-markettelevision stations, may not be achievable absent dispositions of certain ofour television stations.**

 

Our ability to make acquisitions is dependent on ourhaving successfully consummated asset dispositions.  We may not be able to find buyers willing toacquire our stations at prices and on terms and conditions satisfactory to us,or at all.  The current uncertainty inthe regulatory environment surrounding multiple station ownership in certain ofour existing television station markets may impede the sale of these stationsat the present time.

 

We also pursue selective acquisitions of television stationswith the goal of improving their operating performance by applying ourmanagement’s business and growth strategy. However, we may not be successful in identifying attractive acquisitiontargets.  Future acquisitions involveinherent risks, such as increasing leverage and debt service requirements andcombining company cultures and facilities, which could have a material adverseeffect on our operating results, particularly during the period immediatelyfollowing any acquisitions. We may not be able to successfully implementeffective cost controls, increase advertising revenues or increase audienceshare with respect to any acquired station. In addition, our futureacquisitions may result in our assumption of unexpected liabilities and mayresult in the diversion of management’s attention from the operation of ourbusiness.

 

In addition, television station acquisitions aresubject to the approval of the FCC and, potentially, other regulatoryauthorities. For example, FCC rules restrict the number of televisionstations an entity may own within a single market. See “Business—TelevisionDuopoly Rule’’ under Item 1. The need for FCC and other regulatory approvalscould restrict our ability to consummate future transactions and potentiallyrequire us to divest some television stations if the FCC or the Department ofJustice believes that a proposed acquisition would result in excessiveconcentration in a market, even if the proposed combinations may otherwisecomply with FCC ownership limitations.

 

The Indenture, which governs our Notes, limits, andfuture debt obligations may limit, our ability to pursue our acquisitionstrategy, including certain limitations in the Indenture with respect toacquisitions for cash. If our acquisition strategy is not successful, ourability to make payments on the Notes could be adversely affected. Even if ouracquisition strategy is successful, we may be unable to make payments on theNotes due to events which are beyond our control such as prevailing business,financial and economic conditions.

 

Our failure to successfully implement our businessstrategy may negatively affect our future liquidity and materially 

 

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adversely affect us and our ability to make paymentson the Notes.

 

**The FCC could reverse, rescind or otherwise modifythe Media Bureau’s consent to the assignment of the license of KDLH-TV toMalara Broadcast Group.**

 

In May 2004, anapplication was filed with the FCC seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between Malara and theCompany.  The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application in December 2004.  In January 2005, the petitioningbroadcasters filed an application for review seeking Commission-level review ofthe Bureau’s decision.  Malara filed anopposition to the application for review, and the petitioning broadcastersfiled a response to that opposition.  TheFCC has not yet ruled on the application for review.  Although we believe that the application forreview is without merit and anticipate that the FCC will affirm the grant ofthe assignment application for KDLH, it is not possible to predict how the FCCwill rule on the application for review. It also is not possible to predict any remedial action or possiblesanction that may be imposed by the FCC in the event that it grants theapplication for review.  FCC grant of theapplications for review ultimately could result in a reformation or rescissionof these agreements, the assignment of the KDLH license back to New VisionGroup, L.L.C., or a sale by Malara of its ownership of KDLH.

 

**FCC ownership rules and policies may limitour ability to create or maintain arrangements with in-market televisionstations, which would impair our strategy.**

 

We would like to own or provide services to affiliatedtelevision stations with a strong local news presence, particularly intelevision markets in which we already operate a station. We are activelypursuing this strategy which includes the creation of arrangements within-market television stations through ownership of one station and acombination of agreements (such as shared services, local services, salesrepresentation, marketing, operating, guarantees or other agreements andarrangements) 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 thesame market, whereby the owner of one station provides operational assistanceto the other station, subject to ultimate editorial and other controls beingexercised by the latter station’s owner. By operating or entering into a localservices agreement with a second television station in a market in which we owna station, we believe that we could achieve significant operationalefficiencies, broaden our audience reach and enhance our ability to capturemore advertising spending in a given market. While these types of arrangementshave been approved by the FCC pursuant to delegated authority as consistentwith current FCC rules and policies, there can be no assurances that theFCC will continue to permit agreements as a means of creating opportunities forarrangements with in-market television stations, that the FCC will not assertits authority over the FCC staff in this area (which may result inmodifications to current policy) or that the FCC’s treatment of these types ofarrangements we may enter into will be consistent with the treatment describedabove or on terms that will permit us to realize the benefits described above.Specifically, the FCC may change its current policies with regard to the regulatorytreatment of and acceptability of certain terms and conditions of sucharrangements for a variety of reasons, such as in response to direction fromlegislators or public opinion, in a way that prevents such arrangements orrequires significant modifications to the financial or other material terms ofsuch arrangements. For example, the FCC recently initiated a proceeding to seekcomment on whether to attribute same-market television joint salesagreements.  We cannot predict whetherthe FCC will decide to attribute television joint sales agreements.   See “Business —FCC Regulation of TelevisionBroadcasting’’ and ‘‘Business—Attribution” under Item 1.  If the FCC, on its own initiative or inresponse to a third party complaint, were to challenge such arrangements anddetermine that such arrangements constitute attributable interests in violationof, or otherwise violate, the FCC’s rules or policies, we may be unable toimplement this business strategy or be required to revise or terminate existingarrangements, and we could be subject to sanctions, fines and/or otherpenalties. Any such change in FCC policies concerning arrangements involvingjoint sales agreements, local services agreements, guarantees or similaragreements could limit our ability to establish or maintain arrangements withother in-market television stations 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 ownership rules currently impose significantlimitations on the ability of broadcast licensees to have attributableinterests in multiple media properties. One of these local market ownershiprestrictions, known as the television duopoly rule, includes an ownership limitof one television station in medium and smaller markets and two stations inlarger markets provided that there are at least eight independently owned andoperating full-power television stations in the market and one of the combiningstations is not ranked among the top four stations in the market. The FCC’scurrent rules also permit a waiver of the duopoly rule but only ifone of the two television stations is a failed or failing station, if theproposed transaction would result in the construction of an unbuilt 

 

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television station or if compelling public interestfactors are present, provided that a waiver applicant demonstrates that noreasonable out-of-market buyer was available. Under the existing televisionduopoly rule, absent a waiver, we would not be able to acquire a second stationin our existing Big-Three affiliated stations’ markets because our stations andthe most likely target stations would be amongst the top-four rated stations inthe market. Our ability to obtain a waiver of the existing duopoly rule alsois severely 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 theproposed sale; or (ii) acquired one of the stations directly andestablished an operating arrangement —through a local services agreement orotherwise—with another party who then would acquire the second station.

 

On June 2, 2003, the FCC voted to substantiallyamend many of its ownership rules. The television duopoly rule was relaxedto permit ownership of up to three stations in certain large markets and twostations in many mid-sized markets, provided that no more than one of theco-owned stations can be among the top four rated stations in the market. Inthe markets in which we operate our Big-Three affiliated stations, absent awaiver, we would not be able to take advantage of this new duopoly rule becauseour station and the most likely target stations would be amongst the top-fourrated stations in the market. The FCC further declared that it would grantwaivers of the top-four restriction under certain circumstances, such as inmarkets where it can be established that ownership consolidation in small tomid-sized television markets with 11 or fewer television stations could lead tosignificant public interest benefits. We are unable to predict whether the FCCwould grant us a waiver pursuant to this standard. The FCC further determinedthat a non-conforming combination permitted by a waiver of the duopoly rule couldnot be transferred jointly either as a separate asset or through the transferof control of the licensee, except by obtaining a waiver of the rule uponeach transfer or by sale to certain eligible small business entities.Therefore, as is currently the case under the present duopoly rule, if we wereto acquire a second station in a market pursuant to a waiver, our ability tosell or transfer that duopoly would be restricted because any potentialacquirer would need to obtain a waiver from the FCC in order to own the duopolyor establish its eligibility as a small business entity or would need toacquire one of the stations directly and establish an operating arrangementwith another party who then would acquire the second station.

 

The FCC’s modified media ownership rules have notgone into effect because on September 3, 2003, the U.S. Court of Appealsfor the Third Circuit stayed the effectiveness of the new rules.  On June 24, 2004, the Third Circuitissued a decision finding virtually all of the media ownership rules withoutsupport and remanding the proceeding back to the FCC for furtherconsideration.  The stay of the modifiedmedia ownership rules remains in effect pending the FCC’s review onremand, except with respect to the FCC’s revised definition of local radiomarket.  The modified media ownership rules alsoare subject to pending petitions for reconsideration filed with the FCC.  In addition, on January 31, 2005, theNational Association of Broadcasters and several industry parties requested theUnited States Supreme Court to review the Third Circuit’s decision.  The request for Supreme Court review remainspending.  We are unable to predict theeventual outcome of the reconsideration petitions, the outcome of the FCC’sreview on remand, whether the Supreme Court will hear the appeal, or theoutcome of any Supreme Court review.  Weare unable to predict the potential effect any changes would have on ouracquisition strategy.

 

**TheIndenture, which governs our Notes, contains various covenants that limit ourmanagement’s discretion in the operation of our business.**

 

Our Indenture, whichgoverns our Notes, contains various covenants that restrict our ability and theability of our restricted subsidiaries to, among other things:

 

•                   incuradditional debt and issue preferred stock;

•                   makecertain distributions, investments and other restricted payments;

•                   createcertain liens;

•                   enterinto transactions with affiliates;

•                   enterinto agreements that restrict our restricted subsidiaries from making paymentsto us;

•                   merge,consolidate or sell substantially all of our assets;

•                   limitthe ability of our subsidiaries to issue preferred stock;

•                   sellor acquire assets; and

•                   enterinto new lines of business.

 

As a result of theserestrictions and covenants, our management’s ability to operate our business atits discretion is limited, and we may be unable to compete effectively, pursueacquisitions or take advantage of new business opportunities, any of whichcould harm our business.  MalaraBroadcast Group’s Senior Credit Facility contains similar terms andrestrictions.

 

If we fail to comply withthe restrictions in the Indenture, a default may occur. A default would allow 

 

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the trustee under theIndenture or the holders of the Notes to accelerate the related debt.  A default followed by an acceleration of theNotes would also allow the trustee under the Indenture to foreclose oncollateral securing such debt.

 

Under the Indenture, the Malara Broadcast Groupcompanies to which the Company provides services pursuant to the local servicesagreements are subject to the terms of the Indenture applicable to RestrictedSubsidiaries that are not Guarantors, as such terms are defined in theIndenture.  Failure of the MalaraBroadcast Group companies to which the Company provides services to comply withthe terms of the Indenture applicable to Restricted Subsidiaries that are notGuarantors would result in a default under the Indenture, which in turn wouldcreate a default under Malara Broadcast Group’s Senior Credit Facility.

 

**Malara Broadcast Group may make decisionsregarding the operation of its station that could reduce the amount of cash wemight receive under our local services agreements with Malara Broadcast Group.**

 

Malara Broadcast Group is 100% owned by an independentthird party.  As of March 8, 2005,Malara Broadcast Group owns and operates the following television stations:WPTA and KDLH. As of March 8, 2005, we entered into various local serviceagreements with Malara Broadcast Group pursuant to which we provide services toMalara Broadcast Group’s stations. In return for the services we provide, wereceive substantially all of the available cash, after payment of debt servicecosts and other expenses, generated by Malara Broadcast Group’s stations. TheCompany also guarantees all of the obligations incurred under Malara BroadcastGroup’s Senior Credit Facility with respect to the term loan B and revolvingloan, which were incurred primarily in connection with Malara Broadcast Group’sacquisition of its stations.

 

We do not own Malara Broadcast Group or MalaraBroadcast Group’s television stations. However, we are deemed to be the primarybeneficial interest holders in them under U.S. GAAP. In order for ourarrangements with Malara Broadcast Group to comply with FCC regulations, MalaraBroadcast Group must maintain complete control over its own stations, includingultimate control over all operations of the stations, such as programming,finances, and personnel.  As a result,Malara Broadcast Group’s equity holder and officers can make decisions withwhich we disagree and which could reduce the cash flow generated by thesestations and, as a consequence, the amounts we receive under our local serviceagreements with Malara Broadcast Group. For instance, we may disagree withMalara Broadcast Group’s programming decisions, which programming may proveunpopular and/or may generate less advertising revenue.

 

**A default by Malara Broadcast Group under itsSenior Credit Facility (i) gives the lenders thereunder holding the TermLoan B or the Revolving Loan the right to enforce the Granite Guaranty, (ii) givesthe lenders thereunder holding the Term Loan A the right to draw on the letterof credit if the lenders thereunder accelerate the related debt and Malara BroadcastGroup does not make full payment thereof, and (iii) triggers a default onthe Indenture if the lenders thereunder accelerate the related debt.**

 

Upon the occurrence and during the continuation of anevent of default under Malara Broadcast Group’s Senior Credit Facility, thelenders thereunder holding the Term Loan B or the Revolving Loan could enforcethe Granite Guaranty relating to such loans notwithstanding the existence ofany dispute between Malara Broadcast Group and any such lender with respect tothe existence of such event.  Theobligations of Granite Broadcasting Corporation under the Granite Guaranty areindependent of the obligations of Malara Broadcast Group under its SeniorCredit Facility and the obligations of any other guarantor of obligations ofMalara Broadcast Group and a separate action or actions may be brought andprosecuted against Granite Broadcasting Corporation whether or not any actionis brought against Malara Broadcast Group or any of such other guarantors andwhether or not Malara Broadcast Group is joined in any such action or actions.

 

Upon the occurrence and during the continuation of anevent of default under Malara Broadcast Group’s Senior Credit Facility, thelenders thereunder holding the Term Loan A could draw on the $25 million letterof credit if the lenders under Malara Broadcast Group’s Senior Credit Facilityaccelerate the debt and Malara Broadcast Group does not make full paymentthereof.  If such lenders draw on theletter of credit, the Company is obligated to reimburse the financialinstitution that issued the letter of credit. The Company pledged $25 million in U.S. Government Securities to supportits reimbursement obligations related to the letter of credit.

 

A default under Malara Broadcast Group’s Senior CreditFacility would also trigger a default under the Indenture if the lenders underMalara Broadcast Group’s Senior Credit Facility accelerate the debt.  If there is a default under the Indenture,the trustee under the Indenture or the holders of the Notes can accelerate thedebt under the Indenture.

 

**A default by Malara Broadcast Group under itsSenior Credit Facility prevents payments to the Company under the localservices agreements and would permit the lenders under the Senior CreditFacility to foreclose and sell the stations owned by Malara Broadcast Group,which causes the automatic termination of the local services agreements.**

 

Upon the occurrence and during the continuation of anevent of default under Malara Broadcast Group’s Senior Credit Facility, thepayments to the Company under the local services agreements would cease, butthe Company would continue to be 

 

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obligated to provide the services set forth in thelocal services agreements while such agreements are in effect.  Should the lenders under the Senior CreditFacility foreclose and sell the stations owned by Malara Broadcast Group inconnection with an event of default, the local services agreements wouldautomatically terminate, and the Company would no longer receive any cash fromthese stations.

 

**If Malara Broadcast Group were to enterbankruptcy, a bankruptcy court could reject the local services agreementsbetween the Company and Malara Broadcast Group.**

 

In certain bankruptcy cases, a debtor has the right,subject to bankruptcy court approval and certain other limitations, to assumeor reject executory contracts and unexpired leases.  If Malara Broadcast Group were to enterbankruptcy, there can be no assurances that Malara Broadcast Group, or atrustee acting on behalf of Malara Broadcast Group, would affirm its localservices agreements with us and continue to make payments in a timely mannerunder the local services agreements. Also, we could not cease performing under a local services agreementsolely because of a bankruptcy of Malara Broadcast Group. Any other bankruptcyor financial difficulties of Malara Broadcast Group may negatively affect ouroperating results by decreasing our revenues.

 

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

 

Our operating results are primarily dependent onadvertising revenues. The success of our operations depends in part uponfactors beyond our control, such as:

 

•                    nationaland local economic conditions;

 

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

 

•                    therelative popularity of the programming on our stations;

 

•                    thedemographic characteristics of our markets; and

 

•                    theactivities of our competitors.

 

Our programming may not attract sufficient targetedviewership and we may not achieve favorable ratings. Our ratings depend partlyupon unpredictable and volatile factors beyond our control, such as viewerpreferences, the quality of the programming provided to us by the networks,competing programming and the availability of other entertainment activities. Ashift in viewer preferences could cause our programming not to gain popularityor to decline in popularity, which could cause our advertising revenues todecline. In addition, we and those that we rely on for programming may not beable to anticipate and react effectively to shifts in viewer tastes andinterests in the markets.

 

**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 business is characterized generally by high fixedcosts, primarily for debt service, programming costs, operating leases andpersonnel. Other than commissions paid to our sales staff and outside salesagencies, our expenses do not vary significantly with the increase or decreasein advertising revenue. As a result, a relatively small change in advertisingrevenue could have a disproportionate effect on our financial results.

 

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

 

Approximately 20% of our total revenues for the yearended December 31, 2004, and 21% for the year ended December 31,2003, consisted of automotive advertising. A significant decrease in theserevenues in the future could materially and adversely affect our results ofoperations and cash flows, which could affect our ability to fund operationsand service our debt obligations.

 

**We have a history of net losses and a substantialaccumulated deficit.**

 

We have had net losses of $83,292,000 for the yearended December 31, 2004; $46,948,000 for the year ended December 31,2003 and $81,567,000 for the year ended December 31, 2002, primarily as aresult of amortization of intangible assets and debt 

 

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service obligations. In addition, as of December 31,2004, we had an accumulated stockholders’ deficit of $332,090,000.  We may not be able to achieve or maintainprofitability. The future utilization of a portion of our net operating lossesfor federal income tax purposes is subject to an annual limitation.

 

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

 

We intend to pursue selective acquisitions oftelevision stations with the goal of improving their operating performance byapplying our management’s business and growth strategy. However, we may not besuccessful in identifying attractive acquisition targets. Future acquisitionsinvolve inherent risks, such as increasing leverage and debt servicerequirements and combining company cultures and facilities, which could have amaterial adverse effect on our operating results, particularly during theperiod immediately following any acquisitions. We may not be able tosuccessfully implement effective cost controls, increase advertising revenuesor increase audience share with respect to any acquired station. In addition,our future acquisitions may result in our assumption of unexpected liabilitiesand may result in the diversion of management’s attention from the operation ofour business.

 

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

 

The entertainment industry, and particularly thetelevision industry, is highly competitive and is undergoing a period ofconsolidation and significant change. Many of our current and potentialcompetitors have greater financial, marketing, programming and broadcastingresources than we do. Technological innovation and the resulting proliferationof television entertainment, such as cable television, wireless cable,terrestrial multi-channel video distribution and data systems,satellite-to-home distribution services, pay-per-view, digital video recordersand home video and entertainment systems, have fractionalized televisionviewing audiences and have subjected free over-the-air television broadcaststations 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 advertisingrevenue from political campaign advertising, and to a lesser extent, frombroadcasting the Olympics. In 2004, political election revenue contributedapproximately 6.5% of total net revenues. The absence of political advertisingin 2005 could have a negative impact on our revenues and profitability.

 

**The revenue generated by stations we operate orprovide services to could decline substantially if they fail to maintain or renewtheir network affiliation agreements on favorable terms, or at all.**

 

The non-renewal or termination of a networkaffiliation agreement could have a material adverse effect on us. See ‘‘Business—Networkaffiliation’’ under Item 1. Each of the networks generally provides theaffiliated stations we operate or provide services to****with22 hours of prime time programming per week in the case of the Big-Threestations and 13 hours of prime time programming per week in the case of the WBstations. Each of these agreements is subject to periodic renewal. In addition,some of the network affiliation agreements are subject to earlier terminationby the networks under specified circumstances including as a result of a changeof control of the affiliated stations we operate or provide services to, whichwould generally result upon the acquisition of 50% of our voting power, withrespect to the stations we own, and 50% of Malara Broadcast Group’s votingpower, with respect to the stations to which we provide services. W. DonCornwell through his  ownership of all ofthe outstanding shares of our voting common stock, possess 100% of our votingpower. Some of the networks with which our stations are affiliated haverequired us and other broadcast groups, upon renewal of affiliation agreements,to reduce or eliminate network affiliation compensation and, in specific cases,to make cash payments to the network, and to accept other materialmodifications of existing affiliation agreements. Consequently the affiliationagreements may not all remain in place and each network may not continue toprovide programming or compensation to affiliates on the same basis as itcurrently provides programming or compensation. If this occurs, we and/orMalara Broadcast Group would need to find alternative sources of programming,which may be less attractive and more expensive.  We have no reason to believe that the networkaffiliation agreements will not be renewed when they expire.

 

**Our industry is subject to significant syndicatedand other programming costs, and increased programming costs could adverselyaffect our operating results.**

 

Our industry is subject to significant syndicated andother programming costs. We may be exposed in the future to increasedprogramming costs which may adversely affect our operating results. We oftenacquire program rights two or three years in advance, making it difficult forus to accurately predict how a program will perform. In some instances, we mayhave to replace programs before their costs have been fully amortized,resulting in write-offs that increase station operating costs.

 

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**Any extraordinary, newsworthy event, includinghostilities or terrorist attacks, may affect our revenues and results of operations.**

 

During 2003, we experienced a loss of advertisingrevenue and incurred additional broadcasting expenses due to the initiation ofmilitary action. The military action disrupted our television stations’regularly scheduled programming and some of our clients rescheduled or delayedadvertising campaigns to avoid being associated with war coverage. We expectthat if the United States engages in other foreign hostilities, there is aterrorist attack against the United States or there is some other extraordinary,newsworthy event, we may lose additional advertising revenue and incurincreased broadcasting expenses due to further pre-emption, delay orcancellation of advertising campaigns and the increased costs of providingcoverage of such events. We cannot predict the extent and duration of anyfuture disruption to our programming schedule, the amount of advertisingrevenue that would be lost or delayed or the amount by which our broadcastingexpenses would increase as a result. The loss of revenue and increased expensescould negatively affect our results of operations.

 

**We are dependent on key personnel.**

 

W. Don Cornwell, our Chief Executive Officer andChairman of our Board of Directors has an employment agreement with us. Theagreement provides for a two-year employment term, which is automaticallyrenewed for subsequent two-year terms unless advance notice of nonrenewal isgiven (the current term under such agreements, which were automatically renewedin September 2003, expires September 19, 2005). The agreementprovides that Mr. Cornwell will not engage in any business activitiesduring the term of such agreements outside the scope of their employment withus unless approved by a majority of our independent directors. The loss of theservices of certain key operating and executive personnel currently employed byus could have an adverse impact on us. There can be no assurance that theservices of such personnel will continue to be made available to us. We do notmaintain key-man life insurance on any of our employees.

 

**The industry-wide mandatory conversion to digitaltelevision requires us to make significant capital expenditures for which wemight not see a return on our investment.**

 

The FCC required all commercial television stations inthe United States to start broadcasting in digital format by May 1, 2002unless the FCC granted an extension. Stations may broadcast both analog anddigital signals until December 31, 2006, when they must abandon the analogformat, provided that 85% of households within the relevant DMA have thecapability to receive a digital signal. The digital transmissions may initiallybe reduced power.  However, in its secondDTV periodic review order, the FCC established July 2005 and July 2006deadlines by which stations must commence full-power operation.  We may not have sufficient resources to makerequired capital expenditures to broadcast with full power digitaltransmission.  See ‘‘Business—FCCRegulation of Television Broadcasting’’ and ‘‘Business—Digital Television’’under Item 1.  In addition, there areefforts in Congress and the FCC to establish a firm DTV transitiondeadline.  We cannot predict the outcomeof these efforts or their impact on the Company.

 

It is expensive to convert from the current analogformat to digital format. We have completed the upgrades to our televisionstations to enable them to broadcast with digital technology either withfull-power or reduced-power transmissions, as authorized by the FCC. See ‘‘Business—FCCRegulation of Television Broadcasting’’ and ‘‘Business—Digital Television’’under Item 1.

 

The transition to digital television, or DTV,eventually will require consumers to purchase new televisions that are capableof receiving and displaying DTV signals, or adapters to receive DTV signals andconvert them to analog signals for display on their existing receivers.Currently, very few households have either a digital television or an adapter.Although the FCC has adopted some rules intended to facilitate consumers’transition to digital television—e.g., those concerning ‘‘plug and play’’compatibility and DTV tuners—it is possible that many households will nevermake the switch to digital television. See ‘‘Business—FCC Regulation ofTelevision Broadcasting’’ and ‘‘Business—Digital Television’’ under Item 1.Such households would not be able to view our stations’ signals over-the-air ifand when the FCC requires us to cease broadcasting analog signals. If thishappens our investment in upgrading our stations to broadcast digitally willhave been largely wasted with respect to such households and our audience sharecould be diminished. In addition, digital technology could expose us toadditional competition since digital technology allows broadcasting of multiplechannels within the additional allocated spectrum, compared to only one channeltoday using analog technology. We do not know now what effect this will have onthe competitive landscape in our industry.

 

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

 

TheSatellite Home Viewer Improvement Act of 1999 and the Satellite Home ViewerExtension and Reauthorization Act of 2004 allow direct broadcast satellitetelevision companies to transmit local broadcast television signals tosubscribers in local markets provided that they offer to carry all localstations in that market. However, satellite providers have limited satellitecapacity to deliver 

 

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local station signals in local markets.  As of March 2005, satellitecarriers DirecTV and EchoStar both carried the signals of our stations KBWB,WDWB, WKBW, KSEE and KBJR.Satellite providers, such as DirecTV and EchoStar, may choose not to carrylocal 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 limited circumstanceswhere satellite subscribers cannot receive an adequate over-the-air signal fromone of our stations or when we grant a waiver of our rights, satellite carriersmay provide the signals of distant or significantly viewed 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.

 

**The FCCcan sanction us for programming on our stations which it finds to be indecent.**

 

In 2004, the FCC imposedsubstantial fines on television broadcasters for the broadcast of indecentmaterial in violation of the Communications Act and its rules. The FCC alsorevised its indecency review analysis to more strictly prohibit the use ofcertain language on television stations. Because our and Malara Broadcast Group’sstations’ programming is in large-part comprised of programming provided by thenetworks with which the stations are affiliated, we and Malara Broadcast Groupdo not have full control over what is broadcast on our stations, and we andMalara Broadcast Group may be subject to the imposition of fines if the FCCfinds such programming to be indecent. In addition, Congress currently isconsidering legislation that will substantially increase the maximum amount theFCC can fine broadcasters for the broadcast of indecent programming and mayconsider permitting the FCC to institute license revocation proceedings againstany station which repeatedly violates the indecency regulations.

 

**Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

The interest rate on ouroutstanding Senior Secured Notes is fixed at 9.75%.  Consequently, our earnings will not beaffected by changes in short-term interest rates.

 

Interest rates associatedwith Malara Broadcast Group’s March 8, 2005, Term Loan A are based, atMalara Broadcast Group’s option, at either (i) the higher of the PrimeRate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with Malara BroadcastGroup’s March 8, 2005, Term Loan B and Revolving Loan are based, at MalaraBroadcast Group’s option, at either (i) the Base Rate plus 4.625% perannum or (ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Term Loan B and Revolving Loan at arate of 3% per annum.  As of March 8,2005, the six-month Adjusted Eurodollar Rate rate was 3.21%.  Malara Broadcast Group did has not enteredinto any agreements to hedge the risk of potential interest rateincreases.  Based on borrowingsoutstanding as of March 8, 2005, a 2% increase in the Adjusted EurodollarRate rate would increase interest expense on an annual basis by approximately$1,070,000.

 

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

 

Index toConsolidated Financial Statements

 
| Report  of Independent Registered Public Accounting Firm                                                          | 46    |
|-------------------------------------------------------------------------------------------------------------------|-------|
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and  2002                 | 47    |
| Consolidated Balance Sheets  as of December 31, 2004 and 2003                                                | 48    |
| Consolidated  Statements of Stockholder’s Deficit for the years ended December 31,  2004, 2003 and 2002 | 49    |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                 | 50    |
| Notes to the  Consolidated Financial Statements                                                                   | 51-65 |
| Schedule II —  Valuation and Qualifying Accounts                                                        | 66    |

 

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**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of Directors and StockholdersGranite Broadcasting Corporation

 

We have audited theaccompanying consolidated balance sheets of Granite Broadcasting Corporation asof December 31, 2004 and 2003 and the related consolidated statements ofoperations, stockholders’ deficit and cash flows for each of the three years inthe period ended December 31, 2004. Our audits also included the financial statement schedule listed inthe Index at Item 15(a).  These financialstatements and the schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements and the schedule based onour audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  We werenot engaged to perform an audit of Granite Broadcasting Corporation’s internalcontrol over financial reporting. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Granite BroadcastingCorporation at December 31, 2004 and 2003, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended December 31, 2004 in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 1 tothe consolidated financial statements, the Granite Broadcasting Corporation’srecurring losses from operations and net capital deficiency raise substantialdoubt about its ability to continue as a going concern.  Management’s plans to address these liquiditymatters are also described in Note 1. The 2004 financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

As discussed in Note 2 tothe consolidated financial statements, on January 1, 2002 GraniteBroadcasting Corporation adopted Statement of Financial Accounting Standards No. 142,Goodwill and Intangible Assets.

 

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

 

 

New York, New York

March 9, 2005

 

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                                                                    | ** ** | **For the Years Ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                    | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                    | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net  revenues                                                                                 |       | $                                         | 113,765,211 |   | $ | 108,544,424 |   | $ | 135,344,151 |   |
| Station  operating expenses                                                                   |       | 90,227,015                                |        | 92,033,163 |   | 103,963,240 |   |
| Depreciation                                                                                  |       | 6,429,964                                 |        | 6,285,077 |   | 5,896,626 |   |
| Amortization  of intangible assets                                                            |       | 7,892,924                                 |        | 9,976,310 |   | 21,964,771 |   |
| Impairment  of Goodwill                                                                       |       | 15,491,327                                |        | — |   | — |   |
| Corporate  expense                                                                            |       | 13,532,344                                |        | 11,715,412 |   | 9,536,424 |   |
| Performance  award expense                                                                    |       | 3,414,698                                 |        | 52,247 |   | — |   |
| Corporate  separation agreement expense                                                       |       | 1,406,442                                 |        | — |   | — |   |
| Non-cash  compensation expense (1)                                                            |       | 696,522                                   |        | 895,539 |   | 1,508,048 |   |
|                                                                                          |       |                                      |        |   |   |   |   |
| Operating  loss                                                                               |       | (25,326,025                               | )           | (12,413,324 | ) | (7,524,958 | ) |
|                                                                                          |       |                                      |        |   |   |   |   |
| Other  expenses (income):                                                                     |       |                                      |        |   |   |   |   |
| Interest  expense                                                                             |       | 39,541,188                                |        | 31,305,297 |   | 34,889,378 |   |
| Interest  income                                                                              |       | (1,162,476                                | )           | (1,281,251 | ) | (1,077,327 | ) |
| Non-cash  interest expense                                                                    |       | 4,198,603                                 |        | 4,969,421 |   | 13,030,566 |   |
| Non-cash  preferred stock dividend                                                            |       | 25,547,844                                |        | 12,773,922 |   | — |   |
| Gain  on sale of assets                                                                       |       | —                                    |        | — |   | (192,406,138 | ) |
| Loss  on extinguishment of debt                                                               |       | —                                    |        | 3,214,524 |   | 15,096,641 |   |
| Other                                                                                         |       | 1,554,792                                 |        | 584,324 |   | 868,724 |   |
| (Loss)  income before income taxes and cumulative effect of a change in accounting  principle |       | (95,005,976                               | )           | (63,979,561 | ) | 122,073,198 |   |
| (Benefit)  provision for income taxes:                                                        |       |                                      |        |   |   |   |   |
| Current                                                                                       |       | 216,400                                   |        | (16,110,412 | ) | 18,873,040 |   |
| Deferred                                                                                      |       | (11,930,701                               | )           | (921,277 | ) | 34,288,913 |   |
| Total  (benefit) provision for income taxes                                                   |       | (11,714,301                               | )           | (17,031,689 | ) | 53,161,953 |   |
| (Loss)  income before cumulative effect of a change in accounting principle                   |       | (83,291,675                               | )           | (46,947,872 | ) | 68,911,245 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit of $58,350,946     |       | —                                    |        | — |   | 150,478,583 |   |
| Net  loss                                                                                     |       | $                                         | (83,291,675 | ) | $ | (46,947,872 | ) | $ | (81,567,338 | ) |
|                                                                                          |       |                                      |        |   |   |   |   |
| Net  loss attributable to common shareholders                                                 |       | $                                         | (83,291,675 | ) | $ | (59,899,430 | ) | $ | (80,744,517 | ) |
|                                                                                          |       |                                      |        |   |   |   |   |
| Per  basic common share:                                                                      |       |                                      |        |   |   |   |   |
| (Loss)  income before cumulative effect of a change in accounting principle                   |       | $                                         | (4.30       | ) | $ | (3.15 | ) | $ | 3.72 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit                    |       | —                                    |        | — |   | (8.03 | ) |
| Basic  net loss per share                                                                     |       | $                                         | (4.30       | ) | $ | (3.15 | ) | $ | (4.31 | ) |
|                                                                                          |       |                                      |        |   |   |   |   |
| Weighted  average common shares outstanding                                                   |       | 19,365,950                                |        | 18,990,919 |   | 18,749,363 |   |
|                                                                                          |       |                                      |        |   |   |   |   |
| Per  diluted common share:                                                                    |       |                                      |        |   |   |   |   |
| (Loss)  income before cumulative effect of a change in accounting principle                   |       | $                                         | (4.30       | ) | $ | (3.15 | ) | $ | 3.65 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit                    |       | —                                    |        | — |   | (7.88 | ) |
| Diluted  net loss per share                                                                   |       | $                                         | (4.30       | ) | $ | (3.15 | ) | $ | (4.23 | ) |
|                                                                                          |       |                                      |        |   |   |   |   |
| Weighted  average common shares outstanding — assuming dilution                          |       | 19,365,950                                |        | 18,990,919 |   | 19,098,326 |   |

 

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

 
| ** **                    | ** ** | **For  the Years Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Station operating expenses    |       | $                                          | 112,520    |   | $ | 139,269 |   | $ | 295,652 |   |
| Corporate expense             |       | 584,002                                    |       | 756,270 |   | 1,212,396 |   |
| Non-cash compensation expense |       | $                                          | 696,522    |   | $ | 895,539 |   | $ | 1,508,048 |   |

 

See accompanyingnotes.

 

47

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2004**              | ** **  | **2003** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** **            | ** **  | ** ** | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                                      |       |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Current  assets:                                                                                                                                                                                                                                                                                                                                                                            |       |                  |        |   |   |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                                                                                                                  |       | $                     | 60,858,710  |   | $ | 90,213,995 |   |
| Marketable  securities, at fair value                                                                                                                                                                                                                                                                                                                                                       |       | 5,603,500             |        | — |   |
| Accounts  receivable, less allowance for doubtful accounts ($896,465 in 2004 and  $1,319,238 in 2003)                                                                                                                                                                                                                                                                                       |       | 20,551,203            |        | 21,464,965 |   |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                                       |       | 11,605,637            |        | 15,299,993 |   |
| Income  tax receivable                                                                                                                                                                                                                                                                                                                                                                      |       | —                |        | 16,326,799 |   |
| Other  current assets                                                                                                                                                                                                                                                                                                                                                                       |       | 4,442,080             |        | 5,795,794 |   |
| Total  current assets                                                                                                                                                                                                                                                                                                                                                                       |       | 103,061,130           |        | 149,101,546 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Property  and equipment, net                                                                                                                                                                                                                                                                                                                                                                |       | 45,739,747            |        | 48,449,586 |   |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                                       |       | 5,180,140             |        | 8,446,229 |   |
| Other  non current assets                                                                                                                                                                                                                                                                                                                                                                   |       | 8,430,731             |        | 7,891,335 |   |
| Deferred  financing fees, less accumulated amortization ($1,989,038 in 2004 and $50,902  in 2003)                                                                                                                                                                                                                                                                                           |       | 11,760,080            |        | 13,373,623 |   |
| Goodwill,  net                                                                                                                                                                                                                                                                                                                                                                              |       | 47,632,113            |        | 63,123,440 |   |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                                    |       | 127,331,829           |        | 127,331,829 |   |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                                  |       | 80,793,410            |        | 86,379,757 |   |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                               |       | $                     | 429,929,180 |   | $ | 504,097,345 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Liabilities  and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                 |       |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                                       |       |                  |        |   |   |
| Accounts  payable                                                                                                                                                                                                                                                                                                                                                                           |       | $                     | 1,859,291   |   | $ | 2,903,728 |   |
| Accrued  interest                                                                                                                                                                                                                                                                                                                                                                           |       | 3,290,625             |        | 987,187 |   |
| Other  accrued liabilities                                                                                                                                                                                                                                                                                                                                                                  |       | 7,376,683             |        | 7,039,091 |   |
| Film  contract rights payable                                                                                                                                                                                                                                                                                                                                                               |       | 24,526,448            |        | 27,314,160 |   |
| Other  current liabilities                                                                                                                                                                                                                                                                                                                                                                  |       | 3,785,399             |        | 2,951,001 |   |
| Total  current liabilities                                                                                                                                                                                                                                                                                                                                                                  |       | 40,838,446            |        | 41,195,167 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Long-term  debt                                                                                                                                                                                                                                                                                                                                                                             |       | 400,791,298           |        | 400,086,598 |   |
| Film  contract rights payable                                                                                                                                                                                                                                                                                                                                                               |       | 17,976,348            |        | 24,616,575 |   |
| Deferred  tax liability                                                                                                                                                                                                                                                                                                                                                                     |       | 19,347,007            |        | 31,277,708 |   |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                                 |       | 198,835,862           |        | 198,480,586 |   |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                                            |       | 70,256,573            |        | 44,708,729 |   |
| Other  non current liabilities                                                                                                                                                                                                                                                                                                                                                              |       | 13,973,794            |        | 13,163,788 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| 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; 98,250 shares of Class A Common Stock and  19,283,924 shares of Common Stock (Nonvoting) (18,834,179 shares at December 31,  2003) issued and outstanding at December 31, 2004 |       | 193,820               |        | 190,126 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                 |       | 361,088               |        | — |   |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                                       |       | (12,914               | )           | — |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                        |       | (331,410,284          | )           | (248,118,609 | ) |
| Less:  Unearned compensation                                                                                                                                                                                                                                                                                                                                                                |       | (346,183              | )           | (627,648 | ) |
| Treasury  stock, at cost                                                                                                                                                                                                                                                                                                                                                                    |       | (875,675              | )           | (875,675 | ) |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                           |       | (332,090,148          | )           | (249,431,806 | ) |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                           |       | $                     | 429,929,180 |   | $ | 504,097,345 |   |

 

See accompanyingnotes.

 

48

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ DEFICIT**

**For theYears Ended December 31, 2002, 2003 and 2004**

 
|                                                                            | ** ** | **Class A  Common Stock** | ** ** | **Common  Stock (Nonvoting)** | ** ** | **Additional  Paid-in Capital** | ** ** | **Other   Comprehensive  Income** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** ** | **Treasury  Stock** | ** **   | **Total  Stockholders’  Deficit** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|--------------|----------------------------------------|------------|
|                                                                            |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       |                |         |                                   |       |
| Balance as of 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                                                                        |       |                           |       |                          |       |                            |       |                              |       | (81,567,338              | )          |                       |       |                |         | (81,567,338                            | )          |
| Balance at December 31, 2002                                               |       | 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                           | )          |
| Conversion of Class A to Class B                                      |       | (803                           | )          | 803                           |       |                            |       |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Grant of stock award under stock plans                                          |       |                           |       |                          |       | 180,885                         |       |                              |       |                     |       | (180,885                   | )     |                |         | —                                 |       |
| Issuance of Common Stock (Nonvoting)                                            |       |                           |       | 3,694                         |       | (3,694                          | )          |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense related to stock plans                                            |       |                           |       |                          |       | 183,897                         |       |                              |       |                     |       | 252,020                    |       |                |         | 435,917                                |       |
| Discount on loans to officers                                                   |       |                           |       |                          |       |                            |       |                              |       |                     |       | 210,330                    |       |                |         | 210,330                                |       |
| Net loss                                                                        |       |                           |       |                          |       |                            |       |                              |       | (83,291,675              | )          |                       |       |                |         | (83,291,675                            | )          |
| Unrealized loss on investment                                                   |       |                           |       |                          |       |                            |       | (12,914                           | )     |                     |       |                       |       |                |         | (12,914                                | )          |
| Comprehensive loss                                                              |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       |                |         | (83,304,589                            | )          |
| Balance at December 31, 2004                                               |       | $                              | 982        |                          | $          | 192,838                         |       | $                                 | 361,088    |                     | $          | (12,914                    | )     | $                   | (331,410,284 | )                                 | $          | (346,183 | )  | $ | (875,675 | )  | $ | (332,090,148 | )  |

 

See accompanyingnotes.

 

49

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **For the Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                   | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                       |       |                                      |        |   |   |   |   |
| Net  loss                                                                    |       | $                                         | (83,291,675 | ) | $ | (46,947,872 | ) | $ | (81,567,338 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                      |        |   |   |   |   |
| Amortization  of intangible assets                                           |       | 7,892,924                                 |        | 9,976,310 |   | 21,964,771 |   |
| Impairment  of Goodwill                                                      |       | 15,491,327                                |        | — |   | — |   |
| Depreciation                                                                 |       | 6,429,964                                 |        | 6,285,077 |   | 5,896,626 |   |
| Performance  award expense                                                   |       | 3,414,698                                 |        | 52,247 |   | — |   |
| Non-cash  compensation expense                                               |       | 696,522                                   |        | 895,539 |   | 1,508,048 |   |
| Non-cash  interest expense                                                   |       | 4,198,603                                 |        | 4,969,421 |   | 13,030,566 |   |
| Non-cash  preferred stock dividend                                           |       | 25,547,844                                |        | 12,773,922 |   | — |   |
| Deferred  tax benefit                                                        |       | (11,930,701                               | )           | (921,277 | ) | (24,060,838 | ) |
| Loss  on extinguishments of debt                                             |       | —                                    |        | 3,214,524 |   | 15,096,641 |   |
| 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                                  |       | 913,762                                   |        | 1,746,672 |   | (34,970,057 | ) |
| Increase  (decrease) in accrued liabilities                                  |       | 2,641,030                                 |        | (2,073,818 | ) | 1,941,543 |   |
| (Decrease)  increase in accounts payable                                     |       | (1,044,437                                | )           | 95,998 |   | 1,131,254 |   |
| WB  affiliation payment                                                      |       | (2,523,428                                | )           | (2,096,753 | ) | (4,523,428 | ) |
| Decrease  (increase) in income tax receivable                                |       | 16,326,799                                |        | (10,991,953 | ) | (5,334,846 | ) |
| Decrease  (increase) in film contract rights and other assets                |       | 4,055,995                                 |        | 2,433,448 |   | (5,692,854 | ) |
| (Decrease)  increase in film contract rights payable and other liabilities   |       | (7,542,427                                | )           | (186,005 | ) | 5,746,953 |   |
| Net  cash used in operating activities                                       |       | (18,723,200                               | )           | (20,774,520 | ) | (73,409,568 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Cash  flows from investing activities:                                       |       |                                      |        |   |   |   |   |
| Proceeds  from sale of station                                               |       | —                                    |        | — |   | 265,018,849 |   |
| Investments  in marketable securities and other investments                  |       | (5,496,847                                | )           | — |   | — |   |
| Capital  expenditures                                                        |       | (4,810,645                                | )           | (12,652,554 | ) | (14,118,797 | ) |
| Net  cash (used in) provided by investing activities                         |       | (10,307,492                               | )           | (12,652,554 | ) | 250,900,052 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Cash  flows from financing activities:                                       |       |                                      |        |   |   |   |   |
| Proceeds  from senior credit facility                                        |       | —                                    |        | — |   | 80,000,000 |   |
| Proceed  from senior secured notes                                           |       | —                                    |        | 400,067,100 |   | — |   |
| Repayment  of bank debt                                                      |       | —                                    |        | (316,677,910 | ) | (170,000,000 | ) |
| Payment  of deferred financing fees                                          |       | (324,593                                  | )           | (14,070,217 | ) | (8,778,814 | ) |
| Repurchase  of cumulative exchangeable preferred stock                       |       | —                                    |        | — |   | (53,264,005 | ) |
| Repurchase  of common stock                                                  |       | —                                    |        | (23,751 | ) | (554,924 | ) |
| Exercise  of stock options                                                   |       | —                                    |        | 26,250 |   | — |   |
| Net  cash (used in) provided by financing activities                         |       | (324,593                                  | )           | 69,321,472 |   | (152,597,743 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Net  (decrease) increase in cash and cash equivalents                        |       | (29,355,285                               | )           | 35,894,398 |   | 24,892,741 |   |
| Cash  and cash equivalents, beginning of year                                |       | 90,213,995                                |        | 54,319,597 |   | 29,426,856 |   |
| Cash  and cash equivalents, end of year                                      |       | $                                         | 60,858,710  |   | $ | 90,213,995 |   | $ | 54,319,597 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Supplemental  information:                                                   |       |                                      |        |   |   |   |   |
| Restricted  cash                                                             |       | $                                         | —      |   | $ | — |   | $ | 1,777,115 |   |
| Cash  paid for interest                                                      |       | 37,184,063                                |        | 33,473,446 |   | 40,634,741 |   |
| Cash  paid for income taxes                                                  |       | 177,070                                   |        | 832,765 |   | 26,759,484 |   |
| Non-cash  capital expenditures                                               |       | 186,266                                   |        | 142,335 |   | 600,455 |   |
| Cumulative  exchangeable preferred stock dividend                            |       | —                                    |        | 12,773,922 |   | 27,679,733 |   |
| Cancellation  of warrants                                                    |       | —                                    |        | — |   | 12,150,000 |   |

 

See accompanyingnotes.

 

50

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**GRANITEBROADCASTING CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 — Operations of theCompany**

 

The business operationsof Granite Broadcasting Corporation and its wholly owned subsidiaries (the “Company”)consist of eight network affiliated television stations in the United States,consisting of three NBC-affiliated television stations, two ABC-affiliatedstations, two WB Network stations and one CBS-affiliated television station.The Company’s stations are located in New York, California, Michigan, Indiana,Illinois and Minnesota.

 

As more fully discussedin Note 3, the Company completed the sale of its Fort Wayne, Indiana ABCaffiliate, WPTA-TV, to Malara Broadcast Group, Inc (“Malara Broadcast Group”)and acquired the Fort Wayne, Indiana NBC affiliate, WISE-TV from New Vision Televisionin March 2005.  Malara BroadcastGroup also acquired KDLH-TV, the CBS affiliate serving Duluth, Minnesota fromNew Vision Group LLC. The Company entered into a strategic arrangement withMalara Broadcast Group, under which the Company will provide advertising sales,promotion and administrative services, and selected programming to WPTA-TV andKDLH-TV under local services agreements. Although the Company does not ownMalara Broadcast Group or its television stations, the Company is deemed to bethe primary beneficiary of Malara Broadcast Group as defined under FinancialAccounting Standards Board Interpretation No. 46, *Consolidationof Variable Interest Entities* (“Interpretation 46”), Interpretation46 requires the Company to consolidate Malara Broadcast Group’s financialposition, results of operations and cash flows as of December 31, 2004. AtDecember 31, 2004, the Company’s consolidated Balance Sheets includes in “othernon-current assets” and “deferred financing fees” $130,000 and $32,500 respectivelyand consolidated Statement of Operations includes in “corporate expense”$107,500 resulting from the entire consolidation of Malara Broadcast Group.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of a seniorcredit facility (the “Malara Broadcast Group Senior Credit Facility”)consisting of two terms loans totaling $48.5 million and a revolving loan of $5million. The $23.5 million Malara Broadcast Group Term Loan A is secured by aletter of credit. To secure the letter of credit, pursuant to the terms andconditions of an Application and Agreement for Standby Letter of Credit, theCompany pledged $25 million of U.S. Government Securities. The $25 millionMalara Broadcast Group Term Loan B and the $5 million revolving loan aresecured by the assets of WPTA-TV and KDLH-TV, and guaranteed on an unsecuredbasis by Granite Broadcasting Corporation.

 

As of March 16,2005, the Company had approximately $61,807,000 of cash and marketablesecurities on hand, of which $25,000,000 in U.S. Government Securities arepledged to secure the reimbursement obligations in the event of a draw on theletter of credit that serves as collateral for the Term Loan A under MalaraBroadcast Group’s Senior Credit Facility and is restricted and not availablefor working capital or any other purposes. To the****extent the Term Loan A isamortized, the letter of credit shall be proportionately reduced and theCompany shall be permitted to proportionately reduce the amount of pledged U.S.Government Securities.  Absent changes toits capital structure and station ownership, the Company may not have enoughliquidity to service its existing obligations over the next twelve months.  In order to improve the Company’s existingliquidity position, the Company is currently exploring the sale of assets andthe raising of additional capital. However, under its Indenture, the Company’s use of the net proceeds fromthe sale of assets is restricted.  Of thenet proceeds received in an asset sale, $5 million may be used for workingcapital purposes and the remainder must be used either:

 

•                  tomake an investment in properties and assets that replace the properties andassets that were the subject of such asset sale or in properties and assetsthat will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, aPermitted Business Acquisition or enter into a definitive agreement toeffectuate such acquisition; provided that (A) the primary purpose of suchacquisition of Replacement Assets or Permitted Business Acquisition is toacquire, and there is acquired, a television station with a Big-4 (ABC, CBS,NBC or Fox) network affiliation agreement in place or the creation (throughownership by the Company and its Restricted Subsidiaries) of a “duopoly” in amarket and (B) that the Company shall use all reasonable best efforts topromptly dispose of any other assets acquired in such acquisition or PermittedBusiness Acquisition (as such terms are defined in the Indenture); or

 

•                  tomake an offer to all holders of the Notes to purchase such amount of the Notesless any such net proceeds used to acquire qualifying Replacement Assets or tomake a Permitted Business Acquistion.

 

Assuming the Company issuccessful in selling assets and raising additional capital, it believes thatthe available proceeds together with the cash and marketable securities on handand internally generated funds from operations will be sufficient to satisfyour cash requirements for our existing operations for the next twelve months.However, a lack of liquidity would have a material adverse effect on theCompany’s business strategy and therefore affect its ability to continue as agoing concern. The 2004 financial statements do 

 

51

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not include anyadjustments that might result from the outcome of this uncertainty.

 

**Note 2 - Summary of SignificantAccounting Policies**

 

*Financialstatement presentation*

 

The consolidated financial statements include the accountsof Granite Broadcasting Corporation and its wholly owned subsidiaries.  All significant inter-company accounts andtransactions have been eliminated in consolidation. Certain prior year amountshave been reclassified to conform to the current year presentation.  In addition, the Company reducedgoodwill during the year ended 2004 by $14,926,000 to appropriately reflect thetax basis of certain assets acquired in prior years’ acquisitions which havebeen reflected in the December 31, 2004 and 2003 Balance Sheets disclosedherein and had no effect on the Company’s Statement of Operations or CashFlows.

 

*Revenuerecognition*

 

The Company’s primarysource of revenue is the sale of television time to advertisers.  Revenue is recorded when the advertisementsare aired and collectibility is reasonably assured.  Other sources of revenue are compensationfrom the networks, studio rental and commercial production activities.  These revenues are recorded when the programsare aired and the services are performed. Revenue from barter transactions isrecognized when advertisements are broadcast and merchandise or servicesreceived are charged to expense when received or used.

 

*Allowancefor Doubtful Accounts*

 

The Company makesestimates of the uncollectibility of accounts receivable and specificallyreviews historical write-off activity by market, large customer concentrations,customer credit worthiness, and changes in customer payment terms whenevaluating the adequacy of the allowance for doubtful accounts.  Historically, the level of customer defaultshas been predictable and the allowance for doubtful accounts has been adequateto cover such defaults.

 

*Intangibles*

 

Intangible assets at December 31are summarized as follows:

 
| ** **                | ** ** | **2004**     | ** **  | **2003**     | ** ** |
|---------------------------|------------|--------------|-------------|--------------|------------|
| ** **                | ** ** | ** **   | ** **  | ** **   | ** ** |
| Goodwill                  |       | $            | 75,833,000  |         | $          | 91,325,000 |   |
| Covenant  not to compete  |       | 30,000,000   |        | 30,000,000   |       |
| Network  affiliations     |       | 135,669,000  |        | 133,362,000  |       |
| Broadcast  licenses       |       | 159,648,000  |        | 159,648,000  |       |
|                      |       | 401,150,000  |        | 414,335,000  |       |
| Accumulated  amortization |       | (145,393,000 | )           | (137,500,000 | )          |
|                      |       |         |        |         |       |
| Net  intangible assets    |       | $            | 255,757,000 |         | $          | 276,835,000 |   |

 

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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 was reflected as acumulative effect of a change in accounting principle in the statement ofoperations.  In calculating theimpairment charge, the fair value was estimated using a discounted cash flowmethodology.  The Company completed its requiredannual impairment test as of December 31, 2004, and recorded an impairmentcharge on the carrying value of goodwill of approximately $15,491,000 as aresult of decreases in projected future cash flows from operations at certainstations.

 

As of December 31,2004 and 2003, the Company’s intangible assets and related accumulatedamortization consisted of the following:

 
| ** **                                      | ** ** | **December 31, 2004** | ** **  | **December 31, 2003**    | ** ** |
|-------------------------------------------------|------------|----------------------------|-------------|-------------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying Value**  | ** **  | **Accumulated  Amortization** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** |
|                                            |       |                       |        |                          |       |   |   |   |   |
| Intangible  assets subject to amortization:     |       |                       |        |                          |       |   |   |   |   |
| Network  affiliation agreements                 |       | $                          | 135,669,000 |                          | $          | (54,876,000 | ) | $ | 133,362,000 |   | $ | (46,983,000 | ) |
| Covenant  not to compete                        |       | 30,000,000                 |        | (30,000,000                   | )          | 30,000,000 |   | (30,000,000 | ) |
|                                            |       | $                          | 165,669,000 |                          | $          | (84,876,000 | ) | $ | 163,362,000 |   | $ | (76,983,000 | ) |
|                                            |       |                       |        |                          |       |   |   |   |   |
| Intangible  assets not subject to amortization: |       |                       |        |                          |       |   |   |   |   |
| Goodwill                                        |       | $                          | 75,833,000  |                          | $          | (28,201,000 | ) | $ | 91,325,000 |   | $ | (28,201,000 | ) |
| Broadcast  licenses                             |       | 159,648,000                |        | (32,316,000                   | )          | 159,648,000 |   | (32,316,000 | ) |
|                                            |       | $                          | 235,481,000 |                          | $          | (60,517,000 | ) | $ | 250,973,000 |   | $ | (60,517,000 | ) |

 

The Company amortizes itsnetwork affiliation agreements for which it does not make contractual paymentsusing an estimated useful life of 25 years and amortizes its networkaffiliation agreements for which it makes contractual payments over the life ofthe contract.  The Company recordedamortization expense of $7,893,000, $9,976,000 and $21,965,000 during the yearsended December 31, 2004, 2003 and 2002, respectively.  Based on the current amount of intangibleassets subject to amortization, the estimated amortization expense for each ofthe succeeding 5 years are as follows: 2005: $8,294,000; 2006: $8,294,000;2007: $7,827,000; 2008: $2,979,000; and 2009: $2,979,000.  As acquisitions anddispositions occur in the future, these amounts may vary.

 

*Long-LivedAssets*

 

Long-lived assets forimpairment are reviewed whenever events or changes in circumstances indicatethat the carrying amount of an asset is not recoverable.  At such time as an impairment in value of along-lived asset is identified, except for goodwill and other intangible assetsdeemed to have indefinite lives as previously discussed, the impairment will bemeasured in accordance with Statement of Financial Accounting Standards No. 144,Accounting for the Impairment of Disposal of Long-Lived Assets, as the amountby which the carrying amount of a long-lived asset exceeds its fair value.  A present value technique, which utilizesmultiple cash flow scenarios that reflect the range of possible outcomes and anappropriate discount rate, is used to determine fair value.  There were no impairments of long-livedassets at December 31, 2004.

 

*Deferredfinancing 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, in part,to (i) repay all outstanding borrowings, plus accrued interest, under theCompany’s then  outstanding senior creditagreement, (ii) to redeem at par, plus accrued interest, all of the 9 3/8%and 10 3/8% Senior Subordinated Notes due 2005 and (iii) to repurchase atpar, plus accrued interest, all of the 8 7/8% Senior Subordinated Notes due2008.  The remaining proceeds wereinvested in short-term securities as well as being used for general workingcapital purposes.  The unamortizeddeferred financing fees related to the Company’s senior credit agreement andthe Company’s senior subordinated notes of $3,215,000 were written off in2003.  The Company incurred fees of $13,749,000 in connection with the sale of the Notes.  These fees are being amortized straight-lineover seven years.

 

53

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*Propertyand equipment*

 

Property and equipmentare recorded at cost and depreciated on a straight-line basis over theirestimated useful lives ranging from 3 to 35 years.  Maintenance and repairs are charged tooperations as incurred.

 

*Filmcontract rights*

 

Film contract rights arerecorded as assets at gross value when the license period begins and the filmsare available for broadcasting.  Filmcontract rights are amortized on an accelerated basis over the estimated usageof the films, and are classified as current or non-current on that basis.  The Company’s accounting for long-lived filmcontract assets requires judgment as to the likelihood that such assets willgenerate sufficient revenue to cover the associated expense.  The Company reviews its film contract rightsfor impairment by projecting the amount of revenue the program will generateover the remaining life of the contract by applying average historical ratesand sell-out percentages for a specific time period and comparing it to theprogram’s expense.  If the projectedfuture revenue of a program is less than its future expense and/or the expectedbroadcast period is shortened or cancelled due to poor ratings, the Companywould be required to write-off the exposed value of the program rights ratablyor potentially immediately. The Company has written down the value of certainfilm contract rights by $ 3,800,000, $3,000,000 and $5,600,000 during the yearsended December 31, 2004, 2003 and 2002, respectively.  Film contract rights payable are classifiedas current or non-current in accordance with the payment terms of the variouslicense agreements.  Film contract rightsare reflected in the consolidated balance sheet at the lower of unamortizedcost or estimated net realizable value. As of December 31, 2004, theamounts of current film contract rights and non-current film contract rightswere $11,606,000 and $5,180,000, respectively.

 

At December 31,2004, the obligation for programming that had not been recorded because theprogram rights were not available for broadcasting aggregated $33,281,000.

 

*Bartertransactions*

 

Revenue from bartertransactions is recognized when advertisements are broadcast and merchandise orservices received are charged to expense when received or used.  Barter revenue totaled $2,024,000, $1,894,000and $1,922,000 for the years ended December 31, 2004, 2003 and 2002respectively.  Barter expense totaled$1,456,000, $1,572,000 and $1,090,000 for the years ended December 31,2004, 2003 and 2002 respectively.

 

*Advertising*

 

The cost of advertisingis expensed as incurred.  Advertisingexpense was $3,672,000, $3,689,000 and $3,511,000 for the years ended December 31,2004, 2003 and 2002 respectively.

 

*Use ofestimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses reported in the financial statements and accompanying notes.   The significant estimates made by managementinclude the allowance for doubtful accounts, the recoverability of filmcontract rights and the useful lives and carrying value of intangible assets.Actual results could differ from those estimates.

 

*CashEquivalents and Investments in Marketable Securities*

 

All highly liquidinvestments with a maturity of ninety days or less from the date of purchase isconsidered cash equivalents. Marketable securities are classified asavailable-for-sale in accordance with the provisions of Statement of FinancialAccounting Standards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  These securities are carried at fair marketvalue based on current market quotes. Unrealized gains and losses are reportedin stockholders’ equity as a separate component of other comprehensive income /(loss) until realized.  Gains and losseson securities sold are based on the specific identification method. The Companydoes not hold these securities for speculative or trading purposes. Marketablesecurities, which include direct obligations of the U.S. Government, domesticcommercial paper and domestic certificates of deposits, have maturities of oneyear or less and have active markets to ensure portfolio liquidity. For theyear ended December 31, 2004, the Company’s unrealized holding lossestotaled approximately $13,000.  For theyear ended December 31, 2004, the Company recorded a realized gain ofapproximately $15,000.

 

54

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*Stock-BasedCompensation*

 

The Company has adoptedthe disclosure provisions of SFAS No. 148, *Accountingfor Stock-Based Compensation — Transition and Disclosure,*to requiredisclosure in the summary of accounting policies of the effects of an entity’saccounting policy with respect to stock-based compensation on reported netincome / (loss) and earnings per share in annual and interim financialstatements.

 

The Company accounts forstock option grants under the recognition and measurement principles ofAccounting Principles Board (“APB”) No 25, *Accounting for StockIssued to Employees,*and related interpretations. Under APB No. 25,because the exercise price of the Company’s stock options equals the marketprice (fair value) of the underlying stock on the date of grant, nocompensation expense is recorded.

 

The following tableillustrates the effect on net loss and loss per share as if the Company hadapplied the fair value recognition provisions of SFAS No. 123, as amendedby SFAS No. 148, to stock-based compensation for the years ended December 31,as follows which may not be representative of the impact in future years:

 
| ** **                                      | ** ** | **2004**  | ** **  | **2003**  | ** ** | **2002**    | ** ** |
|-------------------------------------------------|------------|-----------|-------------|-----------|------------|-------------|------------|
|                                            |       |      |        |      |       |        |       |
| Net  loss                                       |       | $         | (83,292,000 | )         | $          | (46,948,000 | )          | $ | (81,567,000 | ) |
| Pro  forma compensation expense                 |       | 1,330,000 |        | 1,381,000 |       | 2,301,000   |       |
| Less:  Option compensation expense, as reported |       | 45,000    |        | 48,000    |       | 98,000      |       |
| Pro  forma net loss                             |       | $         | (84,577,000 | )         | $          | (48,281,000 | )          | $ | (83,770,000 | ) |
|                                            |       |      |        |      |       |        |       |
| Basic  net loss per share,                      |       | $         | (4.30       | )         | $          | (3.15       | )          | $ | (4.31 | ) |
| Pro  forma compensation expense                 |       | (0.07     | )           | (0.07     | )          | (0.12       | )          |
| Pro  forma basic net loss per share             |       | $         | (4.37       | )         | $          | (3.22       | )          | $ | (4.43 | ) |
|                                            |       |      |        |      |       |        |       |
| Diluted  net loss per share                     |       | $         | (4.30       | )         | $          | (3.15       | )          | $ | (4.23 | ) |
| Pro  forma compensation expense                 |       | (0.07     | )           | (0.07     | )          | (0.12       | )          |
| Pro  forma diluted net loss per share           |       | $         | (4.37       | )         | $          | (3.22       | )          | $ | (4.35 | ) |

 

The fair value for each option grant was estimated at thedate of grant using the Black Scholes option pricing model with the followingassumptions for the various grants made during 2004, 2003 and 2002:

 
| ** **               | ** ** | **2004** | ** ** | **2003**      | ** ** | **2002** | ** ** |
|--------------------------|------------|----------|------------|---------------|------------|----------|------------|
| Risk-free  interest rate |       | 3.00%    |       | 2.93% - 3.19% |       | 3.00%    |       |
| Dividend  yield          |       | —   |       | —        |       | —   |       |
| Expected  volatility     |       | 90%      |       | 59% - 92%     |       | 103%     |       |
| Expected  lives          |       | 5        |       | 5             |       | 4        |       |

 

The Black Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions, which have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility.  The Company’s employee stockoptions have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affectthe fair value estimate.

 

*Netincome (loss) per common share*

 

The following table setsforth the computation of basic and diluted earnings per share:

 
| ** **                                                                    | ** ** | **Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                                    | ** ** | **2004**                          | ** **  | **2003** | ** ** | **2002** | ** ** |
|                                                                          |       |                              |        |   |   |   |   |
| (Loss)  income before cumulative effect of a change in accounting principle   |       | $                                 | (83,292,000 | ) | $ | (46,948,000 | ) | $ | 68,911,000 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit    |       | —                            |        | — |   | 150,478,000 |   |
|                                                                          |       |                              |        |   |   |   |   |
| Net  loss                                                                     |       | (83,292,000                       | )           | (46,948,000 | ) | (81,567,000 | ) |
|                                                                          |       |                              |        |   |   |   |   |
| Gain  on retirement of cumulative exchangeable preferred stock                |       | —                            |        | — |   | (30,299,000 | ) |
| Cumulative  exchangeable preferred stock dividends                            |       | —                            |        | 12,774,000 |   | 29,068,000 |   |
| Accretion  of offering costs on cumulative exchangeable preferred stock       |       | —                            |        | 177,000 |   | 408,000 |   |
|                                                                          |       |                              |        |   |   |   |   |
| Net  loss attributable to common shareholders                                 |       | $                                 | (83,292,000 | ) | $ | (59,899,000 | ) | $ | (80,744,000 | ) |
|                                                                          |       |                              |        |   |   |   |   |
| Weighted  average common shares outstanding for basic net loss per share      |       | 19,366,000                        |        | 18,991,000 |   | 18,749,000 |   |
| ADD:                                                                          |       |                              |        |   |   |   |   |
| Effect  of dilutive securities:                                               |       |                              |        |   |   |   |   |
| Stock  options                                                                |       | —                            |        | — |   | 349,000 |   |
|                                                                          |       |                              |        |   |   |   |   |
| Adjusted  weighted average common shares outstanding – assuming dilution |       | 19,366,000                        |        | 18,991,000 |   | 19,098,000 |   |
|                                                                          |       |                              |        |   |   |   |   |
| Per  basic common share:                                                      |       |                              |        |   |   |   |   |
| (Loss)  income before cumulative effect of a change in accounting principle   |       | $                                 | (4.30       | ) | $ | (3.15 | ) | $ | 3.72 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit    |       | —                            |        | — |   | (8.03 | ) |
| Basic  net loss per share                                                     |       | $                                 | (4.30       | ) | $ | (3.15 | ) | $ | (4.31 | ) |
|                                                                          |       |                              |        |   |   |   |   |
| Per  diluted common share:                                                    |       |                              |        |   |   |   |   |
| (Loss)  income before cumulative effect of a change in accounting principle   |       | $                                 | (4.30       | ) | $ | (3.15 | ) | $ | 3.65 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit    |       | —                            |        | — |   | (7.88 | ) |
| Diluted  net loss per share                                                   |       | $                                 | (4.30       | ) | $ | (3.15 | ) | $ | (4.23 | ) |

 

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Stock options totaling45,565 for the year ended December 31, 2003, was excluded from thecomputation of diluted earnings per share due to their anti-dilutive effect.

 

*RecentAccounting Pronouncements*

 

In December 2004,FASB issued Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, or Statement 123(R). Statement 123(R)addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Statement 123(R) requires an entity torecognize the grant-date fair-value expense of stock options or other equitybased compensation issued to employees in the statement of operations. Therevised Statement generally requires that an entity account for thosetransactions using the fair-value-based method, and eliminates the intrinsicvalue method of accounting in Accounting Principles Board No. 25, *Accounting for Stock Issued to Employees*, or APB 25.   The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial position, results ofoperations or cash flows.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first interim or annual reporting period that begins afterJune 15, 2005. All public companies must use either the modifiedprospective or modified retrospective transition method. Early adoption ofStatement 123(R) for interim or annual periods for which financial statementsor interim reports have not been issued is encouraged but not required.  The Company has not fully evaluated theimpact of adopting this pronouncement which must be adopted in the third quarterof 2005, but it believes that the adoption of this Statement will not have asignificant accounting impact. See “Stock-Based Compensation” for the pro formaimpact if compensation costs for the Company’s stock option plans had beendetermined based on the fair value method set forth Statement 123(R).

 

In September 2004,Emerging Issues Task Force (“EITF”) issued Topic No. D-108, *Use of the Residual Method to Value Acquired Assets Other than Goodwill*,or Topic D-108. Topic D-108 requires that a direct value method be used tovalue intangible assets acquired in business combinations completed after September 29,2004. Topic D-108 also requires that an impairment test using a direct valuemethod on all intangible assets that were previously evaluated using theresidual method be performed no later than the beginning of the first fiscalyear beginning after December 15, 2004 (2005 for the Company). Anyimpairments arising from the initial application of a direct value method wouldbe reported as a cumulative effect of accounting change. The Company has notfully evaluated the impact of, if any, of adopting this pronouncement whichmust be adopted for the year ended 2005, but the Company believes that theadoption of this Statement will not have a significant accounting impact.

 

In December 2003,the FASB issued Interpretation No. 46(R), *Consolidationof Variable Interest Entities*, or Interpretation 46.  Interpretation 46 addresses when a companyshould include in its financial statements the assets, liabilities andactivities of another entity. Interpretation 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 for the year ended December 31, 2003 and the applicationof Interpretation 46 did not have an impact on its financial position, resultsof operations, or cash flows.

 

In May 2003, theFASB issued Statement of Financial Accounting Standards No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity*, or Statement 150.  Statement 150 establishes standards forclassifying 

 

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and measuring asliabilities certain financial instruments that have characteristics of both liabilitiesand equity.  The provisions of Statement150 are effective beginning with the first interim period after June 15,2003.  The Company adopted Statement 150during the six months ended December 31, 2003.  The Company’s 12 3/4 % Cumulative ExchangeablePreferred Stock, which it refers to as the Preferred Stock, was reclassified onits consolidated balance sheet as a long-term liability and the accrual ofdividends for the six months ended December 31, 2003 and it recorded as acharge to expense on the consolidated statement of operations.  The impact of adopting Statement 150 reducedincome before income taxes by $25,548,000 and $12,774,000 for the years ended December 31,2004 and 2003, respectively.  Prior to June 15,2003, dividends on the Preferred Stock were treated as a reduction ofshareholders’ equity.

 

**Note 3 – Acquisitions andDispositions**

 

On March 7, 2005,the Company completed the sale of its Fort Wayne, Indiana ABC affiliate,WPTA-TV to a subsidiary of Malara Broadcast Group Inc. (“Malara BroadcastGroup”) for approximately $45.4 million, pursuant to the terms andconditions of an asset purchase agreement, dated April 23, 2004.  In addition, on March 8, 2005, theCompany completed its purchase of WISE-TV, the NBC affiliate serving Fort Waynefrom New Vision Group, LLC, or New Vision Television, for approximately $43.5million, pursuant to the terms and conditions of a stock purchase agreement,dated April 23, 2004.

 

In addition to asubsidiary of Malara Broadcast Group purchasing WPTA-TV, another subsidiary ofMalara Broadcast Group on March 8, 2005, acquired CBS affiliate KDLH-TV,Duluth, Minnesota from New Vision Television and certain of its subsidiariesfor approximately $9.5 million, pursuant to the terms and conditions of anasset purchase agreement, dated April 23, 2004.

 

On March 8, 2005,the Company entered into a strategic arrangement with Malara Broadcast Group,under which the Company will provide advertising sales, promotion andadministrative services, and selected programming to WPTA-TV and KDLH-TV inreturn for certain fees that will be paid by Malara Broadcast Group to theCompany. The fees payable to the Company will be paid after current debtservice as well as certain other expenses Malara Broadcast Group incurs directlyare satisfied.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of the MalaraBroadcast Group Senior Credit Facility consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Term Loan A is secured by a letter of credit. To secure thereimbursement obligations in the event of a draw on the letter of credit, theCompany pledged $25 million of U.S. Government Securities and is restricted andnot available for working capital or any other purposes. To the extent the TermLoan A is amortized, the letter of credit shall be proportionately reduced andthe Company shall be permitted to proportionately reduce the amount of thepledged U.S. Government Securities. The $25 million Malara Broadcast Group TermLoan B and the $5 million revolving loan are secured by the assets of WPTA-TVand KDLH-TV, and guaranteed on an unsecured basis by Granite BroadcastingCorporation.

 

The Company does not ownMalara Broadcast Group or its television stations. However, as a result ofGranite Broadcasting Corporation’s guarantee of the obligations incurred underMalara Broadcast Group’s senior secured credit facility with respect to theTerm Loan B and the revolving loan and due to its arrangements under the localservice agreements and put or call option agreements, under Generally AcceptedAccounting Principles in the United States (“U.S. GAAP”), specifically,Financial Accounting Standards Board (“FASB”) Interpretation No. 46,Consolidation of Variable Interest Entities (“Interpretation 46”) the Companyis required to consolidate Malara Broadcast Group’s financial position, resultsof operations and cash flows. In addition, in accordance with the provisions ofInterpretation 46, the Company will not account for the sale of the assets ofWPTA-TV and no gain or loss therefrom will be recognized in the consolidatedstatements of operations.

 

In May 2004, anapplication was filed with the FCC seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara Broadcast Group.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between MalaraBroadcast Group and the Company.  TheFCC’s Media Bureau (“Bureau”) denied the petition and granted the assignmentapplication in December 2004.  In January2005, the petitioning broadcasters filed an application for review seekingCommission-level review of the Bureau’s decision.  Malara Broadcast Group filed an opposition tothe application for review, and the petitioning broadcasters filed a responseto that opposition.  The FCC has not yetruled on the application for review. Although the Company believes that the application for review is withoutmerit and anticipates that the FCC will affirm the grant of the assignmentapplication for KDLH, it is not possible to predict how the FCC will rule onthe application for review.  It also isnot possible to predict any remedial action or possible sanction that may beimposed by the FCC in the event that it grants the application for review.  An FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license lack to New Vision Group, L.L.C., or a sale byMalara Broadcast Group of its ownership of KDLH.

 

On April 30, 2002,the Company completed the sale of KNTV to NBC. NBC paid the Company $230,000,000, plus a working capital and otheradjustments of $14,545,000.  In addition,NBC refunded the Company $20,473,000 of the January 1, 2002 affiliationpayment due to NBC under the terms of the KNTV NBC affiliation agreement (“SanFrancisco Affiliation Agreement”), 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 Company’s then outstanding senior credit facility uponconsummation of the sale.  The SanFrancisco Affiliation Agreement terminated upon the closing of the sale and theCompany is not required to make any further affiliation payments to NBC.  The 4,500,000 warrants issued to NBC as partof the San Francisco Affiliation Agreement have been returned to theCompany.  The Company’s affiliationagreements for KSEE-TV, WEEK-TV, and KBJR-TV involve no payment obligations toNBC and have a contractual term through December 31, 2011.

 

**Note 4 – Restructuring andSeverance Charges**

 

During 2004, the Companyrecognized a $2,027,000 restructuring charge relating to employee separationsat both our corporate office and our Buffalo, New York television station.  Of the total $2,027,000, approximately$1,406,000 related to severance and other benefits, associated with thedeparture of Stuart J. Beck (see Note 15, Related Parties) and administrativesupport 

 

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staff at the corporateoffice which is being paid over an eighteen month period from date ofseparation, September 21, 2004. The remaining $621,000 restructuringcharge includes severance and other benefits resulting from a reduction in theworkforce at the Buffalo, New York television stations.

 

At December 31,2004, the accruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the Buffalo, New York television station are included in “stationoperating expenses” and the related expense for the corporate charges areincluded in “corporate separation agreement expenses” on the consolidatedStatement of Operations.  These costswere recognized in accordance with the provisions of Statement of FinancialAccounting Standards No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*.

 

The following is areconciliation of the aggregate liability recorded for restructuring charges asof December 31, 2004:

 
| ** **         | ** ** | **Year Ended December 31, 2004** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **December 31, 2003**            | ** ** | **Provision** | ** ** | **Payments** | ** ** | **December 31, 2004** | ** ** |
|               |       |                                  |       |   |   |   |   |   |   |
| Buffalo,  New York |       | $                                     | —     |   | $ | 621,000 |   | $ | 371,000 |   | $ | 250,000 |   |
| Corporate          |       | —                                |       | 1,406,000 |   | 192,000 |   | 1,214,000 |   |
|               |       |                                  |       |   |   |   |   |   |   |
| Total              |       | $                                     | —     |   | $ | 2,027,000 |   | $ | 563,000 |   | $ | 1,464,000 |   |

 

The liability for the restructuring charges will bepaid in accordance with the provisions of the severance agreements and paymentsare expected to be completed at various times through March 2006.

 

**Note 5 – Property and Equipment**

 

The major classifications of property and equipment are asfollows:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Land                            |       | $                     | 1,556,000  |   | $ | 1,556,000 |   |
| Buildings  and improvements     |       | 16,068,000            |       | 14,651,000 |   |
| Furniture  and fixtures         |       | 6,633,000             |       | 8,898,000 |   |
| Technical  equipment and other  |       | 56,956,000            |       | 62,102,000 |   |
|                            |       | 81,213,000            |       | 87,207,000 |   |
|                            |       |                  |       |   |   |
| Less:  Accumulated depreciation |       | 35,473,000            |       | 38,757,000 |   |
|                            |       |                  |       |   |   |
| Net  property and equipment     |       | $                     | 45,740,000 |   | $ | 48,450,000 |   |

 

**Note 6 – Other AccruedLiabilities**

 

Other accrued liabilitiesare summarized below:

 
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Compensation  and benefits                             |       | $                     | 3,604,000  |   | $ | 2,366,000 |   |
| Severance  and other costs related to the sale of KNTV |       | 547,000               |       | 1,397,000 |   |
| Professional  fees                                     |       | 995,000               |       | 1,283,000 |   |
| Severance  and restructuring                           |       | 1,464,000             |       | — |   |
| Other                                                  |       | 767,000               |       | 1,993,000 |   |
|                                                   |       |                  |       |   |   |
| Total                                                  |       | $                     | 7,377,000  |   | $ | 7,039,000 |   |

 

**Note 7 – Other CurrentLiabilities**

 

Other current liabilities are summarized below:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2004**              | ** ** | **2003** | ** ** |
| WB  affiliation payment, net |       | $                     | 2,001,000  |   | $ | 1,825,000 |   |
| Barter  payable              |       | 664,000               |       | 863,000 |   |
| Other                        |       | 1,120,000             |       | 263,000 |   |
|                         |       |                  |       |   |   |
| Total                        |       | $                     | 3,785,000  |   | $ | 2,951,000 |   |

 

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**Note 8 – Other Current Assets**

 

Other current assets are summarized below:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Barter  and other receivables |       | $                     | 2,994,000  |   | $ | 4,079,000 |   |
| Other                         |       | 1,448,000             |       | 1,716,000 |   |
|                          |       |                  |       |   |   |
| Total                         |       | $                     | 4,442,000  |   | $ | 5,795,000 |   |

 

**Note 9 – Long-term Debt**

 

The carrying amounts andfair values of the Company’s long-term debt are as follows:

 
| ** **                   | ** ** | **December 31, 2004** | ** **  | **December 31, 2003** | ** ** |
|------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                   | ** ** | **Carrying Amount**        | ** **  | **Fair Value**             | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| 9  3/4% Senior Secured Notes |       | $                          | 400,791,000 |                       | $          | 390,825,000 |   | $ | 400,087,000 |   | $ | 401,287,000 |   |
|                              |            |                            |             |                            |            |  |  |  |  |  |  |  |  |

 

The fair value of theCompany’s Senior Secured Notes at December 31, 2004 and 2003 is estimatedbased on quoted market prices.

 

*SeniorSecured Notes*

 

On December 22,2003, the Company completed a $405,000,000 offering of its 9 3/4 % SeniorSecured Notes (the “Notes”) due December 1, 2010, at a discount, resultingin proceeds to the Company of $400,067,100. Interest on the Notes is payable on December 1 and June 1 ofeach year, which commenced on June 1, 2004.  The Notes are secured by substantially all ofthe assets of the Company.  The Companyused the net proceeds from the offering in part to (i) repay alloutstanding borrowings, plus accrued interest, under the Company’s thenoutstanding senior credit agreement, (ii) redeem at par, plus accruedinterest, all of the Company’s 9 3/8% and 10 3/8% senior subordinated notes dueMay and December 2005, respectively, and (iii) to repurchase atpar, plus accrued interest, all of the Company’s 8 7/8% senior subordinatednotes due May 2008. The remaining proceeds were invested in short-termsecurities as well as being used for general working capital purposes.

 

The Indenture, whichgoverns the Notes, contains certain covenants that, among other things, limitsthe ability of the Company and its subsidiaries to incur debt, pay cashdividends on or repurchase capital stock, enter into agreements which createliens against the assets of the Company, restrict the ability of a subsidiaryto pay money or transfer assets to the Company, enter into certain transactionswith affiliates and to merge, consolidate or sell substantially all of theassets of the Company.

 

The Notes are redeemableat any time on or after December 1, 2006, at the option of the Company, inwhole or in part at certain prices declining annually to 100% of the principalamount on or after.  The Company mayredeem up to 35% of the aggregate principal amount of the Notes using proceedsof certain equity offerings completed on or before December 1, 2005.   The Company is required to offer to purchaseall outstanding Notes at 101% of the principal amount thereof plus accruedinterest in the event of a Change of Control (as defined in the Indenture).

 

59

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*SeniorSubordinated Notes*

 

On December 22, 2003, the Company redeemed infull $100,717,000 aggregate principal amount of its 10-3/8% Senior SubordinateNotes due May 15, 2005 and $34,660,000 aggregate principal amount of its 9-3/8%Senior Subordinate Notes due December 1, 2005 at par, plus accrued interest andrepurchased all of the outstanding 8-7/8% Senior Subordinated Notes due May 15,2008 at par, plus accrued interest.  Inconnection with these transactions, the Company recognized a loss on theextinguishment of debt of $3,215,000 related to the write-off of unamortizeddeferred financing fees and 30-day holding period interest on the 9-3/8% Notesand 10-3/8% Notes from December 22, 2003 to January 21, 2004, thedate of redemption, at December 31, 2003.

 

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-termdebt for the five years subsequent to December 31, 2004, are as follows:

 
| 2005                 |   | $           | —      |   |
|----------------------|--------|-------------|-------------|--------|
| 2006                 |   | —      |        |
| 2007                 |   | —      |        |
| 2008                 |   | —      |        |
| 2009                 |   | —      |        |
| 2010 and  thereafter |   | 405,000,000 |        |
|                 |   | $           | 405,000,000 |   |

 

**Note 10 – Commitments**

 

Future minimum lease payments under long-termoperating leases as of December 31, 2004 are as follows:

 
| 2005                 |   | $         | 1,906,000  |   |
|----------------------|--------|-----------|------------|--------|
| 2006                 |   | 1,571,000 |       |
| 2007                 |   | 1,533,000 |       |
| 2008                 |   | 1,574,000 |       |
| 2009                 |   | 1,591,000 |       |
| 2010 and  thereafter |   | 5,826,000 |       |
|                 |   | $         | 14,001,000 |   |

 

Rent expense, including escalation charges, wasapproximately $1,779,000, $1,593,000 and $1,267,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively.

 

Future payments underfilm contract rights agreements as of December 31, 2004 are as follows:

 
| 2005                 |   | $          | 26,007,000 |   |
|----------------------|--------|------------|------------|--------|
| 2006                 |   | 15,953,000 |       |
| 2007                 |   | 10,881,000 |       |
| 2008                 |   | 8,698,000  |       |
| 2009                 |   | 6,121,000  |       |
| 2010 and  thereafter |   | 8,124,000  |       |
|                 |   | $          | 75,784,000 |   |

 

**Note 11 – Redeemable Preferred Stock**

 

*SeriesA Preferred Stock*

 

The Company authorized 100,000 shares of its Series AConvertible Preferred Stock (“Series A Stock”), par value $.01 per share, whichwere issued at an aggregate price of $1,210,000.  All outstanding shares of the Series A Stockwere converted into shares of the Company’s Common Stock (Nonvoting), par value$.01 per share (the “Common Stock (Nonvoting)”) in August 1995.  Prior to conversion, dividends accrued on theSeries A Stock at an annual rate of $.40 per share, which accumulated, withoutinterest, if unpaid.  Accrued but unpaiddividends on the Series A Stock totaled $263,000 at December 31, 2004 and2003 and are recorded in other non-current liabilities on the Company’s balancesheet.  Accrued dividends are due andpayable on the date on which such dividends may be paid under the Company’sdebt instruments.

 

60

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*12 3/4% Cumulative Exchangeable Preferred Stock*

 

In January 1997, the Company authorized theissuance of 400,000 shares of its 12 3/4 % Cumulative Exchangeable PreferredStock (the “12 3/4 % Cumulative Exchangeable Preferred Stock”), par value $.01per share.  In connection with theCompany’s acquisition of WDWB-TV, 150,000 shares of the 12 3/4 % CumulativeExchangeable Preferred Stock were issued in January 1997 at a price of$1,000 per share.

 

Holders of the 12 3/4 % Cumulative ExchangeablePreferred Stock are entitled to receive dividends at an annual rate of 12 3/4 %per share payable semi-annually on April 1 and October 1 of eachyear.  The Company paid dividends on andprior to April 1, 2002 in additional shares of 12 3/4 % CumulativeExchangeable Preferred Stock.  On andafter October 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 wasrestricted by the terms of the indentures governing the Company’s seniorsubordinated notes and was prohibited under the terms of the then outstandingsenior credit agreement. Since three or more semi-annual dividend payments havenot been paid, the holders of the Preferred Stock have the right to elect thelesser of two directors or that number of directors constituting 25% of themembers of the Board of Directors.  Theright of the holders of the Preferred Stock to elect members of the Board ofDirectors as set forth above will continue until such time as all accumulateddividends that are required to be paid in cash and that are in arrears on thePreferred Stock are paid in full in cash. The Company is restricted by theterms of the Indenture, which governs the Company’s senior secured notes, frompaying cash dividends on the 12 3/4 % Cumulative Exchangeable PreferredStock.  The Company does not anticipatepaying cash dividends on the 12 3/4 % Cumulative Exchangeable Preferred Stockin the foreseeable future.  Dividends onthe 12 3/4 % Cumulative Exchangeable Preferred Stock are cumulative and accruewithout interest, if unpaid.  Accrued butunpaid dividends on the 12 3/4 % Cumulative Exchangeable Preferred Stocktotaled $70,257,000 as of December 31, 2004 are recorded in othernon-current liabilities on the Company’s balance sheet.

 

During the three monthsended September 30, 2003, the Company adopted Statement 150 and the 12 3/4  % Cumulative Exchangeable Preferred Stock wasreclassified on the Company’s consolidated balance sheet as a long-termliability and the accrual of dividends for the six months endedDecember 31, 2003 was recorded as a charge to expense on the consolidatedstatement of operations.  Prior to theadoption of Statement 150, dividends on the 12 3/4 % Cumulative ExchangeablePreferred Stock was treated as a reduction of shareholders’ equity. The impactof adopting Statement 150 resulted in a reduction of income before income taxesby $25,548,000 and $12,774,000 for the years ended December 31, 2004 and2003, respectively.

 

The 12 3/4 % Cumulative Exchangeable Preferred Stockis entitled to a preference of $1,000 per share initially, plus accumulated andunpaid dividends in the event of liquidation or winding up of the Company($270,632,000 liquidation value at December 31, 2004).  The Company is required, subject to certainconditions, to redeem all of the 12 3/4 % Cumulative Exchangeable PreferredStock outstanding on April 1, 2009, at a redemption price equal to 100% ofthe then effective liquidation preference thereof, plus, without duplication,accumulated and unpaid dividends to the date of redemption.  Based on quoted market prices, the fair valueof the 12 3/4 % Cumulative Exchangeable Preferred Stock at December 31, 2004 is$97,182,000.

 

Subject to certain conditions, each share of the 123/4 % Cumulative Exchangeable Preferred Stock is exchangeable, in whole or inpart, at the option of the Company, for the Company’s 12 3/4 % ExchangeDebentures (the “12 3/4 % Exchange Debentures”) on any scheduled dividendpayment date at the rate of $1,000 principal amount of 12 3/4 % ExchangeDebentures for each share of 12 3/4 % Cumulative Exchangeable Preferred Stockoutstanding at the time of the exchange.

 

**Note 12 – Stockholders’ Deficit**

 

*Stockoption plans*

 

In April 1990 the Company adopted a stock optionplan (the “Stock Option Plan”) for officers and certain key employees. TheStock Option Plan terminated on April 1, 2000.  At December 31, 2004 and 2003, optionsgranted under the Stock Option Plan were outstanding for the purchase of4,094,700 and 4,232,700 shares of Common Stock (Nonvoting), respectively.

 

On April 27, 2000, the Company adopted a newstock option plan (the “2000 Stock Option Plan”) for officers and certain keyemployees.  The number of shares ofCommon Stock (Nonvoting) subject to options available for grant is4,000,000.  Options may be granted underthe 2000 Stock Option Plan at an exercise price (for tax-qualified incentivestock options) of not less than 100% of the fair market value of the CommonStock (Nonvoting) on the date the option is granted, or 110% of such fairmarket value for option recipients who hold 10% or more of the Company’s votingstock.  The exercise price fornon-qualified stock options may be less than, equal to or greater than the fairmarket value of the Common Stock (Nonvoting) on the date the option is granted.At December 31, 2004 and 2003, options granted under the 2000 Stock OptionPlan were outstanding for the purchase of 1,496,500 and 1,750,000 shares ofCommon Stock (Nonvoting) respectively.

 

61

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On March 1, 1994, the Company adopted a DirectorStock Option Plan (the “Director Option Plan”) providing for the grant, fromtime to time, of nonqualified stock options to non-employee directors of theCompany to purchase shares of Common Stock (Nonvoting).  On April 23, 2002, the Director OptionPlan was amended to increase the shares of Common Stock (Nonvoting) subject tooptions available for grant to 1,500,000. As of December 31, 2004 and 2003, options granted under theDirector Option Plan were outstanding for the purchase of 689,650 and 808,435shares of Common Stock (Nonvoting) respectively.  The options granted under the Director OptionPlan serve as compensation for attendance at regularly scheduled meetings andfor service on certain committees of the Board of Directors.

 

The Company’s stock option information is as follows:

 
| ** **                                                      | ** ** | **2004**    | ** ** | **2003**                                | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|-------------|------------|
| ** **                                                      | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** |
|                                                            |       |        |       |                                    |       |        |       |   |   |   |   |   |   |
| Outstanding at  beginning of year                               |       | 6,791,135   |       | $                                       | 6.21       |        | 6,721,435  |   | $ | 6.33 |   | 5,957,985 |   | $ | 6.98 |   |
| Granted                                                         |       | 20,000      |       | 1.76                                    |       | 160,000     |       | 2.10 |   | 1,030,500 |   | 2.34 |   |
| Exercised                                                       |       | 0           |       | 0                                       |       | (17,500     | )          | 1.50 |   | (2,000 | ) | 1.50 |   |
| Forfeited                                                       |       | (530,285    | )          | 4.51                                    |       | (72,800     | )          | 9.29 |   | (265,050 | ) | 5.52 |   |
| Outstanding at  end of year                                     |       | 6,280,850   |       | 6.34                                    |       | 6,791,135   |       | 6.21 |   | 6,721,435 |   | 6.33 |   |
| Exercisable at  end of year                                     |       | 4,864,900   |       | 5.77                                    |       | 4,637,535   |       | 5.96 |   | 3,980,210 |   | 6.35 |   |
| Weighted-average  fair value of options granted during the year |       | $           | 1.38       |                                    |       |        | $          | 1.36 |   |   |   | $ | 1.65 |   |   |   |
|                                                                 |            |             |            |                                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                           | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **at 12/31/04**         | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Outstanding at  12/31/04** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|                          |       |                    |       |                                              |       |   |   |   |   |   |   |
| $ 1.47 - $2.70           |       | 1,441,500               |       | 6.08 years                                        |       | $ | 2.10 |   | 1,135,550 |   | $ | 2.13 |   |
| $ 3.00 - $5.50           |       | 282,500                 |       | .40 years                                         |       | 3.04 |   | 282,500 |   | 3.04 |   |
| $ 6.13 - $6.88           |       | 1,515,200               |       | 3.50 years                                        |       | 6.45 |   | 1,515,200 |   | 6.45 |   |
| $ 7.00 - $9.75           |       | 1,844,650               |       | 2.37 years                                        |       | 7.61 |   | 1,844,650 |   | 7.61 |   |
| $ 10.00 - $12.44         |       | 1,197,000               |       | 3.17 years                                        |       | 10.11 |   | 87,000 |   | 11.47 |   |
|                               |            |                         |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

*ManagementStock Plan*

 

In April 1993, the Company adopted a ManagementStock Plan providing for the grant from time to time of awards denominated inshares of Common Stock (Nonvoting) (the “Bonus Shares”) to salaried executiveemployees of the Company.  On October 19,2004 the Company increased the reserve of shares from 2,000,000 to2,500,000.  Shares generally vest over afive-year period. As of December 31, 2004, the Company has allocated atotal of 1,879,925 Bonus Shares pursuant to the Management Stock Plan,1,704,475 of which had vested through December 31, 2004.  For the years ended December 31, 2004and 2003, 255,500 and 187,613 shares, respectively, were granted pursuant tothe Management Stock Plan.  Theweighted-average grant-date fair value of those shares is $0.79 and $2.15,respectively.

 

*Non-EmployeeDirectors’ Stock Plan*

 

In April 1997, the Company adopted a Non-EmployeeDirectors’ Stock Plan (the “Director Stock Plan”), providing an annual grant ofshares of the Company’s Common Stock (Nonvoting) to each eligible non-employeedirector.  On December 2, 2002, theCompany increased the reserve of shares of Common Stock (Nonvoting) for grantunder the Director Stock Plan from 400,000 shares

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.  On December 31, 2004, theCompany’s Board of Directors suspended Director Stock Plan until such time theBoard of Directors determines otherwise. Effective beginning January 1, 2005,each eligible non-employee 

 

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director will receive an annual fee of $45,000 for director servicespayable semiannually in equal increments in cash. For the years endedDecember 31, 2004 and 2003, 229,125 and 107,780 shares, respectively, weregranted pursuant to the Director Stock Plan.

 

*EmployeeStock Purchase Plan*

 

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

 

In March 2001, the Company issued 753,491 stockpurchase warrants to its then senior lenders. The warrants were issued at an exercise price of $1.75 and areexercisable at any time prior to March 6, 2006.

 

The total number of common shares outstanding atDecember 31, 2004 assuming the exercise of all outstanding stock optionsand warrants is as follows:

 
| Class A Common  Stock     |   | 98,000     |   |
|---------------------------|--------|------------|--------|
| Common Stock  (Nonvoting) |   | 19,284,000 |   |
| Stock options             |   | 6,281,000  |   |
| Warrants                  |   | 753,000    |   |
|                      |   | 26,416,000 |   |

 

**Note 13 – Income Taxes**

 

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

 

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

 
| ** **                            | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|---------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Current taxes:                        |       |        |        |        |       |        |       |
| Federal                               |       | $           | —      |        | $          | (16,327,000 | )          | $ | 15,594,000 |   |
| State                                 |       | 216,000     |        | 216,000     |       | 3,279,000   |       |
|                                  |       | 216,000     |        | (16,111,000 | )          | 18,873,000  |       |
| Deferred taxes:                       |       |        |        |        |       |        |       |
| Federal                               |       | (11,927,000 | )           | (1,303,000  | )          | 29,353,000  |       |
| State                                 |       | (3,000      | )           | 382,000     |       | 4,936,000   |       |
|                                  |       | (11,930,000 | )           | (921,000    | )          | 34,289,000  |       |
| (Benefit)  provision for income taxes |       | $           | (11,714,000 | )           | $          | (17,032,000 | )          | $ | 53,162,000 |   |

 

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

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax  liability:          |       |                  |       |   |   |
| Depreciation and  amortization    |       | $                     | 29,318,000 |   | $ | 32,054,000 |   |
| Total deferred  tax liability     |       | 29,318,000            |       | 32,054,000 |   |
|                              |       |                  |       |   |   |
| Deferred tax  assets:             |       |                  |       |   |   |
| Net operating  loss carry forward |       | 25,190,000            |       | 4,032,000 |   |
| Other                             |       | 2,108,000             |       | 661,000 |   |
| Valuation  allowance              |       | (17,327,000           | )          | (3,917,000 | ) |
| Total deferred  tax assets        |       | 9,971,000             |       | 776,000 |   |
| Net deferred tax  liability       |       | $                     | 19,347,000 |   | $ | 31,278,000 |   |

 

The difference between the U.S. federal statutory taxrate and the Company’s effective tax rate for the years ended 

 

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December 31 is as follows:

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| U.S. statutory  rate                            |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State and local  taxes                          |       | (0.2     | )          | (0.6     | )          | 3.9      |       |
| Increase  (decrease) in valuation allowance     |       | (12.4    | )          | —   |       | 0.2      |       |
| Accrued dividend  on redeemable preferred stock |       | (9.4     | )          | (7.0     | )          | —   |       |
| Other                                           |       | (0.7     | )          | (0.7     | )          | (0.5     | )          |
| Effective tax  rate                             |       | 12.3     | %          | 26.7     | %          | 38.6     | %          |

 

At December 31, 2004, the Company had a netoperating loss carry forward for federal tax purposes of approximately$71,654,000 of which approximately $17,400,000 is subject to limitationsprovided by the Internal Revenue Code. The net loss carry forwards expire in2005 through 2024.

 

During 2002, new tax legislation was enacted thatallows for a five year carry back of alternative minimum tax net operating lossesto fully offset alternative minimum taxable income.  As such, during 2002, the Company filed forand received a refund of prior alternative minimum tax paid of approximately$2,900,000.  During the second quarter of2004, the Company received the $16,000,000 federal income tax refund asanticipated.

 

**Note 14 – Defined Contribution Plan**

 

The Company has a trusteed profit sharing and savingsplan (the “Plan”) covering substantially all of its employees.  Contributions by the Company to the Plan arebased on a percentage of the amount of employee contributions to the Plan andare made at the discretion of the Board of Directors.  Company contributions, which are fundedmonthly, amounted to $591,000, $452,000 and $735,000 for the years endedDecember 31, 2004, 2003 and 2002 respectively.

 

**Note 15 – Related Party**

 

Between 1995 and 1998, the Company loaned W. DonCornwell, the Company’s Chief Executive Officer, $2,911,000 in four separatetransactions.  On January 1, 2001,the Company loaned Mr. Cornwell an additional $375,000.  On February 15, 2001, the Companyagreed to consolidate the five loans into one promissory note in the amount of$3,286,000.  The promissory note matureson January 25, 2006 or, if earlier, 30 days after Mr. Cornwell’stermination of employment.  Thepromissory note does not bear interest, but interest at an annual rate of 6.75% will be imputed as additional compensation to the officer.  The promissory note allows for the loan to beforgiven in one-third increments if the Company’s Common Stock (Nonvoting)trades for ten consecutive trading days at $15, $20, and $25, respectively, orif the per share consideration received by the Company’s common stockholders ina Change of Control (as defined in the indentures governing the Company’s seniorsubordinated notes) equals at least $15, $20 or $25, respectively.

 

In 1995, the Company loaned Stuart Beck, the Company’sPresident, $221,200. On February 15, 2001, the Company agreed tocancel this note and issue a new promissory note in the same amount. As morefully described below, Mr. Beck’s promissory note was repaid in full in 2004.

 

In February 2003, the Compensation Committeerecommended, and the Board of Directors approved, an incentive award of$3,286,065 to each of Mr. Cornwell and Mr. Beck to be paid, subject to vestingterms, only upon the occurrence of the refinancing with a maturity of at leasttwo years, of the senior debt due April 15, 2004. On December 22, 2003,the Company issued $405 million aggregate principal amount of 9 3/4  % Senior Secured Notes, the proceeds of whichwere used by the Company in part to repay all outstanding borrowings (plusaccrued interest) under the Company’s then outstanding senior credit agreement,which satisfied the performance objective of the awards.  Mr. Cornwell’s award, which vests inone-third tranches over three years from the refinancing date, will be used torepay in full his outstanding loan from the Company of $3,286,065 dueJanuary 25, 2006.  Mr. Cornwell hasirrevocably elected to defer payment of the first two tranches under hisperformance award until January 25, 2006 when his loan is repaid.  On March 1, 2005, the Board of Directorsapproved the acceleration of payment of the third tranche of Mr. Cornwell’saward to January 25, 2006.

 

On September 21, 2004, Stuart Beck resigned from theCompany to accept the appointment as Ambassador/Permanent Representative of theRepublic of Palau to the United Nations. Mr. Beck will remain on the Company’s Board of Directors. Pursuant tohis separation agreement, the Company granted Mr. Beck severance totaling$1,008,000, payable in equal installments over eighteen months from the date ofseparation.  In addition, Mr. Beck was awarded a pro-rated bonus ofapproximately $255,600 based 

 

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upon achievements of certain financial targets in 2004.

 

Under the terms of the separation agreement, theCompany and Stuart J. Beck amended the Performance Award and deferral of suchpayments pursuant to the Separation Agreement. Under the amended terms of the Performance Award, Mr. Beck’s PerformanceAward fully vested as of the separation date and payment of $221,200 was madeon September 30, 2004 to repay his outstanding promissory note to theCompany.  The remaining vested award of$3,065,000 is payable in cash on December 22, 2006. In addition, the Companymodified the terms of Mr. Beck’s outstanding stock option awards to allow hisoptions to continue to vest and have the right to exercise his options untilthe earlier of (A) the later of January 2, 2007 and 30 days after the last dayof Mr. Beck’s continuous service on the Company’s Board of Directors and (B)the fixed date on which each stock option award was initially set to expire.

 

Pursuant to the separation agreement, Mr. Beckexchanged 80,250 shares of the Company’s Class A Voting Common Stock, par value$0.01 per share, for 80,250 shares of the Company’s Class B Non-Voting CommonStock, par value $0.01 per share.

 

As of December 31, 2004, the Company recorded one-timeexpenses for the separation benefits and acceleration of the remaining portionof the Performance Award of approximately $1,290,000 and $1,562,000,respectively.

 

As of December 31, 2004, the Company has agreed toallow Mr. Beck with the use of office space during this transition period at nocharge. The Company anticipates that Mr. Beck will continue to use this officespace through the first half of 2005.

 

**Note16 – Quarterly Results of Operations (unaudited)**

 

The following is a summary of the quarterly results ofoperations for the years ended December 31, 2004 and 2003:

 
| ** **         | ** ** | **March 31,  2004** | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net revenue        |       | $                        | 26,001,000 |                    | $          | 29,163,000                   |       | $                           | 27,046,000 |   | $ | 31,555,000 |   |
| Net loss           |       | (17,413,000              | )          | (15,703,000             | )          | (20,002,000                  | )          | (30,174,000                 | )(a)       |
|               |       |                     |       |                    |       |                         |       |                        |       |
| Per common  share: |       |                     |       |                    |       |                         |       |                        |       |
| Net loss           |       |                     |       |                    |       |                         |       |                        |       |
| Basic              |       | $                        | (0.90      | )                       | $          | (0.81                        | )          | $                           | (1.03      | ) | $ | (1.56 | ) |
| Diluted            |       | (0.90                    | )          | (0.81                   | )          | (1.03                        | )          | (1.56                       | )          |

 
| ** **         | ** ** | **March 31,  2003** | ** ** | **June 30,  2003** | ** ** | **September 30,  2003** | ** ** | **December 31,  2003** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net revenue        |       | $                        | 24,657,000 |                    | $          | 28,467,000                   |       | $                           | 25,720,000 |   | $ | 29,700,000 |   |
| Net loss           |       | (9,451,000               | )          | (7,355,000              | )          | (14,912,000                  | )          | (15,230,000                 | )          |
|               |       |                     |       |                    |       |                         |       |                        |       |
| Per common  share: |       |                     |       |                    |       |                         |       |                        |       |
| Net loss           |       |                     |       |                    |       |                         |       |                        |       |
| Basic              |       | $                        | (0.84      | )                       | $          | (0.73                        | )          | $                           | (0.78      | ) | $ | (0.80 | ) |
| Diluted            |       | (0.84                    | )          | (0.73                   | )          | (0.78                        | )          | (0.80                       | )          |

 

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(a)           In accordance withStatement 142, the Company completed its required annual impairment test as ofDecember 31, 2004, and recorded an impairment charge on the carrying value ofgoodwill of approximately $15,491,000.

 

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**SCHEDULE IIGRANITE BROADCASTING CORPORATION****VALUATION AND 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, 2004 |       | $                                  | 1,319,000  |                                       | $          | (299,000                   | )          | $                            | (124,000   | ) | $ | 896,000 |   |
|                                       |       |                               |       |                                       |       |                       |       |                         |       |
| For the year  ended December 31, 2003 |       | 748,000                            |       | 541,000                                    |       | (30,000                    | )          | 1,319,000                    |       |
|                                       |       |                               |       |                                       |       |                       |       |                         |       |
| For the year  ended December 31, 2002 |       | $                                  | 531,000    |                                       | $          | 952,000                    |       | $                            | 735,000    |   | $ | 748,000 |   |

 

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(1)                                  Netof recoveries.

 

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

 

None.

 

**Item9A.  Controls and Procedures**

 

As of December 31, 2004, an evaluation wascarried out under the supervision and with the participation of GraniteBroadcasting’s management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-14(c) under theSecurities Exchange Act of 1934). Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were effective as ofDecember 31, 2004. No significant changes were made in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

**Item 9B.  Other Information**

 

In connection with our March 8, 2005, acquistion ofWISE-TV, the NBC affiliate serving Fort Wayne, Indiana, from New Vision Group,LLC for approximately $43.5 million, pursuant to the terms and conditions of astock purchase agreement, dated April 23, 2004, we assumed, as of March 8,2005, the NBC network affiliation agreement for WISE-TV, a copy of which isattached hereto as Exhibit 10.18.

 

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**PART III**

 

**Item10.  Directors and Executive Officers ofthe Registrant**

 

The following table sets forth information concerningour executive officers and directors as of March 7, 2005:

 
| **Name**                          | ** ** | **Age** | ** ** | **Position**                                                 |
|-----------------------------------|------------|---------|------------|--------------------------------------------------------------|
| ** **                        |       |    |       |                                                         |
| W. Don Cornwell (1)               |       | 57      |       | Chairman of the Board, Chief Executive Officer and  Director |
| Robert E. Selwyn, Jr.             |       | 61      |       | Senior Operating Advisor and Director                        |
| Lawrence I. Wills                 |       | 44      |       | Senior Vice President-Chief Financial Officer                |
| John Deushane                     |       | 48      |       | Chief Operating Officer                                      |
| James L. Greenwald(2)             |       | 77      |       | Director                                                     |
| Stuart J. Beck(1)                 |       | 58      |       | Director                                                     |
| Edward Dugger, III                |       | 55      |       | Director                                                     |
| Thomas R. Settle(1)(3)(4)         |       | 64      |       | Director                                                     |
| Charles J. Hamilton, Jr.(2)(3)(4) |       | 57      |       | Director                                                     |
| M. Fred Brown(2)                  |       | 58      |       | Director                                                     |
| Jon E. Barfield(3)                |       | 53      |       | Director                                                     |
| Veronica Pollard(3)               |       | 59      |       | Director                                                     |

 

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(1)                                  Memberof the Stock Option Committee.  The stockoption committee is only authorized to grant stock options to employees otherthan executive officers.

(2)                                  Memberof the Audit Committee.

(3)                                  Memberof the Compensation Committee.

(4)                                  Memberof the Management Stock Plan Committee.

 

Mr. Cornwell is a co-founder of our company and hasbeen Chairman of our Board 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 co-founder of our company and hasbeen a member of our Board of Directors since February 1988. Mr. Beckserved as our President and Secretary from September 1991 to September 2004,when he resigned as an officer of the Company to accept an appointment asAmbassador/Permanent Representative of the Republic of Palau to the UnitedNations.  Prior to founding Granite, Mr.Beck was an attorney in private practice of law in New York, New York andWashington, DC.  Mr. Beck received aBachelor of Arts degree from Harvard College in 1968 and a Juris Doctor degreefrom Yale Law School in 1971.

 

Mr. Selwyn has been our Senior Operating Advisor sinceJanuary 1, 2003 and a member of our Board of Directors since May 11,1998.  In addition, Mr. Selwyn served asour Chief Operating 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 thePresident of Broadcasting for SCI Television, Inc.

 

Mr. Wills has been our Senior Vice President–ChiefFinancial Officer since September 2004. In addition, Mr. Wills served as our Senior Vice President-ChiefAdministrative Officer from 2001 to September 2004 and Vice President—Financeand Controller from 1990 to 2001.  Priorto joining Granite, Mr. Wills was employed by Ernst & Young LLP from 1982to 1990 in various capacities, the most recent of which was as senior auditmanager responsible for managing and supervising audit engagements.  Mr. Wills is a director of Junior Achievementof New York, Inc.  Mr. Wills received abachelor’s degree in Business Administration from Iona College in 1982.

 

Mr. Deushane has been our Chief Operating Officersince January 1, 2003.  Mr. Deushaneserved as our Regional Vice President — Midwest from 1998 to 2002.  Prior to his position as Regional VicePresident – Midwest, Mr. Deushane served as President and General Manager ofKSEE-TV during 1997 and President and General Manager of WEEK-TV from 1991 to1996.

 

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Mr. Deushane is a director of the New York State BroadcastersAssociation.  Mr. Deushane graduatedmagna cum laude from Bradley University with a Bachelor of Science degree inbroadcast management and journalism.

 

Mr. Greenwald has been a member of our Board ofDirectors since December 1988. Mr. Greenwald was the Chairman and ChiefExecutive Officer of Katz Communications, Inc. from May 1975 toAugust 1994 and has been Chairman Emeritus since August 1994.  Mr. Greenwald has served as President of theStation Representatives Association and the International Radio and Television Societyand Vice President of the Broadcast Pioneers. Mr. Greenwald is a director of Paxson Communications Corp.  Mr. Greenwald received a Bachelor of Artsdegree from Columbia University in 1949 and an Honorary Doctorate Degree inCommercial Science from St. Johns University in 1980.

 

Mr. Dugger has been a member of our Board of Directorssince December 1988.  Mr. Dugger hasbeen President and Chief Executive Officer of UNC Ventures, Inc., aBoston-based venture capital firm, since January 1978, and its investmentmanagement company, UNC Partners, Inc., since June 1990.  Mr. Dugger is a former director of theFederal Reserve Bank of Boston.  Mr.Dugger received a Bachelor of Arts degree from Harvard College in 1971 and aMasters degree in Public Administration and Urban Planning from PrincetonUniversity in 1973.

 

Mr. Hamilton has been a member of our Board ofDirectors since July 1992.  Mr.Hamilton was a partner in the New York law firm of Battle Fowler LLP from 1983to 2000.  On June 8, 2000 BattleFowler LLP merged with the law firm Paul, Hastings, Janofsky & Walker LLP,where he is a partner.  Mr. Hamiltonreceived a Bachelor of Arts degree from Harvard College in 1969, a Juris Doctordegree from 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 Directorssince July 1992.  Mr. Settle foundedand is currently a director of The Winchester Group, Inc., an investmentadvisory firm, since 1990.  Mr. Settlewas the chief investment officer at Bernhard Management Corporation from 1985to 1989.  He was a Managing Director ofFurman Selz Capital Management from 1979 until 1985.  Mr. Settle received a Bachelor of Arts Degreefrom Muskingum College in 1963 and a Masters degree in Business Administrationfrom Wharton Graduate School in 1965.

 

Mr. Brown has been a member of our Board of Directorssince April 1999.  Mr. Brown foundedand has been President of Aerodyne Capital, Inc., a California companyspecializing in the trading and leasing of commercial jet aircraft andhigh-bypass jet engines since 1993. Prior to founding Aerodyne, Mr. Brown was Senior Vice-President andManaging Director of Marketing for Blenhiem Aviation from 1989-1993.  In addition, Mr. Brown served asVice-President at Goldman Sachs & Co. While at Goldman Sachs & Co., Mr. Brown was seconded to Freedom NationalBank NA as its Senior Vice-President and Chief Financial Officer.  Mr. Brown is a Director of San Francisco JazzOrganization.  Mr. Brown received aBachelor of Arts degree from Middlebury College in 1969.  He received a Juris Doctor degree and a Mastersdegree in Business Administration from the University of California at Berkeleyin 1973 and is a member of the California Bar.

 

Mr. Barfield has been a member of our Board ofDirectors since April 1999.  Mr.Barfield has been Chairman, President and Chief Executive Officer of TheBartech Group, a professional staffing and outsourcing services firm, since1997.  In addition, Mr. Barfield servedas Chairman and Chief Executive Officer of the Bartech Group from 1995 to 1997,and as President of The Bartech Group from 1981 to 1995.  Prior to joining The Bartech Group, Mr.Barfield practiced corporate and securities law with the Chicago based law firmof Sidley, Austin, Brown and Wood from 1977 to 1981.  Mr. Barfield is a director of National CityCorporation, BMC Software, Inc., Tecumseh Products Company, Blue Cross BlueShield of Michigan and Reading is Fundamental. He is also a Trustee Emeritus of Princeton University and a Trustee ofThe Henry Ford and of Kettering University. Mr. Barfield received a Bachelor of Arts degree from PrincetonUniversity in 1974 and received a Juris Doctor degree from Harvard Law Schoolin 1977.

 

Ms. Pollard has been a member of our Board ofDirectors since January 2000.  Ms.Pollard most recently served as Group Vice President, Corporate Communications,Toyota Motor North America, Inc. until June 2004.  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 CorporateServices of North America, Inc., Ms. Pollard was Vice President-CorporatePublic Relations for ABC, Inc. from 1994 to 1998.  Ms. Pollard is a trustee of the Museum forAfrican Art in New York, a director of The Doe Fund and a member of theIndividual Investor Advisory Committee of the New York Stock Exchange.  Ms. Pollard attended the University ofWisconsin for two years, received a Bachelor’s degree from Boston University in1966, and a Master’s degree from Columbia University, Teachers College, in1968.

 

Each member of our Board of Directors hold officeuntil the next annual meeting of our shareholders, unless such director resignsor is removed before then, or until such director’s successor is duly electedand qualified.  All officers are electedannually and serve at the discretion of the Board of Directors.

 

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Directors are separately reimbursed by us for theirtravel expenses incurred in attending Board or committee meetings and receivesecurities under our Director Stock Option Plan and, until December 31, 2004,our Non-Employee Directors Stock Plan.

 

**Board Committees and Membership**

 

Below is a description of each committee of the Boardof Directors. The Board of Directors has determined that each member of eachcommittee, excluding the Stock Option Committee, meets the applicable laws andregulations regarding “independence” and that each member is free of anyrelationship that would interfere with his or her individual exercise ofindependent judgment.

 

*AuditCommittee*.  The AuditCommittee assists the Board of Directors in its oversight of the quality andintegrity of our accounting, auditing, and reporting practices. The AuditCommittee’s role includes discussing with management our processes to managebusiness and financial risk, and for compliance with significant applicablelegal, ethical, and regulatory requirements. The Audit Committee is responsible for the appointment, replacement,compensation, and oversight of the independent auditor engaged to prepare andissue audit reports on our financial statements. The Audit Committee relies onthe expertise and knowledge of management, the internal auditors, and theindependent auditor in carrying out its oversight responsibilities. Thespecific responsibilities and functions of the Audit Committee are delineatedin the Audit Committee Charter. The Audit Committee Charter is reviewedannually and updated as necessary to reflect changes in regulatoryrequirements, authoritative guidance, and evolving practices.  The Board of Directors has determined thateach Audit Committee member is independent and has sufficient knowledge infinancial and auditing matters to serve on the Audit Committee. The AuditCommittee held six meetings during 2004. The members of the Audit Committee areMessrs. Hamilton (Chairman), Greenwald and Brown.  The Board has determined that Mr. Brown is anaudit committee financial expert within the meaning of applicable regulationsof the U.S. Securities and Exchange Commission.

 

*CompensationCommittee*.  TheCompensation Committee consists of four members of our Board of Directors thatare independent directors.  The primaryresponsibilities of the Compensation Committee are to (a) review and recommendto the Board the compensation of the Chief Executive Officer and other officersof our company, (b) review executive bonus plan allocations, (c) oversee andadvise the Board on the adoption of policies that govern our compensationprograms, (d) oversee the administration of our equity-based compensation andother benefit plans, and (e) approve grants of stock options and stock awardsto our officers and employees under our equity plans, subject to certainlimitations.  The Compensation Committee’srole includes producing the report on executive compensation required by SECrules and regulations. The specific responsibilities and functions of theCompensation Committee are delineated in the Compensation Committee Charter.The Compensation Committee Charter is reviewed annually and updated asnecessary to reflect changes in regulatory requirements, authoritativeguidance, and evolving practices.  TheCompensation Committee held four meetings during 2004. The members of theCompensation Committee are Ms. Pollard and Messrs. Settle (Chairman),Hamilton and Barfield.

 

*ManagementStock Plan Committee*. The responsibility of the Management Stock Plan Committee is toadminister our Management Stock Plan. The Management Stock Plan Committee is appointed by our Board ofDirectors and consists of two members of the Board of Directors that arenon-employee directors.  The ManagementStock Plan Committee, from time to time, selects eligible employees to receivea discretionary bonus of Bonus Shares or a Performance Award based upon suchemployee’s position, responsibilities, contributions and value to us and suchother factors as the Management Stock Plan Committee deems appropriate.  The Management Stock Plan Committee hasdiscretion 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 four meetings during 2004. The members ofthe Management Stock Plan Committee are Messrs. Settle and Hamilton.

 

*StockOption Committee*.  TheStock Option Committee consists of three members of the Board of Directorsappointed by the Board.  The Stock OptionCommittee is only authorized to grant Options to persons who are not then “coveredemployees” within the meaning of Section 162(m) of the Internal Revenue Code orwho are not then our officers or holders of 10% or more of the Voting CommonStock.  The Stock Option Committee heldone meeting during 2004. The members of the Stock Option Committee areMessrs. Cornwell, Beck and Settle.

 

*Section16(a) Beneficial Ownership Reporting Compliance*

 

Each of our director and officer who is subject toSection 16 of the Securities Exchange Act of 1934, as amended, or the ExchangeAct, is required to report to the Securities and Exchange Commission, by aspecified date, his or her beneficial ownership of, or certain transactions in,our securities.  Except as set forth below, based solely upon a review ofsuch reports, we believe that all filing requirements under Section 16 werecomplied with on a timely basis.

 

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For fiscal year 2004, Messrs. Barfield, M. Beck,Cornwell, Dugger, Greenwald, Hamilton, Settle and Ms. Pollard did not report,on a timely basis, one transaction on one Form 4, Mr. Brown did not report, ona timely basis, one transaction on two Form 4s, and Messrs. Deushane and Willsdid not report, on a timely basis, one transaction on three Form 4s.  Allof the reports referred to above have been filed.

 

*Code of Business Conduct and Ethics*

 

We have adopted a Code of Business Conduct and Ethicsthat applies to all of our employees, including our principal executiveofficer, principal financial officer and principal accounting officer and theindependent Board of Directors.  A copyof this code is available on our Web site at www.granitetv.com. We intend todisclose any changes in or waivers from our code of conduct that are requiredto be publicly disclosed by posting such information on our Web site or byfiling a Form 8-K.

 

**Item 11.**  **Executive Compensation**

 

The following table sets forth the compensation paidto our Chief Executive Officer and each of its most highly compensatedexecutive officers whose total cash compensation exceeded $100,000 for each ofthe three years in the period ended December 31, 2004:

 

**SummaryCompensation Table**

 
| ** **                      | ** ** | ** **               | ** ** | ** **     | ** ** | ** **            | ** ** | **Long-Term Compensation  Awards**   | ** ** | ** **                  | ** ** |
|---------------------------------|------------|--------------------------|------------|----------------|------------|-----------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Annual  Compensation** | ** ** | **Bonus**      | ** ** | **Restricted  Stock** | ** ** | **Securities  Underlying  Options/** | ** ** | **All Other  Compensation** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                 | ** ** | **Salary ($)** | ** ** | **($) (1)**      | ** ** | **Awards**                           | ** ** | **SARs (#)**                | ** ** | **($)(2)** | ** ** |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| W. Don Cornwell                 |       | 2004                     |       | $              | 672,000    |                  | $          | 480,000                              |       | $                           | 7,500      | (3) | — |   | $ | 5,125 |   |
| Chief Executive  Officer        |       | 2003                     |       | 672,000        |       | 679,000               |       | 96,000                               | (4)        | —                      |       | 6,000 |   |
|                            |       | 2002                     |       | 600,000        |       | 553,191               |       | 297,500                              | (5)        | 160,000                     |       | 5,500 |   |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| John Deushane                   |       | 2004                     |       | $              | 300,000    |                  | $          | 170,000                              |       | $                           | 21,850     | (6) | — |   | $ | 14,725 |   |
| Chief Operating  Officer        |       | 2003                     |       | —         |       | —                |       | —                               |       | —                      |       | — |   |
|                            |       | 2002                     |       | —         |       | —                |       | —                               |       | —                      |       | — |   |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| Robert E.  Selwyn, Jr.          |       | 2004                     |       | $              | 325,000    |                  | $          | 60,000                               |       | $                           | —     |   | — |   | $ | 14,725 |   |
| Senior Operating  Advisor       |       | 2003                     |       | 400,000        |       | 75,000                |       | —                               |       | —                      |       | 15,600 |   |
|                            |       | 2002                     |       | 396,250        |       | 119,000               |       | 17,850                               | (7)        | —                      |       | 15,100 |   |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| Lawrence I.  Wills              |       | 2004                     |       | $              | 250,000    |                  | $          | 175,000                              |       | $                           | 53,250     | (8) | — |   | $ | 23,125 |   |
| Senior Vice  President -        |       | 2003                     |       | 242,500        |       | 200,000               |       | —                               |       | —                      |       | 24,000 |   |
| Chief Financial  Officer        |       | 2002                     |       | 206,000        |       | 175,000               |       | 23,800                               | (9)        | 10,000                      |       | 23,500 |   |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| Ellen McClain  (12)             |       | 2004                     |       | $              | 166,667    |                  | $          | —                               |       | $                           | —     |   | — |   | $ | 16,333 |   |
|                            |       | 2003                     |       | 242,500        |       | 200,000               |       | —                               |       | —                      |       | 24,000 |   |
|                            |       | 2002                     |       | 206,000        |       | 175,000               |       | 23,800                               | (9)        | 10,000                      |       | 23,500 |   |
|                            |       |                     |       |           |       |                  |       |                                 |       |                        |       |   |   |
| Stuart J. Beck  (13)            |       | 2004                     |       | $              | 476,000    |                  | $          | 255,600                              |       | $                           | —     |   | — |   | $ | 11,925 |   |
|                            |       | 2003                     |       | 672,000        |       | 656,829               |       | 179,500                              | (10)       | —                      |       | 15,600 |   |
|                            |       | 2002                     |       | 600,000        |       | 391,319               |       | 238,000                              | (11)       | 213,000                     |       | 15,100 |   |

 

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(1)                                  Represents cash bonuses for service renderedin 2004, 2003 and 2002 that were paid in the subsequent year.

 

(2)                                  The amounts shown in this column consists of amatching contribution by us under our Employees’ Profit Sharing and Savings(401(k)) Plan and an annual perquisite allowance for Messrs. Dueshane, andSelwyn of $9,600 each applicable year, $6,800, $9,600 and $9,600 for Mr. Beckin 2004, 2003 and 2002, respectively, and $18,000 for Mr. Wills in 2004, 2003 and 2002 and $12,000, $18,000 and $18,000for Ms. McClain in 2004, 2003 and 2002, respectively.

 

(3)                                  Represents the market value on the date ofaward of 30,000 Bonus Shares awarded under our Management Stock Plan on October19, 2004 for services rendered during the year-ended December 31, 2004.

 

(4)                                  Represents the market value on the date ofaward of 24,752 Bonus Shares awarded under our Management Stock Plan on January9, 2003 for services rendered during the year-ended December 31, 2002 and25,000 Bonus Shares awarded under the Management Stock Plan on January 5, 2004for services rendered during the year-ended December 31, 2003.

 

(5)                                  Represents the market value on the date ofaward of 125,000 Bonus Shares awarded under our Management Stock Plan on April23, 2002 for services renderedduring the year-ended December 31, 2001. Mr. Cornwell deferred receipt of these shares to December 31, 2003.

 

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(6)                                  Represents the market value on the date ofaward of 5,000, 40,000 and 10,000 Bonus Shares awarded under our ManagementStock Plan on February 25, 2004, October 19, 2004 and December 1, 2004,respectively, for services rendered during the year-ended December 31, 2004.

 

(7)                                  Represents the market value on the date ofaward of 7,500 Bonus Shares awarded under our Management Stock Plan on April23, 2002.

 

(8)                                  Represents the market value on the date ofaward of 25,000, 40,000 and 10,000 Bonus Shares awarded under our ManagementStock Plan on February 25, 2004, October 19, 2004 and December 1, 2004, respectively,for services rendered during the year-ended December 31, 2004.

 

(9)                                  Represents the market value on the date ofaward of 10,000 Bonus Shares awarded under our Management Stock Plan on April23, 2002.

 

(10)                            Represents the market value on the date of awardof 88,861 Bonus Shares awarded under our Management Stock Plan on January 9,2003 for services rendered during the year-ended December 31, 2002.

 

(11)                            Represents the market value on the date ofaward of 100,000 Bonus Shares awarded under our Management Stock Plan on April23, 2002 for services rendered during the year ended December 31, 2001.

 

(12)                            Ms. McClain served as the Company’s SeniorVice President-Chief Financial Officer from 2001 through August 31, 2004. Allamounts represent earnings in 2004 through the date of separation.

 

(13)                            Mr. Beck served as the Company’s Presidentfrom September 1991 through September 21, 2004 and as the Company’s Secretaryfrom 1988 through September 21, 2004. All amounts represent earnings in 2004through the date of separation.

 

**Employment Agreements andCompensation Arrangements**

 

Mr. Cornwell has an employment agreement with us.  The agreement provides for a two-yearemployment term, which is automatically renewed for subsequent two-year termsunless advance notice of nonrenewal is given (the current term under suchagreement, which was renewed in 2003, expires September 19, 2005).  The agreement stipulates that Mr. Cornwellwill devote his full time and efforts to our company and will not engage in anybusiness activities outside the scope of his employment with us unless approvedby a majority of our independent directors. Under the agreement, Mr. Cornwell is permitted to exchange any or all ofhis shares of Voting Common Stock for shares of Common Stock (Nonvoting),provided that, after such exchange is effected, there will continue to beshares of our voting stock outstanding.

 

The Compensation Committee of our Board of Directorsannually develops a compensation model to determine salary and incentivecompensation for Mr. Cornwell and Mr. Beck. The base salary was $600,000 for 2002 and $672,000 for 2003 and2004.   Messrs Cornwell and Beck wereeligible to receive incentive compensation for 2004 if certain Financial Targetswere achieved.  Incentive compensation caninclude cash bonuses, shares of Common Stock (Nonvoting) or a combinationthereof.  Incentive compensation for 2004totaling 480,000 was awarded to Mr. Cornwell on January 11, 2005, which waspaid in 2005.  Mr. Beck resigned from theCompany on September 21, 2004 and pursuant to his separation agreement, anyincentive compensation awards for 2004 will be prorated to represent 75% of thetotal earned award.  Incentivecompensation for 2004 totaling $255,600 was awarded to Mr. Beck on January 11,2005 which was paid in 2005.

 

Mr. Selwyn has an employment agreement with us.  The current employment term expires onDecember 31, 2005.  The agreementstipulates that Mr. Selwyn will devote his full time and effort to our companyand will not engage in any business activities outside of the scope of hisemployment with us other than permitted under the agreement.  In addition to his base salary, Mr. Selwyn iseligible to receive a cash bonus if certain quantitative and qualitative goalsare achieved. He has been granted options to purchase shares of Common Stock(Nonvoting) under our stock option plans and is eligible to participate in ourEmployee Stock Purchase Plan. The annual base salary determined by theCompensation Committee of the Board of Directors was $396,000 for 2002,$400,000 for 2003 and $325,000 for 2004. Mr. Selwyn’s base salary for 2005 is$200,000.  (See “—Employee Stock PurchasePlan,” “—Stock Option Plan” and “—Management Stock Plan.”)

 

Under an employment arrangement with us, Mr. Wills iseligible to receive an annual cash bonus based upon our financial performanceand the achievement of certain qualitative and strategic goals during thatyear, such bonus to be determined by Mr. Cornwell.  Mr. Wills’ 2004 base salary was fixed at$250,000 and his base salary for 2005 is $240,000.

 

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Under an employmentarrangement with us, Mr. Deushane is eligible to receive an annual cash bonusbased upon our financial performance and the achievement of certain qualitativeand strategic goals during that year, such bonus to be determined by Mr.Cornwell. Mr. Deushane’s  2004 basesalary was fixed at $300,000 and his base salary for 2005 is $290,000.

 

*401(k)Profit Sharing and Savings Plan*

 

Effective January 1990, we adopted the GraniteBroadcasting Corporation Employees’ Profit Sharing and Savings (401(k)) Plan,or the 401(k) Plan for the purpose of providing retirement benefits forsubstantially all of our employees.  Weand our employees both make contributions to the 401(k) Plan.  We match 50% of that part of an employee’sdeferred compensation that does not exceed 5% of such employee’s salary.  Company-matched contributions vest at a rateof 20% for each year of an employee’s service to our company.

 

We made an aggregate contribution to the 401(k) Planof $591,000 during 2004.

 

*EmployeeStock Purchase Plan*

 

On February 28, 1995, we adopted the GraniteBroadcasting Corporation Employee Stock Purchase Plan, or the Stock PurchasePlan, for the purpose of enabling our employees to acquire ownership of sharesof Common Stock (Nonvoting) at a discount, thereby providing an additionalincentive to promote the growth and profitability of our company.  The Stock Purchase Plan enables our employeesto purchase up to an aggregate of 1,000,000 shares of Common Stock (Nonvoting)at 85% of the then current market price through application of regularly madepayroll deductions.  A Committeeconsisting of not less than two directors who are ineligible to participate inthe Stock Purchase Plan administers the Stock Purchase Plan.  The members of the Committee are currentlyMr. Cornwell and Mr. Stuart J. Beck.  Atthe discretion of the Committee, purchases under the Stock Purchase Plan may beeffected through issuance of authorized but previously unissued shares,treasury shares or through open market purchases.  The Committee has engaged a brokerage companyto administer the day-to-day functions of the Stock Purchase Plan.  Purchases under the Stock Purchase Plancommenced on June 1, 1995.

 

*StockOption Plan*

 

In April 1990, we adopted a Stock Option Plan, or theStock Option Plan, providing for the grant, from time to time, of Options tokey employees and officers of our company or its affiliates to purchase sharesof Common Stock (Nonvoting).  The StockOption Plan terminated on April 1, 2000. As of March 7, 2005, options grantedunder the Stock Option Plan were outstanding for the purchase of 4,094,700shares of Common Stock (Nonvoting).

 

*2000Stock Option Plan*

 

On April 27, 2000, we adopted a new stock option plan,which provides for the grant to employees, officers, directors and consultantsof our company or its affiliates, collectively known as Participating Persons,to purchase an aggregate of 4,000,000 shares of Common Stock (Nonvoting) of thefollowing:

 

•                  Optionsintended to qualify as Incentive Stock Options, or ISOs, as defined in Section422 of the Code and

 

•                  Optionswhich do not qualify as ISOs, or NQSOs.

 

On April 23, 2002, theDirector Participants were granted an option to purchase 50,000 shares CommonStock (Nonvoting) as additional compensation for attendance at regularquarterly meetings during the period beginning on July 1, 2002 and ending onOctober 31, 2004 in lieu of additional cash compensation.  Of each such grant, Options to purchase 5,000shares of Common Stock (Nonvoting) become exercisable on the date of attendancein person or by telephonic means, of a Director Participant at each regularquarterly meeting of the Board of Directors.

 

No Participating Personmay be granted ISOs which, when first exercisable in any calendar year(combined with ISOs under all incentive stock option plans of our company andits affiliates) will permit such person to purchase stock of our company havingan aggregate fair market value (determined as of the time the ISO was granted)of more than $100,000.

 

The 2000 Stock Option Plan is administered by both theStock Option Committee which consists of not less than three members of theBoard of Directors appointed by the Board, and our Compensation Committee,which consists 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 only authorizedto grant Options to persons who are not then “covered 

 

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employees” within the meaning of Section 162(m) of the Internal RevenueCode or who are not then our officers or holders of 10% or more of the VotingCommon Stock.  The Compensation Committeeis authorized 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 2000Stock Option Plan at any time, except that approval of the holders of amajority of our outstanding Voting Common Stock is required for amendmentsthat:

 

•                  decreasethe minimum option price for ISOs;

 

•                  extendthe term of the 2000 Stock Option Plan beyond 10 years or the maximum term ofthe Options granted beyond 10 years;

 

•                  withdrawthe administration of the 2000 Stock Option Plan from the Committee;

 

•                  changethe class of eligible employees, officers or directors; or

 

•                  increasethe aggregate number of shares which may be issued pursuant to the provisionsof the 2000 Stock Option Plan.

 

Notwithstanding the foregoing, our Board of Directorsmay, without the need for shareholder approval, amend the 2000 Stock OptionPlan in any respect to qualify ISOs as Incentive Stock Options under Section422 of the Code.

 

The exercise price per share for all ISOs may not beless than 100% of the fair market value of a share of Common Stock (Nonvoting)on the date on which the Option is granted (or 110% of the fair market value onthe date of grant of an ISO if the Optionee owns more than 10% of the totalcombined voting power of all classes of voting stock of our company or any ofits affiliates, who we refer to as a 10% Holder).  The exercise price per share for NQSOs may beless than, equal to or greater than the fair market value of a share of CommonStock (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 thedate of grant of any Option, that in the event the Optionee pays the exerciseprice for the Option by tendering shares of Common Stock (Nonvoting) previouslyowned by the Optionee, the Optionee will automatically be granted a “reloadoption” for the number of shares of Common Stock (Nonvoting) used to pay theexercise price plus the number of shares withheld to pay for taxes associatedwith the Option exercise (a “Reload Option”). 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 sooner terminated by the Board of Directors,the 2000 Stock Option Plan will terminate on April 27, 2010, 10 years after itseffective date.  Unless otherwisespecifically provided in an Optionee’s Option Agreement, each Option grantedunder the 2000 Stock Option Plan expires no later than 10 years after the datesuch Option is granted (5 years for ISO’s granted to 10% Holders).  Options may be exercised only during theperiod that the original Optionee has a relationship with us which confers eligibilityto be granted Options and for:

 

•                    aperiod of 30 days after termination of such relationship;

 

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

 

•                    aperiod of 12 months after the death or disability of the Optionee.

 

As of March 7, 2005, options granted under the 2000Stock Option Plan were outstanding for the purchase of 1,496,500 shares ofCommon Stock (Nonvoting).

 

*ManagementStock Plan*

 

In April 1993, we adopted a Management Stock Plan,which provides for the grant to all our salaried executive employees 

 

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(including officers and directors, except for persons serving asdirectors only) from time to time of the following:

 

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

 

•                    stockor cash awards based on achievement of performance goals, which we refer to asPerformance Awards.

 

The purpose of the Management Stock Plan is to keepsenior executives in our employ and to compensate such executives for theircontributions to the growth and profits of our company and its subsidiaries.

 

The Management Stock Plan is administered by acommittee appointed by the Board of Directors which consists of not less thantwo members of the Board of Directors, which we refer to as the ManagementStock Plan Committee.  The ManagementStock Plan Committee, from time to time, selects eligible employees to receivea discretionary bonus of Bonus Shares or a Performance Award based upon suchemployee’s position, responsibilities, contributions and value to our companyand such other factors as the Management Stock Plan Committee deemsappropriate.  Receipt of awards grantedunder the Management Stock Plan may be deferred.  The Management Stock Plan Committee hasdiscretion 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).  Anycash settlement of an award denominated in shares of Common Stock (Nonvoting)will be made to such employee as of the date the corresponding shares of CommonStock (Nonvoting) would otherwise be issued to such employee and shall be in anamount equal to the fair market value of such shares of Common Stock (Nonvoting)on that date.

 

The aggregate number of shares of Common Stock(Nonvoting) that may be granted under the Management Stock Plan is 2,500,000.

 

As of March 7, 2005, we had allocated a total of1,879,925 shares of Common Stock (Nonvoting) pursuant to the Management StockPlan, 1,704,475 of which had vested through March 7, 2005.

 

*DirectorsStock Option Plan*

 

On March 1, 1994, we adopted a Director Stock OptionPlan, providing for the grant, from time to time, of Options that are NQSOs toour non-employee directors, who we refer to as Director Participants, topurchase shares of Common Stock (Nonvoting). Non-employee directors may also receive grants of Options under the 2000Stock Option Plan.  All such grants vestin increments in connection with attendance by Director Participants at boardor committee meetings, as applicable. Under the Directors Stock Option Plan, the exercise price per share ofall Options is the fair market value on the date of grant.

 

Non-employee directorselected or appointed during the course of a three-year or five year optionperiod receive Options, in lieu of a cash compensation, for the remainingportion of such period.

 

The Board of Directors may provide, at or subsequentto the date of grant of any Option, that in the event the Director Participantpays the exercise price for the Option by tendering shares of Common Stock(Nonvoting) previously owned by the Director Participant, the DirectorParticipant will automatically be granted a Reload Option for the number ofshares of Common Stock (Nonvoting) used to pay the exercise price plus thenumber of shares withheld to pay for taxes associated with the Optionexercise.  The Reload Option has anexercise price equal to the fair market value of the Common Stock (Nonvoting)on the date of grant of the Reload Option and remains exercisable for theremainder of the term of the Option to which it relates.

 

Unless otherwise specifically provided in a DirectorParticipant’s Option Agreement and except in the case of Reload Options as describedabove, each Option granted under the Directors Stock Option Plan expires nolater than 10 years after the date the Option is granted.  Options may be exercised only during theperiod that the original optionee is a non-employee director and (i) for aperiod of six months after the death or disability of the Director Participantor (ii) for a period of 2 years after termination of the Director Participant’sdirectorship for any other reason.

 

The aggregate number of shares of Common Stock(Nonvoting) allocated for grant under the Directors Stock Option Plan is1,500,000.  As of March 7, 2005, Optionsgranted under the Directors Stock Option Plan were outstanding for the purchaseof 689,650 shares of Common Stock (Nonvoting).

 

*Non-EmployeeDirectors Stock Plan*

 

On April 29, 1997, we adopted a Non-Employee DirectorsStock Plan for the purpose of providing a means to attract and 

 

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retain highly qualified persons to serve as our non-employee directorsand to enable such persons to acquire or increase a proprietary interest in ourcompany.  The Non-Employee DirectorsStock Plan provided for that on January 1st of each calendar yearduring the term of the Non-Employee Directors Stock Plan, our non-employee directors,who we refer to as Directors Stock Plan Participants, shall receive a number ofshares of Common Stock (Nonvoting) equal to $50,000 divided by the fair marketvalue per share on the date of grant; provided, that, any Directors Stock PlanParticipant may elect prior to the grant date to be paid up to $30,000 of suchgrant in cash in lieu of shares having an aggregate fair market value equal tothe amount of such cash payment. If a person first becomes a non-employeedirector after January 1st of any calendar year, such a personreceives a prorated grant based on the number of regular board meetingsscheduled from the date of his or her commencement of service as a directoruntil December 31st of that year. Each Directors Stock PlanParticipant may elect to defer the payment of shares of Common Stock(Nonvoting) by filing an irrevocable written election with our Secretary. OnDecember 31, 2004, the Company’s Board of Directors suspended the DirectorStock Plan until such time the Board of Directors determines otherwise.Effective beginning January 1, 2005, each eligible non-employee director willreceive an annual fee of $45,000 for director services payable semiannually inequal increments in cash.

 

The Non-Employee Directors Stock Plan, unless earlierterminated by action of the Board of Directors, will terminate at such time asno shares remain available for issuance under the Non-Employee Directors StockPlan and our company and the Directors Stock Plan Participants have no furtherrights or obligations under the Non-Employee Directors Stock Plan. Theaggregate number of shares of Common Stock (Nonvoting) issuable under theNon-Employee Directors Stock Plan is 600,000. As of March 7, 2005, 532,698 shares had been granted under theNon-Employee Directors Stock Plan.

 

There were no Options granted to our executiveofficers during 2004.

 

The following table sets forth, as of December 31,2004, the number of options and the value of unexercised options held by ourexecutive officers that held options as of that date, and the options exercisedand the consideration received therefore by such persons during fiscal 2004:

 

Aggregated Option/SARExercisesIn Last Fiscal Year AndFY-End Option/SAR Values
| **Name**               | ** ** | **Shares  Acquired  on Exercise  (#)** | ** **      | **Value  Realized ($)** | ** **        | **Number  of  Securities Underlying  Unexercised Options  at December 31, 2004** | ** **      | **Value  of Unexercised  in-the-Money Options  at December 31, 2003 ($)** | ** **        |
|------------------------|------------|----------------------------------------|-----------------|-------------------------|-------------------|----------------------------------------------------------------------------------|-----------------|---------------------------------------------------------------------------|-------------------|
| ** **             | ** ** | ** **                             | **Exercisable** | ** **              | **Unexercisable** | ** **                                                                       | **Exercisable** | ** **                                                                | **Unexercisable** | ** ** |
| ** **             |       |                                   |            |                    |              |                                                                             |            |                                                                      |              |   |   |   |   |
| W. Don Cornwell        |       | —                                 |            | —                  |              | 1,367,600                                                                        |            | 635,000                                                                   |              | — |   | — |   |
|                   |       |                                   |            |                    |              |                                                                             |            |                                                                      |              |   |   |   |   |
| John Deushane          |       | —                                 |            | —                  |              | 189,900                                                                          |            | 30,600                                                                    |              | — |   | — |   |
|                   |       |                                   |            |                    |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Robert E.  Selwyn, Jr. |       | —                                 |            | —                  |              | 340,000                                                                          |            | 10,000                                                                    |              | — |   | — |   |
|                   |       |                                   |            |                    |              |                                                                             |            |                                                                      |              |   |   |   |   |
| Lawrence I.  Wills     |       | —                                 |            | —                  |              | 154,000                                                                          |            | 27,250                                                                    |              | — |   | — |   |

 

**Compensation Committee Interlocks andInsider Participation**

 

During 2004, Thomas R. Settle, Charles J. Hamilton,Jr., Veronica Pollard and Jon E. Barfield served as members of the CompensationCommittee of our Board of Directors.

 

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**BOARD OFDIRECTORS COMPENSATION COMMITTEE REPORT****ON EXECUTIVE COMPENSATION**

 

**Compensation Philosophy**

 

The goal of thecompensation arrangements of our company is to attract, retain, motivate andreward personnel critical to our long-term success. As described below, thevarious components of such compensation arrangements for management are tied toour performance, which in turn unites the interests of management with theinterests of our stockholders.

 

**Components of Compensation**

 

The components ofexecutive compensation in 2004 were (i) a base salary, and (ii) incentivecompensation opportunity.

 

*BaseSalary.*     In establishing the basesalary for the Chief Executive Officer and the former President who resignedeffective September 21, 2004, the Compensation Committee annually develops aformula for determining salary increases based on the attainment of certainbroadcast cash flow targets. No specific formula was established to determinebase salary for the other executive officers, but rather the salary levels weredetermined by a subjective evaluation of the individual’s performance andaccomplishments.

 

*IncentiveCompensation Opportunity.*    Incentivecompensation opportunities can consist of cash bonuses, shares of common stockor a combination thereof. The Compensation Committee has decided to favor theissuance of restricted stock in lieu of stock options.  The 2004 incentive compensation (paid in2005) for the Chief Executive Officer and the former President were determinedbased on our financial performance in 2004 and the achievement of certainfinancial targets.  The 2004 incentivecompensation (paid in 2005) for the other executive officers was determinedbased on our financial performance in 2004, the attainment of certain financialtargets and a subjective evaluation of the individual’s performance andaccomplishments during the 2004.

 

**Limitation of Deductions**

 

Section 162(m) of theInternal Revenue Code generally limits the corporate tax deduction forcompensation paid to executive officers named in the Summary Compensation Tableto $1 million, unless certain requirements are met.  While the Compensation Committee’s generalpolicy is to preserve the deductibility of most compensation paid to our namedexecutives, the Compensation Committee authorizes payments that may not bedeductible if it believes they are in the best interests of our company and ourshareholders.

 

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, asof March 7, 2005, regarding beneficial ownership of our (i) Voting Common Stockby each shareholder 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 agroup.  We also have 200,376 shares ofour 12.75% Cumulative Exchangeable Preferred Stock outstanding, none of whichare owned by any 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 ofstock.

 
| ** **                             | ** ** | **Voting  Common Stock  Shares Beneficially Owned** | ** ** | **Common  Stock (Nonvoting)  Shares Beneficially Owned** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | **Number**                                          | ** ** | **Percent**                                              | ** ** | **Number** | ** ** | **Percent(1)** | ** ** |
| ** **                             |       |                                                |       |                                                     |       |   |   |   |   |
| W. Don Cornwell                        |       | 98,250                                              |       | 100.0                                                    | %          | 2,075,727] | (2) | 10.0 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Stuart J. Beck                         |       |                                                |       |                                                     |       | 1,710,603 | (3) | 8.3 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| John Deushane                          |       |                                                |       |                                                     |       | 365,464 | (4) | 1.9 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Robert E.  Selwyn, Jr.                 |       |                                                |       |                                                     |       | 465,781 | (5) | 2.4 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Lawrence I.  Wills                     |       |                                                |       |                                                     |       | 230,665 | (6) | 1.2 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Ellen McClain                          |       |                                                |       |                                                     |       | 33,644 |   | * |   |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| James L.  Greenwald                    |       |                                                |       |                                                     |       | 276,981 | (7) | 1.4 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Edward Dugger  III                     |       |                                                |       |                                                     |       | 186,530 | (8) | * |   |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Thomas R. Settle                       |       |                                                |       |                                                     |       | 453,340 | (9) | 2.3 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Charles J.  Hamilton, Jr.              |       |                                                |       |                                                     |       | 257,605 | (10) | 1.3 | % |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| M. Fred Brown                          |       |                                                |       |                                                     |       | 159,363 | (11) | * |   |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Jon E. Barfield                        |       |                                                |       |                                                     |       | 189,294 | (12) | * |   |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| Veronica Pollard                       |       |                                                |       |                                                     |       | 175,811 | (13) | * |   |
|                                   |       |                                                |       |                                                     |       |   |   |   |   |
| All directors  and officers as a group |       | 98,250                                              |       | 100.0                                                    | %          | 6,580,808 |   | 27.64 | % |

 

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*                                         Less than 1%.

 

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

 

(2)                                  Includes 1,367,600 shares issuable uponexercise of options granted to Mr. Cornwell under the Stock Option Planthat are exercisable at the option of the holder within sixty days and a totalof 29,200 shares held by Mr. Cornwell’s immediate family.  Mr. Cornwell disclaims beneficialownership with respect to such 29,200 shares. The business address of Mr. Cornwell is Granite BroadcastingCorporation, 767 Third Avenue, 34th Floor, New York, New York, 10017.

 

(3)                                  Includes 1,249,850 shares issuable uponexercise of options granted to Stuart J. Beck under the Stock Option Plan whichare exercisable at the option of the holder within sixty days and a total of8,000 shares held in trust for Mr. Beck’s children.  Mr. Beck disclaims beneficial ownership withrespect to such 8,000 shares.  Thebusiness address of Mr. Stuart Beck is Granite Broadcasting Corporation,767 Third Avenue, 34th Floor, New York, New York, 10017.

 

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(4)                                  Includes189,900 shares issuable upon exercise of options granted to Mr. Deushane underthe Stock Option Plan that are exercisable at the option of the holder withinsixty days and a total of 239 shares held by Mr. Deushane’s wife.  Mr. Deushane disclaims beneficial ownershipwith respect to such 239 shares.

 

(5)                                  Includes 340,000 shares issuable upon exerciseof options granted to Mr. Selwyn under the Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(6)                                  Includes 154,000 shares issuable upon theexercise of options granted to Mr. Wills under the Stock Option Plan thatare exercisable at the option of the holder within sixty days.

 

(7)                                  Includes 158,125 shares issuable upon exerciseof options granted to Mr. Greenwald under the Directors’ Stock Option Plan thatare exercisable at the option of the holder within sixty days.

 

(8)                                  Includes 132,250 shares issuable upon exerciseof Options granted to Mr. Dugger under the Directors’ Stock Option Plan thatare exercisable at the option of the holder within sixty days.

 

(9)                                  Includes 3,000 shares held by Mr. Settle’swife as custodian for his children and 171,475 shares issuable upon exercise ofoptions granted to Mr. Settle under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.  Mr. Settle disclaims beneficialownership with respect to the shares held by his spouse.

 

(10)                            Includes 2,800 shares held by Mr. Hamilton’swife as custodian for their minor children under the UGMA and 185,675 sharesissuable upon exercise of options granted to Mr. Hamilton under the Directors’Stock Option Plan, which are exercisable at the option of the holder withinsixty days.  Mr. Hamilton disclaimsbeneficial ownership with respect to the shares held by his spouse.

 

(11)                            Includes 200 shares held by Mr. Brown’schildren and 135,875 issuable upon exercise of options granted to Mr. Brownunder the Directors’ Stock Option Plan that are exercisable at the option ofthe holder within sixty days.

 

(12)                            Includes 51,586 shares held in trust and133,750 shares issuable upon exercise of options granted to Mr. Barfield underthe Directors’ Stock Option Plan that are exercisable at the option of theholder within sixty days.

 

(13)                            Includes 116,250 shares issuable upon exerciseof options granted to Ms. Pollard under the Directors’ Stock Option Plan thatare exercisable at the option of the holder within sixty days.

 

79

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

 

Between 1995 and 1998, we loaned Mr. Cornwell, ChiefExecutive Officer and Chairman of the Board of Directors, $2,911,000 in fourseparate transactions to pay the exercise price on stock options exercises andcertain personal income taxes.  OnJanuary 1, 2001, we loaned Mr. Cornwell an additional $375,000.  On February 15, 2001, we agreed toconsolidate the five loans into one loan in the amount of $3,286,000.  The promissory note matures on January 25,2006 or, if earlier, 30 days after the officer’s termination ofemployment.  The promissory note does notbear interest, but interest at an annual rate of 6.75% will be imputed asadditional compensation to the officer. The promissory note allows for the loan to be forgiven in one-thirdincrements if our Common Stock (Nonvoting) trades for ten consecutive tradingdays at $15, $20, and $25, respectively, or if the per share considerationreceived by our common stockholders in a Change of Control (as defined in the indenturesthat governed 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, the Company loaned Stuart Beck, the Company’sPresident, $221,200. On February 15, 2001, the Company agreed tocancel this note and issue a new promissory note in the same amount. As morefully described below, Mr. Beck’s promissory note was repaid in full in 2004.

 

On February 25, 2003, the Compensation Committeerecommended, and the Board of Directors approved, an incentive award of$3,286,065 to each of Mr. Cornwell and Mr. Beck to be paid, subject to vestingterms, only upon the occurrence of the refinancing with a maturity of at leasttwo years of the senior debt due April 15, 2004.  On December 22, 2003, we issued $405 millionaggregate principal amount of 9 3/4 % Senior Secured Notes, the proceeds ofwhich we used in part to repay all outstanding borrowings (plus accruedinterest) under our then outstanding senior credit agreement, which satisfiedthe performance objective of the awards. Mr. Cornwell’s award, which vests in one-third tranches over three yearsfrom the refinancing date, will be used to repay in full his outstanding loanfrom us of $3,286,065 due January 25, 2006. Mr. Cornwell has irrevocablyelected to defer payment of the first two tranches under his performance awarduntil January 25, 2006 when his loan will be repaid.  On March 1, 2005, the Board of Directorsapproved the acceleration of payment of the third tranche of Mr. Cornwell’saward to January 25, 2006.  On September21, 2004, we and Stuart J. Beck amended the Performance Award and deferral ofsuch payments pursuant to the Separation Agreement.  Under the amended terms of the PerformanceAward, Mr. Beck’s Performance Award fully vested as of the separation date andpayment of $221,200 was made on September 30, 2004 to repay his outstandingpromissory note to us. The remaining vested award of $3,065,000 is payable incash on December 22, 2006.

 

On September 21, 2004, we and Stuart J. Beck,President and Secretary, mutually agreed upon Mr. Beck’s resignation from thecompany in connection with his appointment as Ambassador/PermanentRepresentative of the Republic of Palau to the United Nations.  Mr. Beck remained on our Board of Directors.Pursuant to his Separation Agreement, as approved by the Company’s Board ofDirectors, we granted Mr. Beck severance totaling $1,008,000, payable in equalinstallments over eighteen months from the date of separation.  Inaddition, Mr. Beck received a pro-rated bonus of approximately $255,600 asdetermined by the Company’s Compensation Committee and pursuant to theSeparation Agreement based upon achievements of certain financial targets in2004. The pro-rated bonus will be paid in 2005.

 

On September 21, 2004, pursuant to the SeparationAgreement we modified the terms of Mr. Beck’s outstanding stock optionawards.  Under the original provisions ofthe stock option awards, when an employee separates from the Company forreasons other than (i) death or disability or (ii) the occurrence of a Changeof Control, any unvested options would be forfeited and the employee would havethirty days from the date of separation to exercise any vested portion of thestock option award.  Under the modifiedterms pursuant to the Separation Agreement, Mr. Beck will continue to vest andhave exercise rights in his outstanding stock option awards as of September 21,2004 until the earlier of (A) the later of January 2, 2007 and 30 days afterthe last day of Mr. Beck’s continuous service on the Company’s Board ofDirectors and (B) the fixed date on which each stock option award was initiallyset to expire.

 

Pursuant to the Separation Agreement dated September21, 2004, Mr. Beck exchanged 80,250 shares of the Company’s Class A VotingCommon Stock, par value $0.01 per share, for 80,250 shares of the Company’sClass B Non-Voting Common Stock, par value $0.01 per share.

 

80

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As of December 31, 2004,we agreed to allow Mr. Beck the use of his office subsequent to the employmentseparation at no charge. We anticipate that Mr. Beck will continue to beprovided the use of this space in 2005.

 

**Item14.  Principal Accountant Fees and Services**

 

The following table sets forth the aggregate fees andrelated expenses for professional services provided by Ernst & Young LLP ineach of the last two fiscal years.

 
| ** **          | ** ** | **Fiscal Year  December 31,** | ** ** |
|---------------------|------------|-------------------------------|------------|
| ** **          | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Audit fees          |       | $                             | 873,440    |   | $ | 656,740 |   |
| Audit-related  fees |       | 152,500                       |       | 18,500 |   |
| Tax fees            |       | 260,650                       |       | 253,690 |   |
| All other fees      |       | —                        |       | 4,100 |   |
|                |       |                          |       |   |   |
| Total               |       | $                             | 1,286,590  |   | $ | 933,030 |   |

 

*AuditFees:*Audit fees billed by Ernst & Young LLP related tothe following services: 1) audit of our annual consolidated financialstatements and 2) review of our interim consolidated financial statementsincluded in our Quarterly Reports on Form 10-Q for the periods ended March 31st,June 30th and September 30th.

 

*Audit-RelatedFees:*Audit-related fees billed by Ernst & Young LLPrelated to the following services: 1) audit of our benefit plan 2) assistancewith understanding Section 404 of the Sarbanes Oxley Act of 2002 3)consultations for the accounting for proposed transactions and performingaudits of proposed transactions.

 

*TaxFees:*Tax fees billed by Ernst & Young LLP related to thefollowing services: 1) tax compliance and 2) tax consulting.

 

The Audit Committee of our Board of Directors hasestablished a practice that requires the committee to pre-approve any audit orpermitted non-audit services to be provided to us by our independent auditor,Ernst & Young LLP, in advance of such services being provided to us.

 

Under the SEC rules,subject to certain de minimis criteria, pre-approval is required for allprofessional services rendered by our principal accountant for all services renderedon or after May 6, 2003.  In fiscal2004, all of the fees included above were pre-approved by the Audit Committee.

 

81

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**PART IV**

 

**Item15.  Exhibits and Financial Statement Schedules**

 

(a)1                            Financialstatements and the schedule filed as a part of this report are listed on the “Indexto Consolidated Financial Statements” at page 45 herein.  All other schedules are omitted because theyare not applicable to us.

 

(a)3  Exhibits

 
| 2.1    |   | Purchase and Sale Agreement, dated as of April 23,  2004, by and among Malara Broadcast Group of Fort Wayne, LLC, WPTA-TV, Inc.,  WPTA-TV License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.2    |   | Stock Purchase Agreement, dated as of April 23,  2004, by and among Granite Broadcasting Corporation, NVG-Fort Wayne, Inc. and  New Vision Group, LLC (incorporated by reference to Exhibit 2.2 to our Quarterly  Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 10,  2004)                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 3.1 to our Current Report  on Form 8-K filed on January 1, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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) (incorporated by reference to  Exhibit 4.1 to our Current Report on Form 8-K filed on December 23, 2003).                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Registration Rights Agreement, dated as of December  22, 2003, between Granite Broadcasting Corporation and J.P. Morgan Securities  Inc. (incorporated by reference to Exhibit 4.2 to our Current Report on Form  8-K filed on December 23, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6/a  |   | Credit Agreement, dated as of March 8, 2005, by and  among Malara Broadcast Group Inc., as Parent Guarantor, Malara Broadcast  Group of Duluth LLC, Malara Broadcast Group of Duluth Licensee LLC, Malara  Broadcast Group of Fort Wayne LLC, Malara Broadcast Group of Fort Wayne  Licensee LLC, as Borrowers, the lenders listed therein, as Lenders, D.B.  Zwirn Special Opportunities Fund, L.P., as Administrative Agent, Dresdner  Bank AG New York and Grand Cayman Branches, as Syndication Agent, and D. B.  Zwirn Special Opportunities Fund, L.P., as Arranger (incorporated by  reference to Exhibit 4.1 to our Current Report on Form 8-K filed on March 11,  2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.7    |   | First Supplemental Indenture, dated as of March 9,  2005, by and among Granite Broadcasting Corporation, the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

82

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|   |   | guarantors party thereto and The Bank of New York,  as Trustee, supplementing that certain Indenture, dated as of December 22,  2003, relating to the Company’s $405,000,000 Principal Amount 9 3/4% Senior  Secured Notes due December 1, 2010 (incorporated by reference to Exhibit 4.2  to our Current Report on Form 8-K filed on March 11, 2005) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 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   |   | 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).                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.3   |   | 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).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | 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).                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Network Affiliation Agreement (WTVH-TV)  (incorporated by reference to Exhibit 10.20 to our Registration Statement No.  33-94862 filed on July 21, 1995).                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | 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).                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Network Affiliation Agreement (WKBW) (incorporated  by reference to Exhibit 10.28 to our Current Report on Form 8-K filed on July  14, 1995).                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | 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).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.9   |   | 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).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.10  |   | 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).     |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | 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).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | 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).                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | 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)                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | Amendment to Network Affiliation Agreement (WKBW)  (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 2003, filed on March 29, 2004).                                                                                                                                                   |

 

83

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| 10.15  |   | Separation Agreement dated September 21, 2004  between Granite Broadcasting Corporation and Stuart J. Beck (incorporated by  reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004, filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Renewal of Network Affiliation Agreement, dated May  20, 2004, by and among The Warner Bros. Network, Granite Broadcasting  Corporation and WDWB-TV (incorporated by reference to Exhibit 10.2 to our  Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed  on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Guaranty, dated as of March 8, 2005, by Granite  Broadcasting Corporation, in favor of and for the benefit of D.B. Zwirn  Special Opportunities Fund, L.P., as agent for and representative of (“Guarantied  Party”) the financial institutions (“Lenders”) party to that certain Credit  Agreement dated as of March 8, 2005, by and among Malara Broadcast Group,  Inc., Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of Duluth  Licensee LLC, Malara Broadcast Group of Fort Wayne LLC, Malara Broadcast  Group of Fort Wayne Licensee LLC, Dresdner Bank AG New York and Grand Cayman  Branches, as Syndication Agent, Guarantied Party and Lenders (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March  11, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Network Affiliation Agreement (WISE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 21.    |   | Subsidiaries of Granite Broadcasting Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.    |   | Consent of Independent Registered Public Accounting  Firm (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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

----

a/                                      Neitherthe Company nor any of its subsidiaries is party to this agreement; however,because it is anticipated that the results of Malara Broadcast Group Inc.,Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of Duluth LicenseeLLC, Malara Broadcast Group of Fort Wayne LLC and Malara Broadcast Group ofFort Wayne Licensee LLC will be consolidated with the results of the Companyfor financial reporting purposes, this agreement of these entities is filedherewith.

 

84

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, as amended, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized, in the City of New York, State of New York, on the 31 stday of March, 2005.

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

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the Registrant in the capacities and on the dates indicated:

 
| **Signature**                | ** ** | **Title**                                                             | ** ** | **Date**       |
|------------------------------|------------|-----------------------------------------------------------------------|------------|----------------|
| ** **                   | ** ** |                                                                  |       |           |
| /s/ W. DON CORNWELL          |       | Chief Executive Officer                                               |       | March 31, 2005 |
| (W. Don Cornwell)            |       | (Principal Executive Officer) and Chairman of  the Board of Directors |       |           |
|                         |       |                                                                  |       |           |
| /s/  LAWRENCE  I. WILLS |       | Senior Vice President – Chief Financial                          |       | March 31, 2005 |
| (Lawrence I. Wills)          |       | Officer and Secretary (Principal Financial Officer)                   |       |           |
|                         |       |                                                                  |       |           |
| /s/ ROBERT E. SELWYN, JR.    |       | Senior Operating Advisor and Director                                 |       | March 31, 2005 |
| (Robert E. Selwyn, Jr.)      |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ STUART J. BECK           |       | Director                                                              |       | March 31, 2005 |
| (Stuart J. Beck)             |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ JAMES L. GREENWALD       |       | Director                                                              |       | March 31, 2005 |
| (James L. Greenwald)         |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ EDWARD DUGGER III        |       | Director                                                              |       | March 31, 2005 |
|  (Edward  Dugger III)   |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ THOMAS R. SETTLE         |       | Director                                                              |       | March 31, 2005 |
| (Thomas R. Settle)           |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ CHARLES J. HAMILTON, JR. |       | Director                                                              |       | March 31, 2005 |
| (Charles J. Hamilton, Jr.)   |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ M. FRED BROWN            |       | Director                                                              |       | March 31, 2005 |
| (M. Fred Brown)              |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ JON E. BARFIELD          |       | Director                                                              |       | March 31, 2005 |
| (Jon E. Barfield)            |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ VERONICA POLLARD         |       | Director                                                              |       | March 31, 2005 |
| (Veronica Pollard)           |       |                                                                  |       |           |

 

85

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**ExhibitIndex**

 

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1                  |       | Purchase and Sale Agreement, dated as of April 23,  2004, by and among Malara Broadcast Group of Fort Wayne, LLC, WPTA-TV, Inc.,  WPTA-TV License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.2                  |       | Stock Purchase  Agreement, dated as of April 23, 2004, by and among Granite Broadcasting  Corporation, NVG-Fort Wayne, Inc. and New Vision Group, LLC (incorporated by  reference to Exhibit 2.2 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                                                                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 3.1 to our Current Report on Form 8-K filed on January 1, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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)  (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K  filed on December 23, 2003).                                                                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                  |       | Registration Rights  Agreement, dated as of December 22, 2003, between Granite Broadcasting  Corporation and J.P. Morgan Securities Inc. (incorporated by reference to  Exhibit 4.2 to our Current Report on Form 8-K filed on December 23, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6/a                |       | Credit Agreement, dated  as of March 8, 2005, by and among Malara Broadcast Group Inc., as Parent  Guarantor, Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of  Duluth Licensee LLC, Malara Broadcast Group of Fort Wayne LLC, Malara  Broadcast Group of Fort Wayne Licensee LLC, as Borrowers, the lenders listed  therein, as Lenders, D.B. Zwirn Special Opportunities Fund, L.P., as  Administrative Agent, Dresdner Bank AG New York and Grand Cayman Branches, as  Syndication Agent, and D. B. Zwirn Special Opportunities Fund, L.P., as  Arranger (incorporated by reference to Exhibit 4.1 to our Current Report on  Form 8-K filed on March 11, 2005) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.7                  |       | First Supplemental  Indenture, dated as of March 9, 2005, by and among Granite Broadcasting  Corporation, the guarantors party thereto and The Bank of New York, as  Trustee, supplementing that certain Indenture, dated as of December 22, 2003,  relating to the Company’s $405,000,000 Principal Amount 9 3/4% Senior Secured  Notes due December 1, 2010 (incorporated by reference to Exhibit 4.2 to our  Current Report on Form 8-K filed on March 11, 2005)                                                                                                                                                                                                         |

 

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| 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   |   | 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).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.3   |   | 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).                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.4   |   | 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).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.5   |   | Network Affiliation  Agreement (WTVH-TV) (incorporated by reference to Exhibit 10.20 to our  Registration Statement No. 33-94862 filed on July 21, 1995).                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.6   |   | 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).                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.7   |   | Network Affiliation  Agreement (WKBW) (incorporated by reference to Exhibit 10.28 to our Current  Report on Form 8-K filed on July 14, 1995).                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.8   |   | 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).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.9   |   | 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).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | 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). |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.11  |   | 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).                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.12  |   | 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).                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.13  |   | 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)                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Amendment to Network  Affiliation Agreement (WKBW) (incorporated by reference to Exhibit 10.16 to  our Annual Report on Form 10-K for the fiscal year ended December 31, 2003,  filed on March 29, 2004)..                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Separation Agreement  dated September 21, 2004 between Granite Broadcasting Corporation and Stuart  J. Beck (incorporated by reference to Exhibit 10.1 to our Quarterly Report on  Form 10-Q for the quarter ended                                                                                                                                      |

 

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|   |   | September 30, 2004,  filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Renewal of Network  Affiliation Agreement, dated May 20, 2004, by and among The Warner Bros.  Network, Granite Broadcasting Corporation and WDWB-TV (incorporated by  reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004, filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Guaranty, dated as of  March 8, 2005, by Granite Broadcasting Corporation, in favor of and for the  benefit of D.B. Zwirn Special Opportunities Fund, L.P., as agent for and  representative of (“Guarantied Party”) the financial institutions (“Lenders”)  party to that certain Credit Agreement dated as of March 8, 2005, by and  among Malara Broadcast Group, Inc., Malara Broadcast Group of Duluth LLC,  Malara Broadcast Group of Duluth Licensee LLC, Malara Broadcast Group of Fort  Wayne LLC, Malara Broadcast Group of Fort Wayne Licensee LLC, Dresdner Bank  AG New York and Grand Cayman Branches, as Syndication Agent, Guarantied Party  and Lenders (incorporated by reference to Exhibit 10.1 to our Current Report  on Form 8-K filed on March 11, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Network Affiliation  Agreement (WISE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 21.    |   | Subsidiaries of Granite  Broadcasting Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.    |   | Consent of Independent  Registered Public Accounting Firm (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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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a/                                      Neitherthe Company nor any of its subsidiaries is party to this agreement; however,because it is anticipated that the results of Malara Broadcast Group Inc.,Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of Duluth LicenseeLLC, Malara Broadcast Group of Fort Wayne LLC and Malara Broadcast Group ofFort Wayne Licensee LLC will be consolidated with the results of the Companyfor financial reporting purposes, this agreement of these entities is filedherewith.

 

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