** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**Form 10-K**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

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F**or the fiscalyear ended December 31, 2002**

** **

**Commission filenumber 0-19728**

** **

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

 

Securities RegisteredPursuant to Section 12(b) of the Act:**None**

Securities RegisteredPursuant to Section 12(g) of the Act:**Common Stock (Nonvoting), $.01 par value per share**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in any definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.

 

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

 

As of March 21, 2003,18,813,529  shares of GraniteBroadcasting Corporation Common Stock (Nonvoting) were outstanding.  The aggregate market value (based upon thelast reported sale price on the Nasdaq Small Cap Market on June 30,2002) of theshares of Common Stock (Nonvoting) held by non-affiliates was approximately$41,074,000  (For purposes ofcalculating the preceding amounts only, all directors and executive officers ofthe registrant are assumed to be affiliates.) As of March 21, 2003, 178,500 shares of Granite Broadcasting CorporationClass A Voting Common Stock were outstanding, all of which were held byaffiliates.

 

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**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**GRANITEBROADCASTING CORPORATION**

**Form10-K**

**Tableof Contents**

 
| PART I                      |                                                                                       | Page   |
|-----------------------------|--------------------------------------------------------------------------------------------|--------|
|                        |                                                                                       |
| Item 1.                     | Business                                                                                   | 2      |
| Item 2.                     | Properties                                                                                 | 18     |
| Item 3.                     | Legal Proceedings                                                                          | 19     |
| Item 4.                     | Submission of Matters to a Vote of Security  Holders                                       | 19     |
|                        |                                                                                       |   |
| PART II                     |                                                                                       |   |
|                        |                                                                                       |   |
| Item 5.                     | Market for Registrant’s Common Equity and  Related Stockholder Matters                | 20     |
| Item 6.                     | Selected Financial Data                                                                    | 21     |
| Item 7.                     | Management’s Discussion and Analysis of  Financial Condition and Results of Operation | 22     |
| Item 7A.                    | Quantitative and Qualitative Disclosures About  Market Risk                                | 30     |
| Item 8.                     | Financial Statements and Supplementary Data                                                | 31     |
| Item 9.                     | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosures     | 53     |
|                        |                                                                                       |   |
| PART III                    |                                                                                       |   |
|                        |                                                                                       |   |
| Item 10.                    | Directors and Executive Officers  of the Registrant                                        | 54     |
| Item 11.                    | Executive Compensation                                                                     | 57     |
| Item 12.                    | Security Ownership of Certain  Beneficial Owners and Management                            | 64     |
| Item 13.                    | Certain Relationships and Related Transactions                                             | 66     |
| Item 14.                    | Controls and Procedures                                                                    | 66     |
|                        |                                                                                       |   |
| PART IV                     |                                                                                       |   |
|                        |                                                                                       |   |
| Item 15.                    | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                           | 67     |
|                        |                                                                                       |   |
| SIGNATURES                  | 71                                                                                         |
|                        |                                                                                       |   |
| Section 302  Certifications | 72                                                                                         |

 

FORWARD-LOOKINGSTATEMENTS

 

THIS REPORT INCLUDES ORINCORPORATES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKINGSTATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. THEFORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT, CONCERNING, AMONG OTHERTHINGS, FUTURE FINANCIAL RESULTS, INVOLVE RISKS AND UNCERTAINTIES, AND ARESUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS, INCLUDING THE IMPACT OFCHANGES IN NATIONAL AND REGIONAL ECONOMIES, OUR ABILITY TO SERVICE OUROUTSTANDING DEBT, SUCCESSFUL INTEGRATION OF ACQUIRED TELEVISION STATIONS(INCLUDING ACHIEVEMENT OF SYNERGIES AND COST REDUCTIONS), PRICING FLUCTUATIONSIN LOCAL AND NATIONAL ADVERTISING, VOLATILITY IN PROGRAMMING COSTS AND THEEFFECTS OF GOVERNMENTAL REGULATION OF BROADCASTING. OTHER MATTERS SET FORTH INTHIS REPORT, OR IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE MAY ALSOCAUSE ACTUAL RESULTS IN THE FUTURE TO DIFFER MATERIALLY FROM THOSE DESCRIBED INTHE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISEANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTUREEVENTS OR 

 

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OTHERWISE. IN LIGHT OFTHESE RISKS, UNCERTAINTIES AND ASSUMPTIONS, THE FORWARD-LOOKING EVENTSDISCUSSED IN THIS REPORT MIGHT NOT OCCUR.

 

 

**PART I**

 

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

 

GraniteBroadcasting Corporation (“Granite” or the “Company”), a Delaware corporation,is a group broadcasting company founded in 1988 to acquire and managenetwork-affiliated television stations and other media andcommunications-related properties.  TheCompany’s goal is to identify and acquire properties that management believeshave the potential for substantial long-term appreciation and to aggressivelymanage such properties to improve their operating results.  The Company currently owns and operateseight network-affiliated television stations: WTVH-TV, the CBS affiliateserving Syracuse, New York (“WTVH”); KSEE-TV, the NBC affiliate servingFresno-Visalia, California (“KSEE”); WPTA-TV, the ABC affiliate serving FortWayne, Indiana (“WPTA”); WEEK-TV, the NBC affiliate serving Peoria-Bloomington,Illinois (“WEEK-TV”); KBJR-TV, the NBC affiliate serving Duluth, Minnesota andSuperior, Wisconsin (“KBJR”); WKBW-TV, the ABC affiliate serving Buffalo, NewYork (“WKBW”); WDWB-TV, the WB Network affiliate serving Detroit, Michigan(“WDWB”); and KBWB-TV, the WB Network affiliate serving SanFrancisco-Oakland-San Jose, California (“KBWB”). The Company also owns Channel11 License, Inc., the permittee of television station KRII, Channel 11,Chisholm, Minnesota, a satellite station which rebroadcasts the signal ofKBJR.  KRII began to rebroadcast thesignal of KBJR in January 2003.

 

KBJRand WEEK were acquired in separate transactions in October 1988, WPTA wasacquired in December 1989, WTVH and KSEE were acquired in December 1993, WKBWwas acquired in June 1995, WDWB was acquired in January 1997 and KBWB wasacquired in July 1998.  The Company ownsall but one of its television stations through separate wholly ownedsubsidiaries (collectively, the “Subsidiaries”; references herein to the“Company” or to “Granite” include Granite Broadcasting Corporation and itsSubsidiaries).

 

# **The Company makes available freeof charge, on or through the SEC Filings section of Granite’s web site *(http://www.granitetv.com/)*,the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q andcurrent reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 assoon as reasonably practicable after the Company electronically files suchmaterial with, or furnished it to, the SEC.Recent Developments**

 

Recent Developments

 

*Asset Disposition*

 

On April 30, 2002, the Company completed the sale ofKNTV to the National Broadcasting Company (“NBC”).  NBC paid the Company $230,000,000 plus working capital and otheradjustments of $14,545,000.  Inaddition, NBC refunded the Company $20,473,000 of the January 1, 2002affiliation payment due NBC under the terms of the KNTV NBC AffiliationAgreement (the “San Francisco Affiliation Agreement”), which the Companyprepaid on March 6, 2001. The Company repaid $170,000,000 of outstanding seniordebt and $14,763,000 of deferred interest and other fees associated with thesenior credit facility and the amended credit agreement discussed below 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 NBC affiliationagreements for KSEE-TV, WEEK-TV and KBJR-TV involve no payment obligations toNBC and have a contractual term through December 31, 2011.  The Company recorded a pre-tax book gain of$192,406,000 on the sale of KNTV.

 

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*Amended and Restated CreditAgreement*

 

Simultaneously with the sale of KNTV, the Companyentered into an amended and restated senior credit facility (the “CreditAgreement”). The Credit Agreement consists of (i) a committed $60,000,000Tranche A term loan facility, (ii) a committed $80,000,000 Tranche B term loanfacility and (iii) an uncommitted $10,000,000 Tranche C supplemental term loanfacility. Upon entering into the Credit Agreement, the Company rolled overexisting outstanding loans under the prior loan facility into an initialTranche A borrowing in the amount of $35,000,000 and currently has $25,000,000of available borrowings under this loan facility.  The Company borrowed the entire Tranche B term loan facilityduring 2002.  The terms of the Tranche Cterm loan have not been fully negotiated and borrowing of the Tranche C loanswill require supplemental action by the Board of Directors of the Company.  TheTranche A loans bear interest at the greater of 6.50% or LIBOR plus 4.50% andthe Tranche B loans bear interest at the greater of 11% or LIBOR plus 9%.  All interest is payable monthly in arrears.   The Credit Agreement matures on April 15,2004, at which time the Company must repay the principal amount of alloutstanding loans and all other obligations then due and owing under the CreditAgreement. The Credit Agreement requires the Company to maintain compliancewith certain financial tests, including but not limited to minimum net revenue,broadcast cash flow, EBITDA, working capital and cash balances.  The Company is currently in compliance withall covenants under the Credit Agreement.

 

*12.75%Cumulative Exchangeable Preferred Stock*

 

During the second quarterof 2002 the Company repurchased and retired a total of 83,920 shares of its$1,000 face amount 12.75% Cumulative Exchangeable Preferred Stock (the“Shares”) for $53,264,000.  The Shareswere repurchased at an average price of $634.70 per share, generating a gain,after transaction related expenses and the write off of a portion of theinitial offering costs, of $30,299,000. The gain was recorded in additional paid in capital.

 

Operating Strategy

 

The Company’s operatingstrategy focuses on increasing advertising revenue and strictly controllingoperating expense.

 

The Company seeks toexpand existing relationships with local and national advertisers andattracting new advertisers through targeted marketing projects presented by itsskilled sales staff.  The Company worksclosely with advertisers to develop campaigns that match specifically targetedaudiences with the advertisers marketing strategy.  The Company regularly refines its programming mix among network,syndicated and locally produced shows in an effort to attract audiences withdemographic characteristics desirable to advertisers.  The Company believes that its success is attributable to itsability to reach desirable demographic groups with the programs it broadcasts.

 

The Company’s NBC, ABCand CBS affiliates seek to achieve a distinct local identity principallythrough the quality of its local news programming.  Strong local news helps differentiate local broadcast stationsfrom cable system competitors, which generally do not provide thisservice.  The cost of producing localnews programming generally is lower than other sources of programming and theamount of local news programming can be increased with relatively smallincreases in operating costs.  In addition,the Company utilizes the internet to deliver news, weather and sports toviewers’ computers.  The Company’s WBaffiliates do not have local news franchises, but have been very successful inestablishing local identities by utilizing programs of local interest andsponsored community events to strengthen community relations and increaseadvertising revenue.

 

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The Company continually reviews its existingprogramming inventory and seeks to purchase or produce the most profitable andcost effective programs available for each time period. In developing itsselection of programs, the Company weighs the cost of available syndicatedprograms and their potential to increase advertising revenue with the cost and revenuepotential of expanding its locally produced news and entertainment programming.

Some of the Company’sstations have recently replaced syndicated programs with more profitablelocally produced information and entertainment programs.

 

The Company emphasizesstrict control of its overall operating expenses.  Through the annual budget process, each station looks to identifyand implement cost savings opportunities. The Company closely monitors the expenses incurred at each stationthrough a rigorous monthly forecasting process and continually evaluates theproductivity of its station personnel.

 

Acquisition Strategy

 

The Company’s long-termobjective is to acquire additional television stations and to pursue theacquisitions of other media and communications related properties in thefuture. The Company would like to acquire affiliated television stations with astrong local news presence, particularly in television markets in which wealready operate a station.  The Companyplans to pursue favorable acquisition opportunities, as they becomeavailable.  The Company is regularlypresented with opportunities to acquire television stations, which it evaluateson the basis of its acquisition strategy. The Company does not presently have any agreements to acquire anytelevision stations and its ability to incur debt to finance acquisitions iscurrently limited by the terms of the Credit Agreement and its indentures.

 

*The Stations*

 

The stations aregeographically diverse, which minimizes the impact of regional economicdownturns.  Two stations are located inthe 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, WPTA — 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).  Three of the Company eight stations are affiliated with NBC, twoare affiliated with ABC, two are affiliated with the WB Network and one isaffiliated with CBS.

 

The following table sets forth general information foreach of the Company’s licensed television stations:

 
| **TV  Station** |   | **Market  Area**                       |   | **Date of  Acquisition** |   | **Channel/  Frequency** |   | **Network  Affiliation** |   | **Market  Rank(1)** |   | **In-Market  Share(2)** |   | **Other  Commercial   Stations  in DMA** |   | **Households(3)** |   |
|-----------------|--------|----------------------------------------|--------|--------------------------|--------|-------------------------|--------|--------------------------|--------|---------------------|--------|-------------------------|--------|------------------------------------------|--------|-------------------|--------|
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| KBWB-TV         |   | San Francisco - Oakland - San Jose, CA |   | 07/20/98                 |   | 20/UHF                  |   | WB                       |   | 5                   |   | 5                       |   | 18                                       |   | 2,436,220         |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| WDWB-TV         |   | Detroit, MI                            |   | 01/31/97                 |   | 20/UHF                  |   | WB                       |   | 10                  |   | 6                       |   | 7                                        |   | 1,899,910         |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| WKBW-TV         |   | Buffalo, NY                            |   | 06/29/95                 |   | 7/VHF                   |   | ABC                      |   | 44                  |   | 25                      |   | 8                                        |   | 639,190           |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| KSEE-TV         |   | Fresno- Visalia, CA                    |   | 12/23/93                 |   | 24/UHF                  |   | NBC                      |   | 57                  |   | 18                      |   | 11                                       |   | 519,330           |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| WTVH-TV         |   | Syracuse, NY                           |   | 12/23/93                 |   | 5/VHF                   |   | CBS                      |   | 80                  |   | 27                      |   | 5                                        |   | 375,880           |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| WPTA-TV         |   | Fort Wayne, IN                         |   | 12/11/89                 |   | 21/UHF                  |   | ABC                      |   | 104                 |   | 31                      |   | 4                                        |   | 264,140           |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| WEEK-TV         |   | Peoria - Bloomington, IL               |   | 10/31/88                 |   | 25/UHF                  |   | NBC                      |   | 117                 |   | 40                      |   | 4                                        |   | 236,810           |   |
|            |   |                                   |   |                     |   |                    |   |                     |   |                |   |                    |   |                                     |   |              |   |
| KBJR-TV         |   | Duluth, MN  - Superior, WI        |   | 10/31/88                 |   | 6/VHF                   |   | NBC                      |   | 136                 |   | 33                      |   | 5                                        |   | 172,250           |   |

 

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

 

2                                          Represents an estimate of the share of DMAhouseholds viewing television received by a local commercial station incomparison to other local commercial stations in the market (“in-market share”)as measured sign-on to sign-off.

 

3                                          Represents the number of television households inthe DMA as estimated by Nielsen.

 

The following is a description of each of theCompany’s television stations:

 

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

 

KBWB commencedbroadcasting in 1968 and is a WB Network affiliate.  The Company acquired KBWB from Pacific FM, Incorporated in July1998.

 

San Francisco-Oakland-SanJose is the fifth largest DMA in the country, comprising eleven counties andapproximately 2.4 million television households, according to Nielsen.  For the November 2002 ratings period, KBWBranked seventh out of eight English-language television stations, with asign-on to sign-off in-market audience share of 5 percent.

 

KBWB is a fast growing WBNetwork affiliate that attracts teens, young adults and families. KBWB’s primetime line up includes popular WB programs such as *Gilmore Girls, Smallville, Angel,Everwood, Dawson’s Creek, 7th Heaven, Charmed*and *Reba.*  The Station’s syndicated programmingincludes talk shows such as *Jerry Springer* and *Maury Povich* in daytime andsituation comedies such as *Home Improvement* in early fringe, *Dharma andGregg* and *King of the Hill* in prime time access and *Drew Carey*in late night.

 

The SanFrancisco-Oakland-San Jose DMA is one of the most ethnically diverse DMAs inthe country and almost half of its population under 34 years of age, the youngdemographic targeted by the WB Network. According to estimates provided by the BIA Investing in Television 2002Market Report (the “BIA Report”), the Bay Area has the highest Effective BuyingIncome (“EBI”) of the top ten markets, with an average household EBI exceeding$68,000. Studies show Bay Area residents have the third-highest discretionaryincome in the United States. The Bay Area economy is centered on apparel,banking and finance, biosciences, engineering and architecture, high technology,telecommunications, tourism, and wineries. Leading employers in the area include Safeway Supermarkets,Hewlett-Packard, Seagate Technology, The Gap, Intel, Chevron, Oracle andLevi-Strauss.  The Bay Area is also hometo several universities, including the University of California Berkeley, SanFrancisco State University, San Jose State University, and Stanford University.

 

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

 

WDWB commencedbroadcasting in 1968 and is a WB Network affiliate.  The Company acquired WDWB from WXON-TV, Incorporated in January1997.

 

Detroit is the tenthlargest DMA in the country, comprising nine counties and approximately 1.9million television households.  In theNovember 2002 ratings period, WDWB ranked sixth out of six stations, with asign-on to sign-off in-market audience share of 6 percent.

 

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WDWB is afast growing WBNetwork affiliate that attracts teens, young adults and families. WDWB’s primetime line up includes popular WB programs such as *Gilmore Girls, Smallville, Angel,Everwood, Dawson’s Creek, 7th Heaven, Charmed*and *Reba.*  The Station’s syndicated programmingincludes relationship shows such as *Blind Date, Street Smarts*and*5thWheel* in daytime, and situation comedies such as *FamilyMatters, The Hughleys, Living Single*and*Jamie Foxx* in early fringe,*Will andGrace* and *Home Improvement* in prime time access and *Drew Carey*and*Cheers*in late night.

 

The Detroit DMA is anethnically diverse DMA and almost half of its population under 34 years of age,the young demographic that is targeted in part by the WB Network. According tothe BIA Report, Detroit ranks eighth in total EBI, with the average Detroithousehold EBI exceeding $50,000, and also ranks third among the top ten DMAs inHouseholds Using Television (“HUT”). Well known as the home of the “Big Three” U.S. automobile manufacturers(General Motors, Ford and Daimler Chrysler), Detroit is also home to theiradvertising agencies (LCI Media, MindShare, and Pentamark/BBDO). The Detroiteconomy has increasingly diversified and headquarters many Fortune 500companies, including Kmart, Lear and Federal Mogul, as well as 64 hospitals,two world-renowned medical research centers and over 35 institutions of highereducation.  A large number of influentialadvertising agencies serve these institutions, including TN Media, InitiativeMedia and Young & Rubicam and, as a leading voice in the Detroit market,WDWB has a high degree of visibility with all of them. There are 37 educationalinstitutions in Detroit, eleven colleges, eighteen community colleges and eightuniversities, including the University of Michigan, Michigan State University,Wayne State University, and Oakland University.  The area has sixty-four hospitals and two medically renownedresearch centers: The Detroit Medical Center and the University of MichiganMedical Center.

 

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

 

WKBW commencedbroadcasting in 1958 and is an ABC Network affiliate.  The Company acquired WKBW from Queen City Broadcasting,Incorporated in June 1995.

 

Buffalo is the 44thlargest DMA in the country, comprising ten counties and approximately 639,000television households. In the November 2002 ratings period, WKBW ranked secondout of nine stations in the DMA, with a sign-on to sign-off in-market audienceshare of 25 percent.

 

WKBW has a very strongnews organization and broadcasts 51/2 hours of locally produced programming perday.   The station’s morning show, “AMBuffalo” is the only locally produced program of its kind in the market and hasbeen airing at 10am for 25 years.  In2002, the station launched the market’s first locally produced information andentertainment program at 4pm called *Western New York Live*, which is often thesecond most watched program in its time period.  Popular syndicated programming such as *Live with Regis and Kelly* inthe morning and *Wheel of Fortune* and *Jeopardy* in prime time access complementthe ABC Network’s daytime and prime time programming.  WKBW consistently over-indexes the national ABC prime timeaverage.

 

The Buffalo economy is centered on manufacturing,government, health services and financial services.  The average household income in the DMA was $40,321, according toestimates provided in the BIA Report. Leading employers in the area include General Motors, Ford MotorCompany, American Axle and Manufacturing, M&T Bank, Fleet Bank, RoswellPark Cancer Institute, Buffalo General Hospital, Tops Markets and DuPont.

 

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

 

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

 

Fresno-Visalia is the 57thlargest DMA in the country, comprising six counties and approximately 519,000television households. In the November 2002 ratings period, KSEE tied for secondout of seven English-language stations in the DMA, with a sign-on to sign-offin-market audience share of 18 percent.

 

KSEE is a fast growingstation in this market, recently overtaking the long-time news leader KSFN forthe number one newscast at 11pm. KSEE broadcasts 41/2 hours of local news perweekday, including the market’s first locally produced 4pm newscast, launchedin 2002.  Popular syndicated programmingsuch as *Dr.Phil* in the early afternoon and entertainment news magazines *Extra*and *AccessHollywood* in prime time access complement the NBC Network’s daytimeand prime time programming.

 

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Fresno and the San Joaquin Valley is one of the mostproductive agricultural areas in the world with over 6,000 square miles plantedwith more than 250 different crops. Although farming continues to be the single most important part of theFresno area economy, the area now attracts a variety of service-basedindustries and manufacturing and industrial operations.  No single employer or industry dominates thelocal economy.  The average income byhousehold in the DMA was $40,251, according to estimates provided in the BIAReport.  The Fresno-Visalia DMA is alsothe home of several universities, including Fresno State University, withaggregate enrollment estimated at over 40,000.

 

*WTVH, Syracuse, New York*

 

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

 

Syracuse is the 80thlargest DMA in the country, comprising eight counties and approximately 376,000television households. In the November 2002 ratings period, WTVH ranked thirdout of six stations in the DMA, with a sign-on to sign-off in-market audienceshare of 27 percent.

 

WTVH is a growing stationin the market, broadcasting 31/2 hours of locally produced programming perweekday Monday through Friday. The National Association of Black Journalistsrecently honored the station for Best News Documentary.  In January 2003, WTVH launched the market’sfirst locally produced information and entertainment program at 5pm called *Central NewYork Live*.  Popularsyndicated programming such as *Martha Stewart* in the morning and gameshows *Wheelof Fortune* and *Jeopardy* in prime time access complementthe CBS Network’s daytime and prime time programming.

 

The Syracuse economy is centered on manufacturing,education and government.  The averageincome by household in the DMA was $41,082, according to estimates provided inthe BIA Report.  Prominent corporationslocated in the area include Carrier Corporation, New Venture Gear,Bristol-Myers Squibb, Crouse-Hinds, Nestle Foods and Lockheed/Martin.  The Syracuse DMA is also the home of severaluniversities, including Syracuse University, Cornell University and ColgateUniversity, with aggregate enrollment over 50,000 students.

 

*WPTA, Fort Wayne, Indiana*

 

WPTA commenced broadcasting in 1957 and is an ABCaffiliate.  The Company acquired WPTAfrom Pulitzer Broadcasting Company in December 1989.

 

Fort Wayne is the 104thlargest DMA in the country, comprising twelve counties and approximately264,000 television households. In the November 2002 ratings period, WPTA rankedsecond out of four stations in the DMA, with a sign-on to sign-off in-marketaudience share of 31 percent.

 

WPTA has been thelong-time news leader in the market, broadcasting 31/2 hours of local news perweekday. Popular syndicated programming such as *Martha Stewart* in themorning, *Oprah*in the afternoon and *Everybody Loves Raymond* in prime timeaccess complement the ABC Network’s daytime and prime time programming.

 

The Fort Wayne economy is centered on manufacturing,government, insurance, financial services and education.  The average income by household in the DMAwas $46,813, according to estimates provided in the BIA Report.  Prominent corporations located in the areainclude Magnavox, Lincoln National Life Insurance, General Electric, GeneralMotors, North American Van Lines, GTE, Dana, Phelps Dodge, ITT, andTokheim.  Fort Wayne is also the home ofseveral universities, including the joint campus of Indiana University andPurdue University at Fort Wayne, with aggregate enrollment over 11,000students.

 

*WEEK, Peoria-Bloomington, Illinois*

 

WEEK commencedbroadcasting in 1953 and is an NBC affiliate. The Company acquired WEEK from Eagle Broadcasting Corporation in October1988.

 

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Peoria-Bloomington is the117th largest DMA in the country, comprising ten counties andapproximately 237,000 television households. In the November 2002 ratingsperiod, WEEK ranked first out of five stations in the DMA, with a sign-on tosign-off in-market audience share of 40 percent.

 

WEEK is the perennialmarket news leader, broadcasting 41/2 hours of local news per weekday andranking number one in every newscast and in every key time period.  For each of the last four years, theIllinois Broadcaster’s Association has named WEEK Station of the Year.  Popular syndicated programming such as *MarthaStewart* in the morning, *Dr. Phil* and *Oprah* in the afternoon and *Seinfeld*in prime time access complement the NBC Network’s daytime and prime timeprogramming.

 

ThePeoria economy is centered on agriculture and heavy equipment manufacturing buthas achieved diversification with the growth of service-based industries suchas conventions, healthcare and higher technology manufacturing.  Prominent corporations located in Peoriainclude Caterpillar, Bemis, Central Illinois Light Company, Commonwealth EdisonCompany, Komatsu-Dresser Industries, IBM, Trans-Technology Electronics andKeystone Steel & Wire.  In addition,the United States Department of Agriculture’s second largest research facilityis located in Peoria, and the area has become a major regional healthcarecenter.  The economy of Bloomington, onthe other hand, is focused on insurance, education, agriculture andmanufacturing.  Prominent corporationslocated in Bloomington include State Farm Insurance Company, Country CompaniesInsurance Company and Diamond-Star Motors Corporation (a subsidiary ofMitsubishi).  The average income byhousehold in the DMA was $49,670, according to estimates provided in the BIAReport.  The Peoria-Bloomington area isalso the home of numerous institutions of higher education including BradleyUniversity, Illinois Central College, Illinois Wesleyan University, IllinoisState University, Eureka College and the University of Illinois College ofMedicine, with aggregate enrollment over 38,000 students.

 

*KBJR, Duluth, Minnesota-Superior,Wisconsin*

 

KBJR commencedbroadcasting in 1954 and is an NBC affiliate. The Company acquired KBJR from RJR Communications, Incorporated inOctober 1988.

 

Duluth, MN-Superior, WIis the 136th largest DMA in the country, comprising twelve countiesand approximately 172,000 television households. In the November 2002 ratingsperiod, KBJR ranked second out of four stations in the DMA, with a sign-on tosign-off in-market audience share of 33 percent.

 

KBJR is a strongcompetitor in the market, broadcasting 31/2 hours of local news perweekday.  The station’s early newscastoften wins or ties for first place despite a significant signal distributionadvantage held by the local ABC affiliate. The January 2003 completion of a satellite station over the “Iron Range”portion of the DMA is expected torectify this disparity.  Popular syndicated programming such as *MarthaStewart* in the morning, *Dr. Phil* in the afternoon and *Wheel ofFortune* in prime time access complement the NBC Network’s daytimeand prime time programming.  KBJR alsobegan operating a cable-only UPN station in September 2002.

 

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

 

*NetworkAffiliation*

 

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

 

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revenues so generated.  A typical WB Network or UPN affiliate receives prime timeprogramming from the Network pursuant to arrangements agreed upon by theaffiliate and the Network.

 

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

 

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

 

In substance, each TraditionalNetwork affiliation agreement provides the Company’s station with the right tobroadcast all programs transmitted by the Network with which it isaffiliated.  In exchange, the Networkhas the right to sell a substantial majority of the advertising time duringsuch broadcast.  In addition, for everyhour that the station elects to broadcast Traditional Network programming,generally the Network pays the station a fee, specified in each affiliationagreement, which varies with the time of day. Typically, “prime-time” programming (Monday through Saturday8-11 p.m. and Sunday 7-11 p.m. Eastern Time) generates the highesthourly rates.  Rates are subject toincrease or decrease by the Network during the term of each affiliationagreement, with provisions for advance notice to, and right of termination by,the station in the event of a reduction in rates. NBC’s obligation to pay suchfees to KSEE, WEEK and KBJR terminated on December 31, 2001.

 

Under each WB Network affiliationagreement, the Company’s stations receive “prime-time” programming from the WBNetwork.  KBWB and WDWB each pay anaffiliation fee for the programming each station receives pursuant to itsaffiliation agreement.

 

The Network affiliation agreements expire on thefollowing dates:  KBWB, January 9, 2008;WDWB, May 31, 2004; WKBW, December 1, 2004; KSEE, WEEK and KBJR, December31,  2011; WTVH, December 31, 2005 andWPTA, July 3, 2005.  Under each of theCompany’s affiliation agreements, the Networks may, under certaincircumstances, terminate the agreement upon advance written notice.  Under the Company’s ownership, none of itsstations has received a termination notice from its respective Network.

* *

*Industry Overview*

 

Commercial televisionbroadcasting began in the United States on a regular basis in the 1940s.Currently, there are a limited number of channels available for broadcasting inany one geographic area and the license to operate a broadcast station isgranted by the FCC.  Television stationscan be distinguished by the frequency on which they broadcast.  Television stations which broadcast over thevery high frequency (“VHF”) band of the spectrum generally have somecompetitive advantage over television stations that broadcast over theultra-high frequency (“UHF”) band of the spectrum because the former usuallyhave better signal coverage and operate at a lower transmission cost.  In television markets in which all localstations are UHF stations, such as Fort Wayne, Indiana, Peoria-Bloomington,Illinois and Fresno-Visalia, California, no competitive disadvantage exists.

 

Television station revenues areprimarily derived from local, regional and national advertising and, to alesser extent, from network compensation and revenues from studio rental andcommercial production activities. Advertising rates are based upon a program’spopularity among the viewers an advertiser wishes to attract, the number ofadvertisers competing for the available time, the size and demographic make-upof the market served by the station, and the availability of alternative advertisingmedia in the market area.  Becausebroadcast television stations rely on advertising revenues, declines inadvertising budgets, particularly in recessionary periods, adversely affect thebroadcast industry, and as a result may contribute to a decrease in thevaluation of broadcast properties.

 

*Competition*

 

The financial success ofthe Company’s television stations is dependent on audience ratings and revenuesfrom advertisers within each station’s geographic market. The Company’sstations compete for revenues with other television stations in theirrespective markets, as well as with other advertising media, such asnewspapers, radio, magazines, outdoor advertising, transit advertising, yellowpage directories, the Internet, direct mail and local cable

 

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systems. Some competitors are part of larger companies withsubstantially greater financial resources than the Company.

 

Competitionin the broadcasting industry occurs primarily in individual markets. Generally,a television broadcasting station in one market does not compete with stationsin other market areas. The Company’s television stations are located in highlycompetitive markets.

 

Inaddition to management experience, factors that are material to a televisionstation’s competitive position include signal coverage, local programacceptance, Network affiliation, audience characteristics, assigned frequencyand strength of local competition. The broadcasting industry is continuouslyfaced with technological change and innovation, the possible rise in popularityof competing entertainment and communications media, and changes in laborconditions, any of which could possibly have a material adverse effect on theCompany’s operations and results.  Forexample, certain models of digital video recorders, which permit consumers todigitally record up to eighty hours of video programming and then play backthat programming without commercial advertisement, recently have entered themarket place and could have an adverse effect on the Company’s advertisingrevenue.

 

Manyof these other programming, entertainment and video distribution systems canincrease competition for a broadcasting station by bringing into its marketdistant broadcasting signals not otherwise available to the station’s audienceand also by serving as distribution systems for non-broadcast programming.Programming is now being distributed to cable television systems by bothterrestrial microwave systems and by satellite. Other sources of competitioninclude home entertainment systems (including video cassette recorders andplayback systems, video discs and television game devices), the Internet,multi-point distribution systems, multi-channel multi-point distributionsystems, video programming services available through the Internet and othervideo delivery systems. The Company’s television stations also face competitionfrom direct broadcast satellite services which transmit programming directly tohomes equipped with special receiving antennas and from video signals deliveredover telephone lines. Satellites may be used not only to distributenon-broadcast programming and distant broadcasting signals but also to delivercertain local broadcast programming which otherwise may not be available to astation’s audience. An additional challenge is posed by wireless cable systems,including multi-channel distribution services (“MDS”).  Two four-channel MDS licenses have beengranted in most television markets.  MDSoperations can provide commercial programming on a paid basis.  A similar service also can be offered usingthe instructional television fixed service (“ITFS”).  The FCC allows the educational entities that hold ITFS licensesto lease their excess capacity for commercial purposes.  The multi-channel capacity of ITFS could becombined with either an existing single channel MDS or a newer multi-channelmulti-point distribution service to increase the number of available channelsoffered by an individual operator.

 

Inaddition, video compression techniques, now in use with direct broadcastsatellites and in development for cable, are expected to permit greater numbersof channels to be carried within existing bandwidth. These compressiontechniques, as well as other technological developments, are applicable to allvideo delivery systems, including over-the-air broadcasting and othernon-broadcast commercial applications, and have the potential to provide vastlyexpanded programming to highly targeted audiences. Reduction in the cost of creatingadditional channel capacity could lower entry barriers for new channels andencourage the development of increasingly specialized niche programming. Thisability to reach very narrowly defined audiences may alter the competitivedynamics for advertising expenditures. The Company is unable to predict theeffect that technological changes will have on the Company. Commercialtelevision broadcasting may face future competition from interactive video anddata services that provide two-way interaction with commercial videoprogramming, along with information and data services that may be delivered bycommercial television stations, cable television, direct broadcast satellites,multi-point distribution systems, multichannel multi-point distribution systemsor other video delivery systems. In addition, actions by the FCC, Congress andthe courts all presage significant future involvement in the provision of videoservices by telephone companies. The Telecommunications Act of 1996 lifts 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 certain circumstances.It is not possible to predict the impact on the Company’s television stationsof any future relaxation or elimination of the existing limitations on theownership of cable systems by telephone companies. The elimination or furtherrelaxation of the restriction, however, could increase the competition the Company’stelevision stations face from other distributors of video programming.

 

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*FCC Regulation of Television Broadcasting*

 

Televisionbroadcasting is subject to the jurisdiction of the FCC under the CommunicationsAct of 1934, as amended (the “Communications Act”). The Communications Actprohibits the operation of television broadcasting stations except under alicense issued by the FCC and empowers the FCC, among other things, to issue,revoke and modify broadcasting licenses, determine the locations of stations,regulate the equipment used by stations, adopt regulations to carry out theprovisions of the Communications Act and impose penalties for violation of suchregulations. The Telecommunications Act of 1996 (the “1996 Act”), which amendsmajor provisions of the Communications Act, was enacted on February 8, 1996.

 

*License Issuance and Renewal*

 

Televisionbroadcasting licenses generally are granted and renewed for a period of eightyears, but may be renewed for a shorter period upon a finding by the FCC thatthe “public interest, convenience and necessity” would be served thereby. Atthe time application is made for renewal of a television license, parties ininterest 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. A competing application for authority tooperate a station and replace the incumbent licensee may not be filed against arenewal application and considered by the FCC in deciding whether to grant arenewal application. The FCC shall grant a renewal application upon a findingby the FCC that the licensee (1) has served the public interest, convenience,and necessity; (2) has committed no serious violations of the CommunicationsAct or the FCC’s rules; and (3) has committed no other violations of theCommunications Act or the FCC’s rules which would constitute a pattern ofabuse. If the FCC cannot make such a finding, it may deny a renewalapplication, and only then may the FCC accept other applications to operate thestation of the former licensee. In the vast majority of cases, the FCC renewsbroadcast licenses even when petitions to deny are filed against broadcastlicense renewal applications. All of the Company’s existing licenses are ineffect and are subject to renewal at various times during 2005, 2006 and 2007.The main station licenses for the Company’s television stations expire on thefollowing dates:  KBWB, December 1,2006; WDWB, October 1, 2005; WKBW, June 1, 2007; KSEE, December 1, 2006; WTVH,June 1, 2007; WPTA, August 1, 2005; WEEK, December 1, 2005 and KBJR, December1, 2005.  Although there can be noassurance that the Company’s licenses will be renewed, the Company is not awareof any facts or circumstances that would prevent the Company from having itslicenses renewed.

 

*Ownership Restrictions*

 

TheCommunications Act also prohibits the assignment of a license or the transferof control of a licensee without prior approval of the FCC.  In its review process, the FCC considersfinancial and legal qualifications of the prospective assignee or transfereeand also determines whether the proposed transaction complies with ruleslimiting the common ownership of certain attributable interests in broadcast,cable, and newspaper media on a local and national level.  The FCC’s restrictions on multiple ownershipcould limit the acquisitions and investments that the Company makes or theinvestments other parties make in the Company, however, none of theCompany’s officers, directors or holders of voting common stock currently haveattributable or non-attributable interests that violate the FCC’s ownershiprules. As indicated in a separate section below, the FCC currently isreexamining many of its media ownership rules in a biennial review proceedingcommenced in September 2002 (“2002 Biennial Review”).  Revision of the media ownership rules could have an effect on theCompany’s ability to consolidate operations or acquire additionalstations.  Revision of certain mediaownership rules also could increase the number and type of entities with whomthe Company competes in potential acquisitions.  The Company is unable to predict the eventual outcome of theFCC’s 2002 Biennial Review proceeding at this time.

 

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*Attribution*

 

Ownership of televisionlicensees generally is attributed to officers, directors and shareholders whoown 5% or more of the outstanding voting stock of a licensee, except thatcertain institutional investors who exert little or no control or influenceover a licensee may own up to 20% of such outstanding voting stock beforeattribution results.  Under the FCC’s“equity-debt plus” rule, a party’s interest will be deemed attributable if theparty owns equity (including all stockholdings, whether voting or non-voting,common or preferred) and debt interests, in the aggregate, exceeding 33% of thetotal asset value (including debt and equity) of the licensee and it eitherprovides 15% of the station’s weekly programming or owns an attributableinterest in another broadcast station, cable system or daily newspaper in thesame market.  In contrast, debtinstruments, non-voting stock and certain limited partnership interests(provided the licensee certifies that the limited partners are not “materiallyinvolved” in the media-related activities of the partnership) will not resultin attribution.

 

# **InDecember 2000, the FCC revised its rules to eliminate the single majorityshareholder exemption from the broadcast attribution rules.  Under that exception, the interest of aminority voting shareholder would not be attributable if one person or entityheld more than 50% of the combined voting power of the common stock companyholding or controlling a broadcast license. Any minority voting stock interest in a company with a single majorityshareholder was grand fathered as non-attributable if the interest was acquiredbefore December 14, 2000.  The FCC’sdecision eliminating the single majority shareholder exception as it applies tocable system ownership was appealed to the United States Court of Appeals forthe District of Columbia Circuit, and in March 2001, the court reversed theFCC’s decision and remanded the case to the FCC.  In December 2001, the FCC suspended its repeal of the singlemajority shareholder exception for broadcast attribution rules, effectivelyreinstating the exception, until it could act on the court remand.  Thus, the single majority shareholderexception from the broadcast attribution rules currently is in effect.**

 

Inaddition, for purposes of its national and local multiple ownership rules, theFCC attributes local marketing agreements (“LMAs”) that involve more than 15%of the brokered station’s weekly program time. Thus, if an entity owns one television station in a market and has aqualifying LMA with another station in the same market, this arrangement mustcomply with all of the FCC’s ownership rules including the television duopoly rule.  LMA arrangements entered into prior toNovember 5, 1996 are grand fathered until the FCC’s biennial review in 2004, inwhich their status will be reviewed on a case by case basis.  LMAs entered into on or after November 5,1996 were grand fathered temporarily until August 2001 only.  The Company does not operate any stationspursuant to an LMA

 

*National Ownership Rules*

 

FCCrules provide that no individual or entity may have an attributable interest intelevision stations that reach more than 35% of the national television viewingaudience.  For purposes of thiscalculation, stations in the UHF band, which covers channels 14 - 69, areattributed with only 50% of the households attributed to stations in the VHF band,which covers channels 2 - 13 (the “UHF discount”).  The FCC is considering elimination of the UHF discount as part ofthe 2002 Biennial Review, however, the Company cannot predict whether the FCCwill retain or eliminate the UHF discount. Under its recently revised ownershiprules, if an entity has attributable interests in two television stations inthe same market, the FCC will count the audience reach of that market only oncefor purposes of applying the national ownership cap.  In its most recently completed Biennial Review of this restriction,the FCC decided not to relax the 35% cap. In response to a judicial challenge of the FCC’s decision, in February2002, the United States Court of Appeals for the District of Columbia Circuitreversed the FCC’s decision and remanded the 35% broadcast ownership rule backto the FCC for further consideration. Specifically, the Court found that the FCC failed to adequately justifyits decision not to repeal or modify the national ownership cap rule asrequired by the Communications Act.  InJune 2002, the D.C. Circuit granted, in part, a petition for rehearing of itsdecision and

 

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modified a portion of its original opinion.  The national television ownership capremains in effect while the FCC reconsiders its decision in light of thefederal court directive.  TheFCC’s consideration of the court’s directive is part of its 2002 BiennialReview proceeding, discussed in further detail below.

 

*Television Duopoly Rule*

 

The FCC’s television duopoly rule permits a party tohave attributable interests in two television stations without regard to signalcontour overlap provided the stations are licensed to separate DMAs, asdetermined by Nielsen.  In an orderreleased in 1999 and an order on reconsideration released in 2001, the FCCrevised the duopoly rule to permit parties to own up to two television stationsin the same DMA as long as at least eight independently owned and operatingfull-power television stations, or “voices,” remain in the market post- acquisition,and at least one of the two stations is not among the top four ranked stationsin the DMA based on specified audience share measures.  Under the FCC’s rules, once a companyacquires a television station duopoly, the joint owner is not required to divesteither station if subsequently the number of voices within the market fallsbelow eight, or if either of the two jointly-owned stations is later rankedamong the top four stations in the market. The FCC also may grant a waiver of the television duopoly rule if one ofthe two television stations is a “failed” or “failing” station, if the proposedtransaction would result in the construction of an unbuilt television stationor if compelling public interest factors are present.  Additionally, satellite stations authorized to rebroadcast theprogramming of a parent station located in the same DMA are exempt from theduopoly rule.  Thus, the Company’scommon ownership of KBJR and KRII is fully consistent with the televisionduopoly rule.

 

Interested parties appealed the FCC’s 2001 order onreconsideration revising the duopoly rule to the United States Court of Appealsfor the District of Columbia Circuit. Under the current television duopoly rule, “voices” are defined toinclude only broadcast television stations in the market, however, in FCCownership rules governing other media, “voices” are defined to include othermedia such as major newspapers and cable television.  In April 2002, the D.C. Circuit invalidated the FCC’s definitionof voices under the television duopoly rule because it did not adequatelyexplain its decision to include only broadcast television stations asvoices.  The court remanded the matterback to the FCC to consider adjusting the definition of “voices” and thenumerical limit of eight.  The FCC’sconsideration of the court’s directive is part of its 2002 Biennial Reviewproceeding, discussed in further detail below.

 

*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.  However, in February 2002, the United StatesCourt of Appeals for the District of Columbia Circuit vacated the FCC’s ruleprohibiting the common ownership of a television station and a cable televisionsystem in the same market (“Broadcast-Cable Cross Ownership Rule”).  Specifically, the court held that the FCChad no basis for not repealing or modifying the Broadcast-Cable Cross OwnershipRule.  In June 2002, the court ruled onpetitions for rehearing filed by the FCC and two intervenors. On February 26,2003, the FCC released an order repealing the Broadcast-Cable Cross OwnershipRule, pursuant to the D.C. Circuit’s February 2002 decision.

 

TheFCC further prohibits the common ownership of a broadcast television stationand a daily newspaper in the same local market.  The FCC also restricts the common ownership of television andradio stations in the same market.  Oneentity may now own up to two television stations and six radio stations in thesame market provided that: (1) 20 independent voices (including certainnewspapers and a single cable system) will remain in the relevant marketfollowing consummation of the proposed transaction, and (2) the proposedcombination is consistent with the television duopoly and local radio ownershiprules.  If fewer than 20 but more than 9independent voices will remain in a market following a proposed transaction,and the proposed combination is otherwise consistent with the FCC’s rules, asingle entity may hold attributable interests in up to two television stationsand four radio stations.  If neither ofthese various “independent voices” tests are met, a party generally may have anattributable interest in no more than one television station and one radiostation in a market.  FCC considerationof its cross-ownership rules, including the possible reinstatement of the BroadcastCable Cross Ownership rule or some variation thereof, is part of the 2002Biennial Review, as discussed further below.

 

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*Pending 2002 Biennial Review Proceeding*

 

The FCC currently is engaged ina comprehensive review of its media ownership rules.  Section 202(h) of the 1996 Act requires the FCC to engage in areview of its media ownership rules every two years and to repeal any mediaownership restriction that no longer is in the public interest.  The FCC commenced its latest 2002 Biennial Reviewin a Notice of Proposed Rulemaking released September 23, 2002.  Media ownership rules under review includemany of the aforementioned rules, such as the national ownership rule, thelocal television ownership rule, and the broadcast-cable and broadcast-newspapercross-ownership rules.  Specificproposals being examined in the 2002 Biennial Review include those that wouldrelax the FCC’s media ownership rules, thereby permitting increased mediaconsolidation.  Comments in the 2002Biennial Review were due on January 2, 2003 and reply comments were dueFebruary 3, 2003.  Prediction of whenthe FCC will conclude the 2002 Biennial Review range from Spring 2003 to Winter2003 and beyond.  The Company is unableto predict when the FCC will issue its decision or the eventual outcome of the2002 Biennial Review or its potential impact upon Company operations.

 

*AntitrustReview*

 

TheDepartment of Justice and the Federal Trade Commission (together the “AntitrustAgencies”) have the authority to determine that a particular transactionpresents antitrust concerns. The Antitrust Agencies have increased theirscrutiny of the television and radio industries, and have indicated theirintention to review matters related to the concentration of ownership withinmarkets (including LMAs) even when the ownership or LMA in question ispermitted under the regulations of the FCC. In March 2002, the Antitrust Agencies reached an agreement through whichthe Department of Justice would assume primary control over all merger reviewsin the media and entertainment industries, however, the Senate Commercecommittee has stated an intention to formally review the Antitrust Agencies’decision to assign media mergers to the Department of Justice. There can be noassurance that future policy and rulemaking activities of the AntitrustAgencies will not impact the Company’s 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% of the capital stock of a licensee and up to 25% ofthe capital stock of a United States corporation that, in turn, owns a controllinginterest in a licensee. A broadcast license may not be granted to or held byany corporation that is controlled, directly or indirectly, by any othercorporation of which more than one-fourth of the capital stock is owned orvoted by non-citizens or their representatives, by foreign governments or theirrepresentatives, or by non-U.S. corporations, if the FCC finds that the publicinterest will be served by the refusal or revocation of such license.  Non-citizens may serve as officers anddirectors of a broadcast licensee and any corporation controlling, directly orindirectly, such licensee. As a result the Company is restricted by theCommunications Act from having more than one-fourth of its 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*

 

Inearly 2000, the FCC revised its rules requiring broadcast licensees to maintainprograms designed to promote equal employment opportunities (“EEO”).  In January 2001, the United States Court ofAppeals for the District of Columbia Circuit held that portions of theFCC-imposed requirements were unconstitutional.  In response to the court’s ruling, the FCC suspended enforcementof its EEO rules.  Although the courtdecision effectively repealed certain specific EEO rules, the generalprohibition against employment discrimination remained in effect.  In December 2001, the FCC initiated aproceeding to seek public comment on proposed new EEO rules.  The FCC’s

 

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proposed rules were similar to the former rules,with the exception that the requirements deemed unconstitutional by the D.C.Circuit were removed.  On November 20,2002, the FCC released a new set of EEO rules which became effective on March10, 2003.  The new rules require theCompany to comply with certain recruiting, outreach, recordkeeping andreporting requirements.  On February 6,2003, interested parties filed a joint petition for reconsideration of theFCC’s new rules.  The Company is unableto predict the resolution of the petition for reconsideration.

 

*Must Carry/Retransmission Consent*

 

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

 

TheFCC currently is conducting a rulemaking proceeding to determine the scope ofthe cable systems’ carriage obligations with respect to digital broadcastsignals during and following the transition from analog to DTV service. In itsinitial order, the FCC tentatively concluded that broadcasters would not beentitled to mandatory carriage of both their analog and DTV signals and thatbroadcasters with multiple DTV video programming streams would be required todesignate a single primary video stream eligible for mandatory carriage.  Alternatively, a broadcaster may negotiatewith cable systems for carriage of its DTV signal in addition to its analogsignal under retransmission consent.

 

*Satellite Home Viewer Improvement Act*

 

Underthe Satellite Home Viewer Improvement Act (“SHVIA”) a satellite carriergenerally must obtain retransmission consent before carrying a televisionstation’s signal.  Specifically, theSHVIA: (1) provides a statutory copyright license to enable satellite carriersto retransmit a local television broadcast station into the station’s localmarket (i.e., provide “local-into-local” service); (2) permits the continuedimportation of distant network signals (i.e., network signals that originateoutside of a satellite subscriber’s local television market or designatedmarket areas (“DMA”) for certain existing subscribers; (3) provides broadcaststations with retransmission consent rights in their local markets; and (4)mandates carriage of broadcast signals in their local markets after a phase-inperiod.  “Local markets” are defined toinclude both a station’s DMA and its county of license.

 

TheSHVIA permits satellite carriers to provide distant or nationally broadcastprogramming to subscribers in “unserved” households (i.e., households areunserved by a particular network if they do not receive a signal of at leastGrade B intensity from a station affiliated with that network) until December31, 2004.  However, satellite televisionproviders can retransmit the distant signals of no more than two stations perday for each television network.  As ofJanuary 1, 2002, a satellite carrier retransmitting the signal of any localbroadcast station into the station’s local market generally must carry allstations licensed to the carried station’s local market upon request.

 

Pursuant to the SHVIA,satellite carriers are beginning to offer local broadcast signals tosubscribers in some of the nation’s largest television markets.  As of February 2003, satellite carrierDirecTV currently carries the signals of Company stations KBWB, WDWB and WKBW,while EchoStar currently carries KBWB, WDWB, WKBW and KSEE.

 

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*Digital Television*

 

Pursuant to the Telecommunications Act of 1996, theFCC has adopted rules authorizing and implementing DTV service, technology thatshould improve the quality of both the audio and video signals of televisionstations.  The FCC has “set aside”channels within the existing television spectrum for DTV and limited initialDTV eligibility to existing television stations and certain applicants for newtelevision stations (“Existing Broadcasters”). 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. televisionmarkets were required to initiate commercial DTV service with a digital signalby May 1, 1999.  Affiliates of thesenetworks located in the 11th through the 30th largest U.S. television marketswere required to begin DTV operation by November 1, 1999.  All other commercial stations were requiredto construct DTV facilities by May 1, 2002. In November 2001, the FCC modified its digital television transitionrules in an effort to ease the burden of the required build out.  Among other changes, the FCC relaxed itsinitial build out requirement.  Underthe new rules, a station will not have to replicate its entire analog servicearea until a date to be set in a proceeding initiated in February 2003.

 

Generally, Congress has required broadcasters toconvert to DTV service, terminate their existing analog service and surrenderone of their two television channels to the FCC, on or before December 31,2006.  This 2006 transition date may beextended, however, upon the request of a station, in the event that: (i) one ormore of the stations in the station’s market licensed to or affiliated with oneof 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; (ii) digital-to-analog converter technology is not generally availablein such market; or (iii) 15% or more ofthe television households in the station’s market: (A) do not subscribe to amulti-channel video programming distributor that carries the DTV channelsoffered in that market; or (B) do not have either at least one televisionreceiver capable of receiving DTV service or at least one television receiverof  analog service signals equipped withdigital-to-analog converter technology.

 

The FCC also has adopted rulesthat permit DTV licensees to offer ancillary or supplementary services on theirDTV channels under certain circumstances. The FCC rules further require DTV licensees to pay a fee of 5% of thegross 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 Commission also hasinitiated a notice of inquiry to examine whether additional public interestobligations should be imposed on DTV licensees.  Various proposals in this proceeding would require DTV stationsto increase their program diversity, political discourse, access for disabledviewers and to improve emergency warning systems.

 

Company-owned station KBWB hasconstructed and begun operating its DTV facilities pursuant to an FCClicense.  All remaining Company-ownedstations have received permits to construct their DTV stations.  In March 2002, WKBW, KSEE, WEEK, and KBJReach applied for a six-month extension of the DTV build out period, pursuant tothe extension guidelines adopted by the FCC. FCC rules limit each exstension period to six months.  The FCC granted initial six-month extensionrequests for WKBW, KSEE, WEEK and KBJR. KBJR completed construction of its DTV facilities and is currentlyoperating its DTV facilities pursuant to a special temporary authorization(“STA”) for limited buildout operation. As indicated above, the FCC expressly authorized limited buildout of DTVfacilities in order to facilitate the DTV transition. The KBJR DTV STAis scheduled to expire in May 2003 and the Company intends to file in April2003 a request for a six-month extension of the STA.  The Company anticipates that its request to extend the STA willbe granted, pursuant to the FCC’s policy authorizing limited buildout andreduced power operation of DTV facilities under STAs.

 

WKBW,WEEK and KSEE each filed and obtained second extensions which expire in June2003, June 2003, and July 2003, respectively. The remaining Company-owned stations – WDWB, WTVH and WPTA – also

 

16

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are in the process of constructing DTV facilitiespursuant to their FCC-issued permits. The construction permit terms for WDWB, WTVH and WPTA expire in May2003, June 2003, and June 2003, respectively. In March 2003, stationsWDWB and WTVH each filed an initial request for a six-month extension of theDTV buildout period, pursuant to the extension guidelines adopted by theFCC.  These requests are pending beforethe FCC.  WPTA likely will apply for aninitial six-month extension of its DTV build out period in April 2003. If any Company-owned station’s DTV facilities arenot scheduled to be completed before the expiration of its construction permitor construction permit extension, the Company will file further extensionrequests within 60 - 90 days prior to the scheduled expiration of theconstruction permit or extension.  TheCompany cannot predict whether the FCC will grant any such requests.

 

*Class A Television Stations*

 

In November 1999, Congressenacted the Community Broadcasters Protection Act, which created a new “ClassA” status for low power television stations. Under this statute, certain LPTV stations which previously had secondarystatus to full power television stations are eligible for “Class A” status andare entitled to protection from future displacement by modifications tofull-power television stations under certain circumstances. The FCC has adoptedrules governing the extent of interference protection that must be afforded toClass A stations and the eligibility criteria for these stations.  Because Class A stations are required toprovide interference protection to previously authorized full-power televisionstations, these new facilities are not expected to adversely affect theoperations of the Company’s television stations.

 

*Proposed Legislation and Regulations*

 

TheFCC currently has under consideration and the Congress and the FCC may in thefuture consider and adopt new or modified laws, regulations and policiesregarding a wide variety of matters that could, directly or indirectly, affectthe operation, ownership, and profitability of the Company’s broadcastproperties, result in the loss of audience share and advertising revenues forthe Company’s stations, or affect the ability of the Company to acquireadditional stations or finance acquisitions. Such matters include but are not limited to: (i) fees imposed on FCClicensees for failure to timely construct DTV facilities; (ii) matters relatingto minority and female involvement in the broadcasting industry; (iii)political broadcasting and advertising matters; (iv) technical and frequencyallocation matters; (v) changes to broadcast technical requirements; (vi) anexamination of whether the cable must-carry requirement mandates carriage of bothanalog and digital television signals; and (vii) an examination of issues thathave arisen during the transition from analog to digital television service.The Company cannot predict whether such changes will be adopted or, if adopted,the effect that such changes would have on the business of the Company.

 

*Employees*

 

TheCompany and its subsidiaries currently employ approximately 732 persons, ofwhom approximately 259 are represented by three unions pursuant to agreementsexpiring in 2003, 2004 and 2007 at the Company’s stations.  The Company believes its relations with itsemployees are good.

 

17

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

 

The Company’s principal executive offices are located inNew York, New York.  The lease agreement,for approximately 9,500 square feet of office space in New York, expiresJanuary 31, 2011.

 

The types of properties required to support each ofthe Company’s stations include offices, studios, transmitter sites and antennasites.  A station’s studios aregenerally housed with its offices in downtown or business districts.  The transmitter sites and antenna sites aregenerally located so as to provide maximum market coverage.  The following table contains certaininformation describing the general character of the Company’s properties:

 
| **Station** |   | **MetropolitanArea and Use**                        |   | **Owned orLeased** |   | **Approximate Size** |   | **Expiration  of Lease** |   |
|-------------|--------|-----------------------------------------------------|--------|--------------------|--------|----------------------|--------|--------------------------|--------|
|        |   |                                                |   |               |   |                 |   |                     |   |
| WTVH        |   | Syracuse, New YorkOffice and Studio                 |   | Owned              |   | 41,500 sq. feet      |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
|        |   | Onondaga, New YorkTower Site                        |   | Owned              |   | 2,300 sq. feet       |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| KSEE        |   | Fresno, CaliforniaOffice and Studio                 |   | Owned              |   | 32,000 sq. feet      |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
|        |   | Bear Mountain, Fresno County,  CaliforniaTower Site |   | Leased             |   | 9,300 sq. feet       |   | 3/22/51                  |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| WPTA        |   | Fort Wayne, IndianaOffice, Studio and Tower  Site   |   | Owned              |   | 18,240 sq. feet      |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| WEEK        |   | Peoria, IllinoisOffice, Studio and Tower  Site      |   | Owned              |   | 20,000 sq. feet      |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| KBJR        |   | Duluth, Minnesota, Superior, Wisconsin              |   |               |   |                 |   |                     |   |
|        |   | Office and Studio                                   |   | Owned              |   | 20,000 sq. feet      |   | —                   |   |
|        |   | Tower Site                                          |   | Owned              |   | 3,300 sq. feet       |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| KBWB        |   | San Francisco, California                           |   |               |   |                 |   |                     |   |
|        |   | Office and Studio                                   |   | Leased             |   | 25,777 sq. feet      |   | 8/31/12                  |   |
|        |   | Tower Site                                          |   | Leased             |   | 2,750 sq. feet       |   | 2/28/05                  |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| WKBW        |   | Buffalo, New YorkOffice and Studio                  |   | Owned              |   | 32,000 sq. feet      |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
|        |   | Colden, New YorkTower Site                          |   | Owned              |   | 3,406 sq. feet       |   | —                   |   |
|        |   |                                                |   |               |   |                 |   |                     |   |
| WDWB        |   | Southfield, Michigan                                |   |               |   |                 |   |                     |   |
|        |   | Office                                              |   | Leased             |   | 8,850 sq. feet       |   | 12/31/05                 |   |
|        |   | Studio and Tower Site                               |   | Leased(1)          |   | 30,000 sq. feet      |   | 9/30/06                  |   |

 

----

1              TheCompany owns a 3,400 square foot building on the property.

 

18

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**Item 3****.  Legal Proceedings**

 

Granite is from time totime involved in various claims and lawsuits that are incidental to its business.We are not aware of any pending or threatened litigation, arbitration oradministrative proceedings involving claims or amounts that, individually or inthe aggregate, we believe are likely to materially harm our business, financialcondition or future results of operations. Any litigation, however, involvesrisk and potentially significant litigation costs, and therefore we cannot giveany assurance that any litigation which may arise in the future will notmaterially harm our business, financial condition or future results ofoperations.

 

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

 

OnMay 22, 2002, the holders of all of the Company’s Voting Common Stock adoptedresolutions by unanimous written consent in lieu of an annual meeting (i) appointingErnst & Young LLP as independent auditors of the Company and (ii) electingW. Don Cornwell, Stuart J. Beck, James L. Greenwald, Martin F. Beck, EdwardDugger III, Thomas R. Settle, Charles J. Hamilton, Jr., Robert E. Selwyn,Jr., Jon E. Barfield, Milton Frederick Brown and Veronica Pollard as directorsof the Company.

 

On December 2, 2002, the holders of all of the Company’sVoting Common Stock adopted resolutions by unanimous written consent in lieu ofa special meeting (i) amending the Granite Broadcasting CorporationNon-Employee Director Stock Plan to increase the number of shares of CommonStock (Nonvoting) issuable under such plan to 600,000 shares and to increasethe annual compensation payable to non-employee directors to $50,000, and (ii) amendingthe Company’s Management Stock Plan to increase the number of shares of CommonStock (Nonvoting) in the bonus share reserve to 2,000,000.

 

19

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**PART II**

 

**Item 5****.  Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

The Company’s Common Stock(Nonvoting) is traded over-the-counter on the Nasdaq Small Cap Market under thestock symbol GBTVK.  As of March 21,2003, the approximate number of record holders of Common Stock (Nonvoting) was219.

 

The range of high and low pricesfor the Common Stock (Nonvoting) for each full quarterly period during 2001 and2002 is set forth in Note 15 to the Consolidated Financial Statements in Item 8hereof.  At March 21, 2003, the closingprice of the Common Stock (Nonvoting) was $1.60 per share.

 

There is no established publictrading market for the Company’s Class A Voting Common Stock, par value $.01per share (the “Voting Common Stock;”). The Voting Common Stock and the CommonStock (Nonvoting) are referred to herein collectively as the “CommonStock”.  As of March 21, 2003, thenumber of record holders of Voting Common Stock was 2.

 

The Company has never declared orpaid a cash dividend on its Common Stock and does not anticipate paying adividend on its Common Stock in the foreseeable future.  The payment of cash dividends on any equitysecurities of the Company is subject to certain limitations under theIndentures governing the Company’s 10 3/8% Senior Subordinated Notes due May15, 2005, 9 3/8% Senior Subordinated Notes due December 1, 2005 and the 8 7/8%Senior Subordinated Notes due May 15, 2008 and under the Certificate ofDesignations of the Company’s 12 3/4% Cumulative Exchangeable PreferredStock.  The payment of cash dividends onany equity securities of the Company is prohibited under the Company’s CreditAgreement.  The Company is alsoprohibited from paying dividends on any Common Stock until all accrued butunpaid dividends on the Company’s Series A Convertible Preferred Stock, parvalue $.01 per share (the “Series A Preferred Stock”), are paid in full.  All outstanding shares of Series A PreferredStock were converted into Common Stock (Nonvoting) in August 1995.  Accrued dividends on the Series A PreferredStock, which totaled $262,844 at December 31, 2002, are payable on the date onwhich such dividends may be paid under the Company’s existing debt instruments.

 

**Equity Compensation 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     |   | 7,474,926                                                                                           |   | $                                                                                   | 5.87   |                                                                | 2,372,500 |   |
| Equity  compensation plans not approved by security holders |   | —                                                                                              |   | —                                                                              |   | —                                                              |      |
| Total                                                       |   | 7,474,926                                                                                           |   | $                                                                                   | 5.87   |                                                                | 2,372,500 |   |

 

20

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**Item 6****.  Selected Financial Data**

 

The information set forth belowshould be read in conjunction with the consolidated financial statements andnotes thereto included at Item 8 herein. The selected consolidated financial data has been derived from theCompany’s audited Consolidated Financial Statements.

 

The acquisitions and dispositions by the Company ofits operating properties during the periods reflected in the following selectedfinancial data materially affect the comparability of such data from one periodto another.

 
|                                                                                                                           |   | **Years Ended December 31,**                      |    |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|---------|
|                                                                                                                           |   | **1998**                                          |    | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                                                                           |   | **(Dollars in thousands except per  share data)** |    |
| **Statement of Operations Data:**                                                                                              |   |                                              |    |
| Net revenue                                                                                                                    |   | $                                                 | 161,104 |   | $ | 149,847 |   | $ | 140,070 |   | $ | 113,075 |   | $ | 135,344 |   |
| Station operating expenses                                                                                                     |   | 90,240                                            |    | 92,874 |   | 104,396 |   | 116,374 |   | 103,963 |   |
| Depreciation                                                                                                                   |   | 5,388                                             |    | 5,455 |   | 5,725 |   | 6,076 |   | 5,897 |   |
| Amortization of intangible  assets                                                                                             |   | 18,493                                            |    | 26,667 |   | 26,865 |   | 26,735 |   | 18,985 |   |
| Corporate expense                                                                                                              |   | 8,179                                             |    | 8,862 |   | 10,392 |   | 9,687 |   | 9,536 |   |
| Non-cash compensation expense                                                                                                  |   | 977                                               |    | 935 |   | 1,974 |   | 1,473 |   | 1,508 |   |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                                                                        |   | 37,827                                            |    | 15,054 |   | (9,282 | ) | (47,270 | ) | (4,545 | ) |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                                                          |   | 38,896                                            |    | 36,352 |   | 28,975 |   | 45,923 |   | 33,812 |   |
| Non-cash interest expense                                                                                                      |   | 2,095                                             |    | 3,115 |   | 3,008 |   | 7,951 |   | 13,031 |   |
| Gain on sale of assets                                                                                                         |   | (57,776                                           | )       | (101,292 | ) | — |   | — |   | (192,406 | ) |
| Gain from insurance claim                                                                                                      |   | (2,159                                            | )       | (4,079 | ) | (1,247 | ) | — |   | — |   |
| Other expenses                                                                                                                 |   | 2,354                                             |    | 1,870 |   | 2,079 |   | 1,141 |   | 869 |   |
| Income (loss) before income  taxes and extraordinary item and cumulative effect of a change in accounting  principle           |   | 54,417                                            |    | 79,088 |   | (42,097 | ) | (102,285 | ) | 140,149 |   |
| Provision (benefit) for income  taxes                                                                                          |   | 10,250                                            |    | 31,574 |   | (10,878 | ) | (26,745 | ) | 60,243 |   |
| Income (loss) from continuing  operations before extraordinary item and cumulative effect of a change in  accounting principle |   | 44,167                                            |    | 47,514 |   | (31,219 | ) | (75,540 | ) | 79,906 |   |
| Extraordinary (gain) loss, net  of tax benefit                                                                                 |   | 1,761                                             |    | 385 |   | (3,710 | ) | 1,207 |   | 9,058 |   |
| Cumulative effect of a change  in accounting principle, net of tax benefit                                                     |   | —                                            |    | — |   | — |   | — |   | 150,479 |   |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                                              |   | $                                                 | 42,406  |   | $ | 47,129 |   | $ | (27,509 | ) | $ | (76,747 | ) | $ | (79,631 | ) |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| Net income (loss) attributable  to common shareholders                                                                         |   | $                                                 | 16,896  |   | $ | 19,912 |   | $ | (56,345 | ) | $ | (109,311 | ) | $ | (78,808 | ) |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| **Per  common share:**                                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Basic  income (loss) before extraordinary item and cumulative effect of a change in  accounting principle                      |   | $                                                 | 1.80    |   | $ | 1.46 |   | $ | (3.30 | ) | $ | (5.82 | ) | $ | 4.31 |   |
| Basic  net income (loss)                                                                                                       |   | $                                                 | 1.63    |   | $ | 1.43 |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | (4.20 | ) |
| Weighted  average common shares outstanding                                                                                    |   | 10,358                                            |    | 13,969 |   | 18,203 |   | 18,569 |   | 18,749 |   |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| Net  income (loss) attributable to common shareholders – assuming dilution                                                |   | $                                                 | 19,776  |   | $ | 21,588 |   | $ | (56,345 | ) | $ | (109,311 | ) | $ | (78,808 | ) |
|                                                                                                                           |   |                                              |    |   |   |   |   |   |   |   |   |
| **Per  common share**:                                                                                                         |   |                                              |    |   |   |   |   |   |   |   |   |
| Diluted  income (loss) before extraordinary item and cumulative effect of a change in  accounting principle                    |   | $                                                 | 1.27    |   | $ | 1.16 |   | $ | (3.30 | ) | $ | (5.82 | ) | $ | 4.23 |   |
| Diluted  net income (loss)                                                                                                     |   | $                                                 | 1.17    |   | $ | 1.14 |   | $ | (3.10 | ) | $ | (5.89 | ) | $ | (4.13 | ) |
| Weighted  average common shares outstanding – assuming dilution                                                           |   | 16,967                                            |    | 19,012 |   | 18,203 |   | 18,569 |   | 19,098 |   |

 

21

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|                                 |   | **As of  December 31,** |    |
|--------------------------------------|--------|-------------------------|---------|
|                                 |   | **1998**                |    | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
| **Selected  Balance Sheet Data:**    |   |                    |    |   |   |   |   |   |   |   |   |
| Total  assets                        |   | $                       | 781,974 |   | $ | 730,591 |   | $ | 732,091 |   | $ | 731,097 |   | $ | 475,164 |   |
| Total  debt                          |   | 426,399                 |    | 303,874 |   | 311,391 |   | 401,206 |   | 312,791 |   |
| Redeemable  preferred stock          |   | 216,351                 |    | 210,709 |   | 239,545 |   | 272,109 |   | 198,125 |   |
| Stockholders’  equity (deficit) |   | (1,470                  | )       | 50,084 |   | 7,816 |   | (98,144 | ) | (188,358 | ) |
|                                      |        |                         |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*Introduction*

 

Comparisons of theCompany’s consolidated financial statements between the years ended December 31,2001 and 2000 have been affected by the termination of the ABC affiliationagreement at KNTV on July 1, 2000, significant increases in news expense atKNTV and investments in syndicated programs at the Company’s WB affiliates.Comparisons of the Company’s consolidated financial statements between theyears ended December 31, 2002 and 2001 have been affected by the sale of KNTVon April 30, 2002, and a reduction in amortization expense of certain goodwilland other indefinite lived intangible assets in accordance with Statement ofFinancial Accounting Standards No. 142, Goodwill and Other Intangible Assets(“Statement 142”), which was effective January 1, 2002.  The Company anticipates that comparisons ofthe Company’s consolidated financial statements between the years endedDecember 31, 2003 and 2002 will also be impacted by the sale of KNTV.

 

We believe that inflation has not had a materialimpact on our results of operations for each of the three years in the periodended December 31, 2002.  However, therecan be no assurance that future inflation would not have an adverse impact onour operating results and financial condition.

 

The Company’s operating revenues are generally lower inthe first calendar quarter and generally higher in the fourth calendar quarterthan in the other two quarters, due in part to increases in retail advertisingin the fall months in preparation for the holiday season, and in election yearsdue to increased political advertising.

 

The Company’s revenues are derived principally from localand national advertising and, to a lesser extent, from network compensation forthe broadcast of programming and revenues from studio rental and commercialproduction activities.  The primaryoperating expenses involved in owning and operating television stations areemployee salaries, depreciation and amortization, programming, advertisingand promotion. Amounts referred to in the following discussion have beenrounded to the nearest thousand.

 

Set forth below are the principal types of televisionrevenues received by the Company’s television stations for the periodsindicated and the percentage contribution of each to the gross televisionrevenues of the television stations owned by the Company.

 

**GROSS REVENUES, BY CATEGORY,FOR THE COMPANY’S STATIONS**

(dollars in thousands)

 

|                  |   | **Years  Ended December 31,** |    |
|-----------------------|--------|-------------------------------|---------|
|                  |   | **2000**                      |    | **2001** |   | **2002** |   |
|                  |   | **Amount**                    |    | **%** |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|                  |   |                          |    |   |   |   |   |   |   |   |   |   |   |
| Local/Regional        |   | $                             | 82,466  |   | 48.3 | % | $ | 70,876 |   | 52.0 | % | $ | 77,730 |   | 47.6 | % |
| National              |   | 68,624                        |    | 40.2 | % | 55,583 |   | 40.8 | % | 66,673 |   | 40.9 | % |
| Network  Compensation |   | 4,418                         |    | 2.6 | % | 4,272 |   | 3.1 | % | 3,093 |   | 1.9 | % |
| Political             |   | 10,413                        |    | 6.1 | % | 1,167 |   | 1.0 | % | 10,882 |   | 6.7 | % |
| Other                 |   | 4,854                         |    | 2.8 | % | 4,276 |   | 3.1 | % | 4,772 |   | 2.9 | % |
|                  |   |                          |    |   |   |   |   |   |   |   |   |   |   |
| Gross  Revenue        |   | 170,775                       |    | 100.0 | % | 136,174 |   | 100.0 | % | 163,150 |   | 100.0 | % |
| Agency  Commissions   |   | 30,705                        |    |   |   | 23,099 |   |   |   | 27,806 |   |   |   |
|                  |   |                          |    |   |   |   |   |   |   |   |   |   |   |
| Net  Revenue          |   | $                             | 140,070 |   |   |   | $ | 113,075 |   |   |   | $ | 135,344 |   |   |   |

 

22

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Automotive advertisingconstitutes the Company’s single largest source of gross revenues, accountingfor approximately 17% of the Company’s total gross revenues in 2002.  Gross revenues from restaurants, paidprogramming, and retail businesses accounted for approximately 20% of theCompany’s total gross revenues in 2002. Each other category of advertisingrevenue represents less than 4% of the Company’s total gross revenues.

 

The following table sets forth certain operating data forthe three years ended December 31, 2000, 2001 and 2002:

 
|                                                                                                               |   | **Years ended December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                                               |   | **2000**                     |        | **2001** |   | **2002** |   |
| Income  (loss) before income taxes, extraordinary items and cumulative effect of a  change in accounting principle |   | $                            | (42,097,000 | ) | $ | (102,285,000 | ) | $ | 140,149,000 |   |
| Depreciation  and amortization                                                                                     |   | 32,590,000                   |        | 32,812,000 |   | 24,882,000 |   |
| Interest  expense                                                                                                  |   | 29,654,000                   |        | 47,482,000 |   | 34,889,000 |   |
| Non-cash  compensation                                                                                             |   | 1,974,000                    |        | 1,473,000 |   | 1,508,000 |   |
| Non-cash  interest expense                                                                                         |   | 3,008,000                    |        | 7,951,000 |   | 13,031,000 |   |
| Program  amortization                                                                                              |   | 24,507,000                   |        | 32,742,000 |   | 28,924,000 |   |
| Program  payments                                                                                                  |   | (20,565,000                  | )           | (24,391,000 | ) | (24,187,000 | ) |
| Gain  on sale of assets                                                                                            |   | —                       |        | — |   | (192,406,000 | ) |
| Interest  income                                                                                                   |   | (678,000                     | )           | (1,559,000 | ) | (1,077,000 | ) |
|                                                                                                               |   |                         |        |   |   |   |   |
| EBITDA                                                                                                             |   | $                            | 28,393,000  |   | $ | (5,775,000 | ) | $ | 25,713,000 |   |
|                                                                                                               |   |                         |        |   |   |   |   |
| Cash  used in operating activities                                                                                 |   | $                            | (3,584,000  | ) | $ | (56,950,000 | ) | $ | (73,410,000 | ) |

 

“EBITDA” means income (loss) before income taxes,extraordinary item and cumulative effect of a change in accounting principleplus depreciation, amortization, interest expense, non-cash compensation,non-cash interest expense and program amortization, less program payments, gainon sale of assets and interest income. The Company has included EBITDAdata because such data is commonly used as a measure of performance forbroadcast companies and is also used by investors to measure a company’sability to service debt. EBITDA isnot, and should not be used as an indicator or alternative to operating income,net loss or cash flow as reflected in the consolidated financial statements, isnot a measure of financial performance under accounting principles generallyaccepted in the United States and should not be considered in isolation or as asubstitute for measures of performance prepared in accordance with accountingprinciples generally accepted in the United States.

 

Critical AccountingPolicies

 

Our accounting policies are described in Note 2 of theconsolidated financial statements in Item 8. We prepare our consolidated financial statements in conformity withaccounting principles generally accepted in the United States, which require usto make estimates and assumptions that effect the reported amounts of assetsand liabilities and disclosures of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts ofrevenues and expenses during the year. Actual results could differ from those estimates.  We consider the following policies, whichwere discussed with the Audit Committee of the Board of Directors, to be mostcritical in understanding the judgments involved in preparing our consolidatedfinancial statements and the uncertainties that could affect our results ofoperations, financial condition and cash flows.

 

23

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*Revenue recognition*

 

The Company’s primary source ofrevenue is the sale of television time to advertisers. Revenue is recorded whenthe advertisements are aired.  Othersources of revenue are compensation from the networks, studio rental andcommercial production activities.  Theserevenues are recorded when the programs are aired and the services areperformed. Revenue from barter transactions is recognized when advertisementsare broadcast and merchandise or services received are charged to expense whenreceived or used.  Barter revenuetotaled $2,293,000, $1,723,000 and $1,922,000 for the years ended December 31,2000, 2001 and 2002 respectively. Barter expense totaled $1,379,000, $1,487,000 and $1,044,000 for theyears ended December 31, 2000, 2001 and 2002 respectively.

 

*FilmContract Rights*

 

The Company’s accountingfor long-lived program assets requires judgment as to the likelihood that suchassets will generate sufficient revenue to cover the associated expense.  Many of the Company’s program commitmentsare for syndicated shows with contractual lives of four or more years.  On a semi-annual basis, the Company reviewsits program inventory for impairment by projecting the amount of revenue theprogram will generate over the remaining life of the contract and comparing itto the program’s expense.  The Companyhas written down the value of certain programs by $8,522,000 and $5,600,000 inthe years ended December 31, 2001 and 2002, respectively.

* *

*Goodwill and Intangible Assets*

 

The Company has made acquisitions in the past forwhich a significant portion of the purchase price was allocated to goodwill andother identifiable intangible assets.

 

In accordance with Statement 142, goodwill and otherintangible assets deemed to have indefinite lives are no longer beingamortized, but instead are subject to annual impairment tests.  The Company adopted the new rule onaccounting for goodwill and other intangible assets beginning on January 1,2002.  The Company recorded a charge toreduce the carrying value of its goodwill and other indefinite-lived intangibleassets by $95,000,000 and $114,000,000 respectively during the first quarter of2002.  The annual impairment testingrequired by Statement 142 was completed as of December 31, 2002 and did notresult in any additional write down of the carrying value of our goodwill andother intangible assets.  As of December31, 2002, the Company had $284,867,000 in goodwill and other intangible assetswith indefinite lives net of accumulated amortization.

 

*Long-Lived Assets*

 

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

 

*Allowance for Doubtful Accounts*

 

We must make estimates ofthe uncollectibility of our accounts receivable.  We specifically review historical write-off activity by market,large customer concentrations, customer credit worthiness, and changes in ourcustomer payment terms when evaluating the adequacy of the allowance fordoubtful accounts. Our experience has been that the level of customer defaultshave been predictable and that the allowance for doubtful accounts has beenadequate to cover such defaults.  Ifcircumstances change, such as higher than expected defaults or an unexpectedmaterial adverse change in an agency’s ability to meet its financial obligationto the Company, the Company’s estimates of the recoverability of amounts duethe Company could be reduced by a material amount.

 

24

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*Years endedDecember 31, 2002 and 2001*

 

Net revenue for the yearended December 31, 2002 totaled $135,344,000; an increase of $22,269,000 or 20%compared to $113,075,000 for the twelve months ended December 31, 2001. Of thisincrease, $14,539,000 related to KNTV’s switch from an independent televisionstation to an NBC affiliate serving San Francisco-Oakland-San Jose, the 5thlargest market in the country, until its sale on April 30, 2002.  The remaining $7,730,000 increase isattributable to increased national and political revenue offset in part bydecreased local revenue and network compensation.

 

Station operatingexpenses totaled $103,963,000; a decrease of $12,411,000 or 11% compared to$116,374,000 for the twelve months ended December 31, 2001.  Of this decrease $10,801,000 relates to thesale of KNTV.  The remaining stations’operating expense decrease of $1,610,000 is primarily the result of decreasedprogramming expense.

 

Amortization expensedecreased $7,750,000 or 29% during the twelve months ended December 31, 2002compared to the same period a year earlier primarily due to the elimination ofthe amortization of goodwill and other indefinite-lived intangible assets inaccordance with Statement 142. Corporate expense totaled $9,536,000; a decrease of $151,000 or lessthan 2% compared to $9,687,000 for the twelve months ended December 31, 2001.

 

Interest expense totaled$34,889,000; a decrease of $12,593,000 or 27% compared to $47,482,000 for thetwelve months ended December 31, 2001. The decrease was primarily due to lower levels of outstandingindebtedness and lower interest rates on the Company’s current CreditAgreement. Interest income totaled $1,077,000; a decrease of $482,000 or 31%compared to the twelve months ended December 31, 2001 primarily due to lowercash balances, and lower interest rates. Non-cash interest expense totaled $13,031,000; an increase of $5,079,000or 64% primarily due to the imputation of interest related to KNTV’s NBCaffiliation agreement, until its sale on April 30, 2002, offset in part byreduced amortization of deferred financing fees associated with the currentamended and restated Credit Agreement.

 

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

 

The Company recorded aprovision for income taxes of $60,243,000 in 2002, consisting of a currentportion of $24,981,000 and a deferred portion of $35,262,000 compared to abenefit for income taxes of $26,745,000 in 2001.

 

25

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The Company recorded a $9,058,000 extraordinary losson the early extinguishment of debt, net of a current tax benefit of $6,039,000due to the write-off of unamortized deferred financing fees associated with theold senior credit facility, which was amended and restated in 2002.  The Company recorded an extraordinary losson the early extinguishment of debt of $1,207,000 in 2001.

 

Upon adoption ofStatement 142 as of January 1, 2002, the Company recorded a one-time, non-cashcharge of $150,479,000, net of a tax benefit of $58,351,000, to reduce thecarrying value of its goodwill and other indefinite-lived intangibleassets.  The decline in the carryingvalue of goodwill and other indefinite-lived intangible assets relates solelyto the Company’s WB affiliates.  Suchcharge is non-operational in nature and is reflected as a cumulative effect ofan accounting change in the accompanying consolidated statement of operations.  The Company completed its annual impairmenttest as of December 31, 2002 as required by Statement 142.  The Company performed detailed fair valuedeterminations and concluded that no additional write down of the carryingvalue of goodwill and other indefinite-lived intangible assets is required.

 

*Years endedDecember 31, 2001 and 2000*

 

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

 

Station operatingexpenses totaled $116,374,000, an increase of $11,978,000 or 11% compared to$104,396,000 for the twelve months ended December 31, 2000.  The increase was primarily due to anincrease in news expense at KNTV of $2,572,000, increased programming costs of$2,579,000 at the Company’s WB affiliates, and the write-down of certainsyndicated programs totaling $8,522,000.

 

Corporate expense totaled$9,687,000; a decrease of $705,000 or 7% compared to $10,392,000 for the twelvemonths ended December 31, 2000. The decrease was primarily due to a decrease inprofessional fees.  Non-cashcompensation expense totaled $1,473,000, a decrease of $501,000 or 25% comparedto $1,974,000 for the twelve months ended December 31, 2000.  The decrease was primarily due to a one-timecharge to earnings taken in 2000 resulting from the rescission of the exerciseof certain stock options exercised offset in part by increased stock awardsgranted to certain executives.

 

Interest expense totaled$47,482,000; an increase of $17,828,000 or 60% compared to $29,654,000 for thetwelve months ended December 31, 2000. The increase was primarily due to higher levels of outstandingindebtedness and a higher interest rate on the Company’s current Credit Agreement.  Included in interest expense for 2001 isapproximately $4,671,000 of deferred interest on the Credit Agreement payableon December 31, 2003.  Interest incometotaled $1,559,000; an increase of $881,000 or 130% compared to the twelvemonths ended December 31, 2000 primarily due to higher cash balances, partiallyoffset by lower interest rates. Non-cash interest expense totaled $7,951,000; an increase of $4,943,000or 164% primarily due to increased deferred financing fees related to thecurrent Credit Agreement.

 

The Company sustained severedamage to certain assets in Duluth, Minnesota as a result of a fire in 1997 andan ice storm in 1999.  The Company wroteoff the book balances of the destroyed assets and received insurance

 

26

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proceeds for replacement assets in 1999 and 2000resulting in a gain of $1,247,000 for the twelve months ended December 31,2000.

 

The Company recorded a benefit for income taxes of$26,745,000 in 2001, consisting of a current tax provision of $214,000 and adeferred tax benefit of $26,959,000.

 

During 2001, the Companyrecognized an extraordinary loss net of tax of $1,207,000 related to therepayment of all outstanding borrowings under the then existing bank creditagreement and the write-off of related deferred financing fees.

 

*Liquidity and Capital Resources*

 

On April 30, 2002, the Company completed the sale ofKNTV to NBC.  NBC paid the Company$230,000,000, plus working capital and other adjustments of $14,545,000.  In addition, NBC refunded the Company$20,473,000 of the January 1, 2002 affiliation payment due to NBC under theterms of the KNTV NBC affiliation agreement (“San Francisco AffiliationAgreement”), which the Company prepaid on March 6, 2001.  The Company repaid $170,000,000 ofoutstanding senior debt and $14,763,000 of deferred interest and other feesassociated with the senior credit facility and the amended credit agreementdiscussed below upon consummation of the sale. The Company paid $26,759,000 inincome taxes during 2002, mainly related to the sale of KNTV. The San FranciscoAffiliation Agreement terminated upon the closing of the sale and the Companyis 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 NBC affiliationagreements for KSEE-TV, WEEK-TV, and KBJR-TV involve no payment obligations toNBC and have a contractual term through December 31, 2011.  The Company recorded a pre-tax book gain of$192,406,000 on the sale.

 

Simultaneously with the closing of the sale of KNTV,the Company entered into an amended and restated senior credit agreement (the“Credit Agreement”).  The CreditAgreement consists of (i) a committed $60,000,000 Tranche A term loan facility,(ii) a committed $80,000,000 Tranche B term loan facility, and (iii) anuncommitted $10,000,000 Tranche C supplemental term loan facility.  The obligations of the Company with respectto all of the loan facilities are secured by substantially all of the assets ofthe Company and its subsidiaries. The Company rolled over existing outstandingloans under the prior loan facility into an initial Tranche A borrowing in theamount of $35,000,000.  Under theTranche A term loan facility, $25,000,000 of borrowing capacity remains.  The Company also borrowed the entire$80,000,000 Tranche B term loan facility during the year.  The terms of the Tranche C term loan havenot been fully negotiated and borrowing of the Tranche C loans will requiresupplemental action by the Board of Directors of the Company.  Proceeds from Tranche A and Tranche B termloans can be used for working capital and general corporate purposes.  The Tranche A loans bear interest at thegreater of 6.50% or LIBOR plus 4.50% and the Tranche B loans bear interest atthe greater of 11% or LIBOR plus 9%. All interest is payable monthly in arrears.  The Credit

 

27

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Agreement matures on April 15, 2004, at which time the Company mustrepay the principal amount of all outstanding loans and all other obligationsthen due and owing under the Credit Agreement. The Credit Agreement requires the Company, among other matters, tomaintain compliance with certain financial tests, including but not limited to,minimum net revenue, broadcast cash flow, EBITDA, working capital and cashbalances.  The Company is in compliancewith all covenants under the Credit Agreement.

 

The Company repurchased and retired a total of 83,920shares of the 12.75% Cumulative Exchangeable Preferred Stock (the “PreferredStock”) for $53,264,000.  The PreferredStock was repurchased at an average price of $634.70 per share generating again, after transaction related expenses and the write off of a portion of theinitial offering costs, of $30,299,000. The gain was recorded in additional paid in capital. Under the terms ofthe Certificate of Designations for the Company’s Preferred Stock, the Companywas required to make the semi-annual dividends on such shares in cash beginningOctober 1, 2002.  The cash payment ofdividends is restricted by the terms of the indentures governing the Company’ssenior subordinated bonds and is prohibited under the terms of the CreditAgreement. Consequently the Company did not pay the semi-annual dividend due tothe holders of the Preferred Stock on October 1, 2002.  If three or more semi-annual dividendpayments (whether or not consecutive) are not paid, the holders of thePreferred Stock will have the right to elect the lesser of two directors orthat number of directors constituting 25% of the members of the Board ofDirectors.  The right of the holders ofthe Preferred Stock to elect members of the Board of Directors as set forthabove would continue until such time as all accumulated dividends that arerequired to be paid in cash and that are in arrears on the Preferred Stock arepaid in full in cash. The Company does not anticipate paying cash dividends onits exchangeable preferred stock in the foreseeable future.

 

Net cash used in operating activities was $73,410,000during the year ended December 31, 2002 compared to $56,950,000 during the yearended December 31, 2001.  The changefrom 2001 to 2002 was primarily the result of an increase in cash tax payments,and an increase in net operating assets partially offset by an increase inoperating cash flow.

 

Net cash provided by investing activities was$250,900,000 during the year ended December 31, 2002 compared to net cash usedin investing activities of $3,232,000 during the year ended December 31,2001.  The change from 2001 to 2002 wasprimarily the result of the sale of KNTV.

 

Net cash used in financing activities was $152,598,000during the year ended December 31, 2002 compared to net cash provided byfinancing activities of $80,400,000 during the year ended December 31,2001.  The change from 2001 to 2002primarily resulted from a net decrease in senior debt, and repurchases ofcumulative exchangeable preferred stock and common stock offset in part byincreased capital expenditures.

* *

*Capital and Commercial Commitments*

 

The following table and discussion reflect theCompany’s significant contractual obligations and other commercial commitmentsas of December 31, 2002:
|                                |   | **Payment  Due by Period** |        |
|-------------------------------------|--------|----------------------------|-------------|
| **Capital Commitment**              |   | **Total**                  |        | **1 Year** |   | **2-3 years** |   | **4-5 years** |   | **After5 years** |   |
|                                |   |                       |        |   |   |   |   |   |   |   |   |
| Principal  amount of Long-term debt |   | $                          | 312,942,000 |   | $ | — |   | $ | 250,377,000 |   | $ | — |   | $ | 62,565,000 |   |
| Operating  leases                   |   | 5,231,498                  |        | 1,244,617 |   | 2,047,385 |   | 1,858,496 |   | 81,000 |   |
| Program  contracts                  |   | 104,475,564                |        | 30,147,004 |   | 43,187,808 |   | 20,096,791 |   | 11,043,961 |   |
| WB  Affiliation                     |   | 10,389,449                 |        | 2,523,428 |   | 4,025,946 |   | 3,413,400 |   | 426,675 |   |
| Interest                            |   | 81,190,307                 |        | 30,326,408 |   | 36,982,289 |   | 11,105,288 |   | 2,776,322 |   |
|                                     |        |                            |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company expects to spend approximately $15,000,000in 2003 on capital expenditures, of which a total of approximately $7,000,000is associated with the implementation of digital technology pursuant to theFCC’s relaxed digital television build-out rules.  The Company believes that borrowings under the current CreditAgreement together with internally generated funds from operations, and cash onhand will be sufficient to satisfy the

 

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Company’s cash requirements for its existing operations for the nexttwelve months.  The Company’s seniordebt matures on April 15, 2004.  TheCompany expects to refinance its senior debt on or before its maturity with anew senior credit facility.

 

*Recent Accounting Pronouncements*

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement142”), effective January 1, 2002.  Underthe new rules, goodwill and other indefinite-lived intangible assets deemed tohave indefinite lives will no longer be amortized but will be subject to annualimpairment tests in accordance with Statement 142.

 

Under Statement 142,goodwill and other indefinite-lived intangible assets are deemed to be impairedif their net book value exceeds their estimated fair value.  Upon adoption of Statement 142 as of January1, 2002, the Company recorded a one-time, non-cash charge to reduce thecarrying value of its goodwill and other indefinite lived intangible assets by$95,000,000 and $114,000,000, respectively. The decline in the carrying value of goodwill and other indefinite-livedintangible assets relates solely to the Company’s WB affiliates.  Such charge is non-operational in nature andis reflected as a cumulative effect of an accounting change in the accompanyingconsolidated statement of operations. In calculating the impairment charge, the fair value was estimated usinga discounted cash flow methodology.

 

In June 2001, the FASBissued Statement of Financial Accounting Standards No. 143, Accounting forAsset Retirement Obligations (“Statement 143”), effective for fiscal yearsbeginning after June 15, 2002. This standard provides the accounting for thecost of legal obligations associated with the retirement of long-lived assets.Statement 143 requires that companies recognize the fair value of a liabilityfor asset retirement obligations in the period in which the obligations areincurred and capitalize that amount as a part of the book value of the long-livedasset. That cost is then depreciated over the remaining life of the underlyinglong-lived asset. The Company is currently evaluating the impact that this newstandard will have on future results of operations and financial position.

 

In August 2001, the FASBissued Statement No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets (“Statement 144”). Statement 144 addresses financialaccounting and reporting for the impairment or disposal of long-lived assetsand supercedes FASB Statement No. 121, Accounting for the Impairment ofLong-Lived Assets and for Long- Lived Assets to be Disposed Of, and theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, Reporting the Results of Operation for a disposal of a segment of abusiness. The Company adopted statement 144 on January 1, 2002 and its adoptiondid not have a significant impact on its financial position, results ofoperations, or cash flows.

 

On April 30, 2002, theFASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections (“Statement145”). Statement 145 updates, clarifies and simplifies existing accountingpronouncements.  Statement 145 rescindsStatement 4, which required all gains and losses from extinguishments of debtto be aggregated and, if material, classified as an extraordinary item, net ofrelated income tax effect. Statement 145 is effective for fiscal yearsbeginning after June 15, 2002. The Company will adopt Statement 145 for theyear ended December 31, 2003.  All priorextraordinary items relating to the extinguishments of debt will beretroactively adjusted and reclassified to income from continuing operations.  Income from continuing operations will be reducedby $15,097,000 and $2,012,000 for the years ended December 31 2002 and 2001,respectively.

 

In June 2002, the FASB issued Statement of FinancialAccounting Standards No. 146, Accounting for Costs Associated with Exit orDisposal Activities (“Statement 146”). Statement 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Issues TaskForce (“EITF”) issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring).” The provisions of Statement 146 are effective for exit or disposalactivities that are initiated after December 31, 2002, with early applicationencouraged.  The Company does notbelieve the adoption of Statement 146 will have a significant impact on itsfinancial position, results of operations, or cash flows.

 

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In December 2002, FASBissued Statement of Financial Accounting Standards No. 148, Accounting forStock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123 (“Statement 148”). Statement 148 amends Statement ofFinancial Accounting Standards No. 123, Accounting for Stock-Based Compensation(“Statement 123”) to provide alternative methods of transition for a voluntarychange to the fair value-based method of accounting for stock-based employeecompensation. In addition, Statement 148 amends the disclosure requirements ofStatement. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Statement148 is effective for fiscal years ending after December 15, 2002 for annualstatements and for interim periods ending after December 15, 2002 for interimfinancial reports.  The Company willcontinue to account for stock-based compensation in accordance with theAccounting Principles Board No. 25.  TheCompany has adopted the disclosure requirements of Statement 148 in theseconsolidated financial statements.

 

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

 

The Company’s earningsmay be affected by changes in short-term interest rates as a result of its newsenior Credit Agreement.  Under theCredit Agreement, Tranche A loans bearinterest at the greater of LIBOR plus 4.50% or 6.50%, currently 6.50%, and theTranche B loans bear interest at the greater of LIBOR plus 9% or 11%, currently11%.  As of March 21, 2003, thesix-month LIBOR rate was 1.28%.  TheCompany has not entered into any agreements to hedge the risk of potentialinterest rate increases.  Based onborrowings outstanding at December 31, 2002, a 2% increase in the LIBOR ratewould increase interest expense on an annual basis by approximately$1,472,000.  This analysis does notconsider the effects of the reduced level of overall economic activity thatcould exist in such environment.

 

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

 

Index to Consolidated Financial Statements

 
|                                                                                                                  | Page |
|-----------------------------------------------------------------------------------------------------------------------|------|
| Report of Independent Auditors                                                                                        | 31   |
| Consolidated  Statements of Operations for the years ended December 31, 2000, 2001 and 2002                           | 32   |
| Consolidated Balance Sheet  as of December 31, 2001 and 2002                                                          | 33   |
| Consolidated  Statements of Stockholder’s Equity (Deficit) for the years ended December 31,  2000, 2001 and 2002 | 34   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002                           | 35   |
| Notes to the  Consolidated Financial Statements                                                                       | 36   |
| Schedule II – Valuation and Qualifying  Accounts                                                                 | 52   |

 

 

**Report of Independent Auditors**

 

The Board of Directors andStockholdersGranite Broadcasting Corporation

 

We have audited the accompanying consolidated balancesheets of Granite Broadcasting Corporation as of December 31, 2002 and 2001 andthe related consolidated statements of operations, stockholders’ equity(deficit) and cash flows for each of the three years in the period endedDecember 31, 2002. Our audits also included the financial statement schedulelisted in the Index at Item 15(a). These financial statements and the schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these financial statements and theschedule based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Granite Broadcasting Corporation at December31, 2002 and 2001, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2002, in conformitywith accounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

As discussed in Note 2 to theconsolidated financial statements, on January 1, 2002 Granite BroadcastingCorporation adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets.

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

 

NewYork, New York

February 24, 2003

 

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                                                                                                                  |   | **For the Years Ended December 31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                                                                                                  |   | **2000**                             |        | **2001** |   | **2002** |   |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Net revenue                                                                                                                                                           |   | $                                    | 140,070,247 |   | $ | 113,075,276 |   | $ | 135,344,151 |   |
| Station operating expenses                                                                                                                                            |   | 104,396,408                          |        | 116,373,938 |   | 103,963,240 |   |
| Depreciation                                                                                                                                                          |   | 5,724,629                            |        | 6,076,212 |   | 5,896,626 |   |
| Amortization of intangible  assets                                                                                                                                    |   | 26,864,596                           |        | 26,735,547 |   | 18,985,413 |   |
| Corporate expense                                                                                                                                                     |   | 10,392,365                           |        | 9,686,952 |   | 9,536,424 |   |
| Non-cash compensation expense(1)                                                                                                                                      |   | 1,974,292                            |        | 1,472,735 |   | 1,508,048 |   |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Operating loss                                                                                                                                                        |   | (9,282,043                           | )           | (47,270,108 | ) | (4,545,600 | ) |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Other expenses (income):                                                                                                                                              |   |                                 |        |   |   |   |   |
| Interest expense                                                                                                                                                      |   | 29,653,779                           |        | 47,481,899 |   | 34,889,378 |   |
| Interest income                                                                                                                                                       |   | (678,375                             | )           | (1,559,321 | ) | (1,077,327 | ) |
| Non-cash interest expense                                                                                                                                             |   | 3,007,570                            |        | 7,951,079 |   | 13,030,566 |   |
| Gain on sale of assets                                                                                                                                                |   | —                               |        | — |   | (192,406,138 | ) |
| Gain from insurance claim                                                                                                                                             |   | (1,247,105                           | )           | — |   | — |   |
| Other                                                                                                                                                                 |   | 2,079,328                            |        | 1,141,058 |   | 868,724 |   |
| Income (loss) before income  taxes, extraordinary item, and cumulative effect of a change in accounting  principle                                                    |   | (42,097,240                          | )           | (102,284,823 | ) | 140,149,197 |   |
| Provision (benefit) for income  taxes:                                                                                                                                |   |                                 |        |   |   |   |   |
| Current                                                                                                                                                               |   | (15,815,000                          | )           | 214,000 |   | 24,981,234 |   |
| Deferred                                                                                                                                                              |   | 4,937,089                            |        | (26,959,010 | ) | 35,262,153 |   |
| Total provision (benefit) for  income taxes                                                                                                                           |   | (10,877,911                          | )           | (26,745,010 | ) | 60,243,387 |   |
| Income (loss) from continuing  operations before extraordinary item and cumulative effect of a change in  accounting principle                                        |   | (31,219,329                          | )           | (75,539,813 | ) | 79,905,810 |   |
| Extraordinary (gain) loss, net of tax expense of  $2,473,470 and tax benefit of $804,720 in 2000 and 2001, respectively and net of tax benefit of $6,038,656  in 2002 |   | (3,710,204                           | )           | 1,207,081 |   | 9,057,985  |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit of $58,350,946                                                                             |   | —                               |        | — |   | 150,478,583 |   |
| Net loss                                                                                                                                                              |   | $                                    | (27,509,125 | ) | $ | (76,746,894 | ) | $ | (79,630,758 | ) |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Net loss attributable to common  shareholders                                                                                                                         |   | $                                    | (56,345,128 | ) | $ | (109,310,870 | ) | $ | (78,807,937 | ) |
| Per basic common share:                                                                                                                                               |   |                                 |        |   |   |   |   |
| Income (loss) from continuing  operations beforeextraordinary  item and cumulative effect of a change in accounting principle                                         |   | $                                    | (3.30       | ) | $ | (5.82 | ) | $ | 4.31 |   |
| Extraordinary (gain) loss, net of tax benefit                                                                                                                         |   | (0.20                                | )           | 0.07 |   | 0.48 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                                                                                            |   | —                               |        | — |   | 8.03 |   |
| Basic net loss per share                                                                                                                                              |   | $                                    | (3.10       | ) | $ | (5.89 | ) | $ | (4.20 | ) |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Weighted average common shares  outstanding                                                                                                                           |   | 18,203,498                           |        | 18,568,811 |   | 18,749,363 |   |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Per fully diluted common share:                                                                                                                                       |   |                                 |        |   |   |   |   |
| Income (loss) from continuing  operations beforeextraordinary  item and cumulative effect of a change in accounting principle                                         |   | $                                    | (3.30       | ) | $ | (5.82 | ) | $ | 4.23 |   |
| Extraordinary (gain) loss, net of tax benefit                                                                                                                         |   | (0.20                                | )           | 0.07 |   | 0.48 |   |
| Cumulative effect of a change in accounting  principle, net of tax benefit                                                                                            |   | —                               |        | — |   | 7.88 |   |
| Fully diluted net  loss per share                                                                                                                                     |   | $                                    | (3.10       | ) | $ | (5.89 | ) | $ | (4.13 | ) |
|                                                                                                                                                                  |   |                                 |        |   |   |   |   |
| Weighted average common shares  outstanding –assuming dilution                                                                                                   |   | 18,203,498                           |        | 18,568,811 |   | 19,098,326 |   |

 

----

(1)   Allocation of non-cash compensation expense to other operatingexpenses:

 
|                          |   | **For the Years Ended December 31,** |      |
|-------------------------------|--------|--------------------------------------|-----------|
|                          |   | **2000**                             |      | **2001** |   | **2002** |   |
| Station operating expenses    |   | $                                    | 407,796   |   | $ | 409,863 |   | $ | 295,652 |   |
| Corporate expense             |   | 1,566,496                            |      | 1,062,872 |   | 1,212,396 |   |
| Non-cash compensation expense |   | $                                    | 1,974,292 |   | $ | 1,472,735 |   | $ | 1,508,048 |   |

 

See Accompanying Notes

 

32

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATEDBALANCE SHEET**

 
|                                                                                                                                                                                                                                                                                                                                                      |   | **December 31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                      |   | **2001**         |        | **2002** |   |
| Assets                                                                                                                                                                                                                                                                                                                                                    |   |             |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                           |   |             |        |   |   |
| Cash and cash equivalents  (including $9,286,326 and $1,777,115 of restricted cash at December 31, 2001  and December 31, 2002, respectively)                                                                                                                                                                                                             |   | $                | 29,426,856  |   | $ | 54,319,597 |   |
| Accounts receivable, less  allowance for doubtful accounts ($530,273 in 2001 and $747,520 in 2002)                                                                                                                                                                                                                                                        |   | 22,411,572       |        | 23,211,637 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                      |   | 16,077,027       |        | 19,713,849 |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                      |   | 6,131,223        |        | 10,116,047 |   |
| Net assets held for sale                                                                                                                                                                                                                                                                                                                                  |   | 33,201,988       |        | — |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                      |   | 107,248,666      |        | 107,361,130 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                               |   | 33,611,468       |        | 41,813,349 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                      |   | 8,377,243        |        | 12,918,123 |   |
| Other non current assets                                                                                                                                                                                                                                                                                                                                  |   | 43,497,269       |        | 3,461,975 |   |
| Deferred financing fees, less  accumulated amortization ($9,656,214 in 2001 and $7,612,443 in 2002)                                                                                                                                                                                                                                                       |   | 14,887,940       |        | 5,630,704 |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                             |   | 178,359,500      |        | 83,051,302 |   |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                   |   | 240,853,200      |        | 127,331,829 |   |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                 |   | 95,011,966       |        | 90,345,315 |   |
| Other intangibles, net                                                                                                                                                                                                                                                                                                                                    |   | 9,250,000        |        | 3,250,000 |   |
| Total Assets                                                                                                                                                                                                                                                                                                                                              |   | $                | 731,097,252 |   | $ | 475,163,727 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Liabilities and stockholders’  deficit                                                                                                                                                                                                                                                                                                               |   |             |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                          |   | $                | 1,704,626   |   | $ | 2,807,730 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                          |   | 4,255,195        |        | 3,158,876 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                 |   | 2,943,466        |        | 6,941,220 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                              |   | 25,133,014       |        | 26,601,355 |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                 |   | 5,808,314        |        | 3,581,243 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                 |   | 39,844,615       |        | 43,090,424 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                            |   | 401,206,439      |        | 312,791,038 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                              |   | 22,859,716       |        | 33,379,694 |   |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                    |   | 68,868,284       |        | 45,779,491 |   |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                             |   |  24,353,351 |        |  30,356,259 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                |   | 272,108,759      |        | 198,125,314 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                               |   |             |        |   |   |
| Common stock: 41,000,000  shares authorized consisting of 1,000,000 shares of Class A Common Stock,  $.01 par value, and 40,000,000 shares of Common Stock  (Nonvoting), $.01 par value; 178,500  shares of Class A Common Stock and  18,581,510 shares of Common Stock (Nonvoting) (18,447,927 shares at December  31, 2001) issued and outstanding |   | 186,264          |        | 187,600 |   |
|                                                                                                                                                                                                                                                                                                                                                      |   |             |        |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                       |   | (96,703,997      | )           | (186,842,835 | ) |
| Less:                                                                                                                                                                                                                                                                                                                                                     |   |             |        |   |   |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                     |   | (1,329,179       | )           | (851,334 | ) |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                   |   | (297,000         | )           | (851,924 | ) |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                          |   | (98,143,912      | )           | (188,358,493 | ) |
| Total liabilities and  stockholders' deficit                                                                                                                                                                                                                                                                                                              |   | $                | 731,097,252 |   | $ | 475,163,727 |   |

 

See accompanying notes.

 

33

----

 

**GRANITE BROADCASTING CORPORATION**

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

 

For the Years Ended December 31, 2000, 2001 and2002

 
|                                                                            |   | **Class A  Common Stock** |   | **Common  Stock (Nonvoting)** |   | **Additional  Paid-in Capital** |    | **(Accumulated Deficit)  Retained Earnings** |       | **Unearned  Compensation** |   | **Note  Receivable  From Officer** |   | **Treasury  Stock** |       | **Total  Stockholders’  Equity (Deficit)** |    |
|---------------------------------------------------------------------------------|--------|---------------------------|--------|-------------------------------|--------|---------------------------------|---------|----------------------------------------------|------------|----------------------------|--------|------------------------------------|--------|---------------------|------------|-------------------------------------------------|---------|
|                                                                            |   |                      |   |                          |   |                            |    |                                         |       |                       |   |                               |   |                |       |                                            |    |
| Balance  as of December 31, 1999                                                |   | $                         | 1,785  |                          | $      | 179,640                         |    | $                                            | 17,909,802 |                       | $      | 35,123,239                         |   | $                   | (1,946,434 | )                                               | $       | (886,875 | ) | $ | (297,000 | ) | $ | 50,084,157 |   |
|                                                                            |   |                      |   |                          |   |                            |    |                                         |       |                       |   |                               |   |                |       |                                            |    |
| Dividends  on redeemable preferred stock                                        |   |                      |   |                          |   | (28,335,855                     | )       |                                         |       |                       |   |                               |   |                |       | (28,335,855                                     | )       |
| Accretion  of offering costs related to Cumulative Exchangeable Preferred Stock |   |                      |   |                          |   | (500,148                        | )       |                                         |       |                       |   |                               |   |                |       | (500,148                                        | )       |
| Exercise  of stock options                                                      |   |                      |   | 15                            |   | (971,464                        | )       |                                         |       |                       |   |                               |   |                |       | (971,449                                        | )       |
| Issuance  of Common Stock (Nonvoting)                                           |   |                      |   | 653                           |   | (653                            | )       |                                         |       |                       |   |                               |   |                |       | —                                          |    |
| Rescission  of stock options exercised                                          |   |                      |   |                          |   | 2,172,852                       |    |                                         |       |                       |   |                               |   |                |       | 2,172,852                                       |    |
| Issuance  of warrants                                                           |   |                      |   |                          |   | 12,149,840                      |    |                                         |       |                       |   |                               |   |                |       | 12,149,840                                      |    |
| Stock  expense related to stock plans                                           |   |                      |   |                          |   | (129,238                        | )  |                                         |       | 854,781                    |   |                               |   |                |       | 725,543                                         |    |
| Net  loss                                                                       |   |                      |   |                          |   |                            |    | (27,509,125                                  | )     |                       |   |                               |   |                |       | (27,509,125                                     | )  |
| Balance  at December 31, 2000                                                   |   | 1,785                     |   | 180,308                       |   | 2,295,136                       |    | 7,614,114                                    |       | (1,091,653                 | )      | (886,875                           | )      | (297,000            | )          | 7,815,815                                       |    |
| Dividends  on redeemable preferred stock                                        |   |                      |   |                          |   | (4,492,611                      | )       | (27,571,217                                  | )          |                       |   |                               |   |                |       | (32,063,828                                     | )       |
| Accretion  of offering costs related to Cumulative Exchangeable Preferred Stock |   |                      |   |                          |   | (500,148                        | )       |                                         |       |                       |   |                               |   |                |       | (500,148                                        | )       |
| Grant  of stock award under stock plans                                         |   |                      |   |                          |   | 573,045                         |    |                                         |       | (573,045                   | )      |                               |   |                |       | —                                          |    |
| Issuance  of Common Stock (Nonvoting)                                           |   |                      |   | 4,171                         |   | (4,171                          | )       |                                         |       |                       |   |                               |   |                |       | —                                          |    |
| Stock  expense related to stock plans                                           |   |                      |   |                          |   | 63,990                          |    |                                         |       | 1,141,713                  |   |                               |   |                |       | 1,205,703                                       |    |
| Issuance  of warrants                                                           |   |                      |   |                          |   | 2,064,759                       |    |                                         |       |                       |   |                               |   |                |       | 2,064,759                                       |    |
| Discount  on loans to officers                                                  |   |                      |   |                          |   |                            |    |                                         |       | (806,194                   | )      |                               |   |                |       | (806,194                                        | )       |
| Repayment  of Note Receivable from Officer                                      |   |                      |   |                          |   |                            |    |                                         |       |                       |   | 886,875                            |   |                |       | 886,875                                         |    |
| Net  loss                                                                       |   |                      |   |                          |   |                            |    | (76,746,894                                  | )          |                       |   |                               |   |                |       | (76,746,894                                     | )       |
| Balance  at December 31, 2001                                                   |   | 1,785                     |   | 184,479                       |   | —                          |    | (96,703,997                                  | )          | (1,329,179                 | )      | —                             |   | (297,000            | )          | (98,143,912                                     | )       |
|                                                                            |   |                      |   |                          |   |                            |    |                                         |       |                       |   |                               |   |                |       |                                            |    |
| 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                                                     |   |                      |   |                          |   |                            |    |                                         |       |                       |   |                               |   | (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                                                                       |   |                      |   |                          |   |                            |    | (79,630,758                                  | )          |                       |   |                               |   |                |       | (79,630,758                                     | )       |
| Balance  at December 31, 2002                                                   |   | $                         | 1,785  |                          | $      | 185,815                         |    | $                                            | —     |                       | $      | (186,842,835                       | )      | $                   | (851,334   | )                                               | $       | — |   | $ | (851,924 | ) | $ | (188,358,493 | ) |
|                                                                                 |        |                           |        |                               |        |                                 |         |                                              |            |                            |        |                                    |        |                     |            |                                                 |         |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes.

 

34

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                   |   | **For the Years Ended December 31,** |        |
|------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                   |   | **2000**                             |        | **2001** |   | **2002** |   |
| Cash flows from operating  activities:                                 |   |                                 |        |   |   |   |   |
| Net loss                                                               |   | $                                    | (27,509,125 | ) | $ | (76,746,894 | ) | $ | (79,630,758 | ) |
|                                                                   |   |                                 |        |   |   |   |   |
| Adjustments to reconcile net  loss to net cash                         |   |                                 |        |   |   |   |   |
| used in operating activities:                                          |   |                                 |        |   |   |   |   |
| Extraordinary (gain) loss                                              |   | (6,183,674                           | )           | 2,011,801 |   | 15,096,641 |   |
| Amortization of intangible  assets                                     |   | 26,864,596                           |        | 26,735,547 |   | 18,985,413 |   |
| Depreciation                                                           |   | 5,724,629                            |        | 6,076,212 |   | 5,896,626 |   |
| Non-cash compensation expense                                          |   | 1,974,292                            |        | 1,472,735 |   | 1,508,048 |   |
| Non-cash interest expense                                              |   | 3,007,570                            |        | 7,951,079 |   | 13,030,566 |   |
| Deferred tax (benefit) expense                                         |   | 4,937,000                            |        | (26,959,263 | ) | (23,088,793 | ) |
| Gain on sale of assets                                                 |   | —                               |        | — |   | (192,406,138 | ) |
| Cumulative effect of a change  in accounting principle                 |   | —                               |        | — |   | 208,829,529 |   |
| Gain from insurance proceeds  over net book value lost                 |   | (1,247,105                           | )           | — |   | — |   |
| Change in assets and  liabilities net of effects from sale of station: |   |                                 |        |   |   |   |   |
| Decrease (increase) in accounts  receivable                            |   | 4,243,724                            |        | 4,335,909 |   | (34,970,057 | ) |
| (Decrease) increase in accrued  liabilities                            |   | (2,838,517                           | )           | 2,773,245 |   | 1,941,543 |   |
| Increase (decrease) in accounts  payable                               |   | 623,904                              |        | (1,835,829 | ) | 1,131,254 |   |
| NBC affiliation prepayment                                             |   | —                               |        | (27,778,694 | ) | — |   |
| WB affiliation payment                                                 |   | (4,774,439                           | )           | (4,523,428 | ) | (4,523,428 | ) |
| (Increase) decrease in film  contract rights and other assets          |   | (19,175,687                          | )           | 11,644,324 |   | (11,027,700 | ) |
| Increase in film contract  rights payable and other liabilities        |   | 10,769,183                           |        | 17,892,764 |   | 5,817,686 |   |
| Net cash used in operating  activities                                 |   | (3,583,649                           | )           | (56,950,492 | ) | (73,409,568 | ) |
|                                                                   |   |                                 |        |   |   |   |   |
| Cash flows from investing  activities:                                 |   |                                 |        |   |   |   |   |
| Proceeds from sale of station                                          |   | —                               |        | — |   | 265,018,849 |   |
| Insurance proceeds received                                            |   | 1,627,572                            |        | — |   | — |   |
| Investment                                                             |   | (252,869                             | )           | — |   | — |   |
| Capital expenditures                                                   |   | (9,084,673                           | )           | (3,231,733 | ) | (14,118,797 | ) |
| Net cash (used in) provided by  investing activities                   |   | (7,709,970                           | )           | (3,231,733 | ) | 250,900,052 |   |
|                                                                   |   |                                 |        |   |   |   |   |
| Cash flows from financing  activities:                                 |   |                                 |        |   |   |   |   |
| Proceeds from bank loan                                                |   | 107,000,000                          |        | 205,000,000 |   | 80,000,000 |   |
| Retirement of senior  subordinated notes                               |   | (81,019,763                          | )           | — |   | — |   |
| Repayment of bank debt                                                 |   | (10,327,572                          | )           | (113,672,428 | ) | (170,000,000 | ) |
| Payment of deferred financing  fees                                    |   | (600,258                             | )           | (10,927,740 | ) | (8,778,814 | ) |
| Repurchase of cumulative  exchangeable preferred stock                 |   | —                               |        | — |   | (53,264,005 | ) |
| Repurchase of common stock                                             |   | —                               |        | — |   | (554,924 | ) |
| Other financing activities, net                                        |   | (3,081                               | )           | — |   | — |   |
| Net cash provided by (used in)  financing activities                   |   | 15,049,326                           |        | 80,399,832 |   | (152,597,743 | ) |
|                                                                   |   |                                 |        |   |   |   |   |
| Net increase in cash and cash  equivalents                             |   | 3,755,707                            |        | 20,217,607 |   | 24,892,741 |   |
| Cash and cash equivalents,  beginning of year                          |   | 5,453,542                            |        | 9,209,249 |   | 29,426,856 |   |
| Cash and cash equivalents, end  of year                                |   | $                                    | 9,209,249   |   | $ | 29,426,856 |   | $ | 54,319,597 |   |
|                                                                   |   |                                 |        |   |   |   |   |
| Supplemental information:                                              |   |                                 |        |   |   |   |   |
| Restricted cash                                                        |   | $                                    | —      |   | $ | 9,286,326 |   | $ | 1,777,115 |   |
| Cash paid for interest                                                 |   | 30,110,599                           |        | 41,386,874 |   | 40,634,741 |   |
| Cash paid for income taxes                                             |   | 297,032                              |        | 443,604 |   | 26,759,484 |   |
| Non-cash capital expenditures                                          |   | 175,896                              |        | 513,640 |   | 600,455 |   |
| Cumulative exchangeable  preferred stock dividend                      |   | 28,335,855                           |        | 32,063,828 |   | 27,679,733 |   |
| Fair value of warrants issued                                          |   | 12,150,000                           |        | 2,065,000 |   | — |   |
| Cancellation of warrants                                               |   | —                               |        | — |   | 12,150,000 |   |

 

See accompanying notes.

 

35

----

 

**GRANITE BROADCASTING CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 –Operations of the Company**

 

The business operations of Granite BroadcastingCorporation and its wholly owned subsidiaries (the “Company”) consist of eightnetwork affiliated television stations (three with NBC, two with ABC, two withthe WB Network and one with CBS).  TheCompany’s stations are located in New York, California, Michigan, Indiana,Illinois and Minnesota.

 

**Note 2 – Summaryof Significant Accounting Policies**

 

*Financial statement presentation*

 

The consolidated financial statements include theaccounts of Granite Broadcasting Corporation and its wholly ownedsubsidiaries.  All significantinter-company accounts and transactions have been eliminated.

 

*Revenue recognition*

 

The Company’s primary source ofrevenue is the sale of television time to advertisers. Revenue is recorded whenthe advertisements are aired.  Othersources of revenue are compensation from the networks, studio rental andcommercial production activities.  Theserevenues are recorded when the programs are aired and the services areperformed.

 

*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 defaults have been predictable and the allowance fordoubtful accounts has been adequate to cover such defaults.

 

* *

*Intangibles*

 

Intangible assets at December 31 are summarized asfollows:

 
|                     |   | **2001**     |        | **2002**     |   |
|--------------------------|--------|--------------|-------------|--------------|--------|
|                     |   |         |        |         |   |
| Goodwill                 |   | $            | 206,560,570 |         | $      | 111,252,372 |   |
| Covenant not to compete  |   | 30,000,000   |        | 30,000,000   |   |
| Network affiliations     |   | 128,741,614  |        | 127,622,741  |   |
| Broadcast licenses       |   | 273,168,965  |        | 159,647,594  |   |
|                     |   | 638,471,149  |        | 428,522,707  |   |
| Accumulated amortization |   | (114,996,483 | )           | (124,544,261 | )      |
|                     |   |         |        |         |   |
| Net intangible assets    |   | $            | 523,474,666 |         | $      | 303,978,446 |   |

 

The Company adopted Statement of Financial AccountingStandards No. 142, Goodwill and Other Intangible Assets ("Statement 142")on January 1, 2002.  Upon adoption ofStatement 142, the Company recorded a one-time non-cash charge to reduce thecarrying value of goodwill and other indefinite lived intangible assets by$95,000,000 and $114,000,000, respectively during 2002.  The decline in the carrying value ofgoodwill and other-indefinite lived intangible assets relates solely to theCompany’s Warner Brothers affiliates. Such charge is non-operational in natureand is reflected as a cumulative effect of a change in accounting principle inthe statement of operations.  Incalculating the impairment charge, the fair value was estimated using adiscounted cash flow methodology.  TheCompany completed its required annual impairment test as of December 31, 2002,and concluded that no additional write down to the carrying value of goodwilland other indefinite-lived intangible assets is required.

 

36

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As of December 31, 2001and 2002, the Company’s intangible assets and related accumulated amortizationconsisted of the following:

 
|                                            |   | **December  31, 2001**    |        | **December  31, 2002**        |   |
|-------------------------------------------------|--------|---------------------------|-------------|-------------------------------|--------|
|                                            |   | **Gross  Carrying Value** |        | **Accumulated  Amortization** |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   |
| Intangible  assets subject to amortization:     |   |                      |        |                          |   |   |   |   |   |
| WB  network affiliation agreements              |   | $                         | 33,374,907  |                          | $      | (12,846,848 | ) | $ | 32,256,034 |   | $ | (16,394,626 | ) |
| Covenant  not to compete                        |   | 30,000,000                |        | (20,750,000                   | )      | 30,000,000 |   | (26,750,000 | ) |
|                                            |   | $                         | 63,374,907  |                          | $      | (33,596,848 | ) | $ | 62,256,034 |   | $ | (43,144,626 | ) |
|                                            |   |                      |        |                          |   |   |   |   |   |
| Intangible  assets not subject to amortization: |   |                      |        |                          |   |   |   |   |   |
| Goodwill                                        |   | $                         | 206,560,570 |                          | $      | (28,201,070 | ) | $ | 111,252,372 |   | $ | (28,201,070 | ) |
| Broadcast  licenses                             |   | 273,168,965               |        | (32,315,765                   | )      | 159,647,594 |   | (32,315,765 | ) |
| Network  affiliation agreements                 |   | 95,366,707                |        | (20,882,800                   | )      | 95,366,707 |   | (20,882,800 | ) |
|                                            |   | $                         | 575,096,242 |                          | $      | (81,399,635 | ) | $ | 366,266,673 |   | $ | (81,399,635 | ) |

 

The Company recordedamortization expense of $26,736,000 and $18,985,000 during the years endedDecember 31, 2001 and 2002, respectively. If Statement 142 had been adopted effective January 1, 2000,amortization expense would have been $11,278,721 and $11,415,315 during theyears ended December 31, 2000 and 2001, respectively.  Based on the current amount of intangible assets subject toamortization, the estimated amortization expense for each of the succeeding 5years are as follows: 2003: $6,752,000; 2004: $3,356,000; 2005: $3,078,000;2006: $3,078,000 and 2007: $3,078,000. As acquisitions and dispositions occur in the future and as purchaseprice allocations are finalized, these amounts may vary.

 

The 2000 and 2001 resultson a historical basis do not reflect the provisions of Statement 142.  Had the Company adopted Statement 142 onJanuary 1, 2000, the historical net loss and basic and diluted net loss per commonshare would have changed to the adjusted amounts indicated below:

 
|                            |   | **December  31, 2000** |        | **December  31, 2001**                   |    |
|---------------------------------|--------|------------------------|-------------|------------------------------------------|---------|
|                            |   |                   |        | **Per basic  and diluted  common share** |    |   |   | **Per basic  and diluted  common share** |   |
| Loss  before extraordinary item |   | $                      | (31,219,329 | )                                        | $       | (3.30 | ) | $ | (75,539,813 | ) | $ | (5.82 | ) |
| Add:  Goodwill amortization     |   | 5,898,800              |        | 0.32                                     |    | 5,898,800 |   | 0.32 |   |
| Add:  Intangible amortization   |   | 9,687,075              |        | 0.53                                     |    | 9,421,432 |   | 0.51 |   |
| Extraordinary  (gain) loss      |   | (3,710,204             | )      | (0.20                                    | )  | 1,207,081 |   | 0.07 |   |
| Adjusted  net loss              |   | $                      | (11,923,250 | )                                        | $       | (2.25 | ) | $ | (61,426,662 | ) | $ | (5.06 | ) |

 

*Long-LivedAssets*

* *

*               *Long-lived assets for impairment are reviewedwhenever events or changes in circumstances indicate that the carrying amountof an asset is not recoverable.  At suchtime as an impairment in value of a long-lived asset is identified, except forgoodwill and other intangible assets deemed to have indefinite lives aspreviously discussed, the impairment will be measured in accordance withStatement of Financial Accounting Standards No. 144,  Accounting for the Impairment of Disposal of Long-Lived Assets,as the amount by which the carrying amount of a long-lived asset exceeds itsfair value.  A present value technique,which utilizes multiple cash flow scenarios that reflect the range of possibleoutcomes and an appropriate discount rate, is used to determine fair value.

* *

*Deferredfinancing fees*

 

The Company has incurred certainfees in connection with entering into a bank credit agreement, the sale of10-3/8% Notes (as defined), the sale of 9-3/8% Notes (as defined) and the saleof 8-7/8% Notes (as defined).  TheCompany entered into an amended and restated senior credit agreement in April2002 and used a portion of the proceeds to repay in full all outstanding borrowingsunder its then existing bank credit agreement (See Note 8 - Long TermDebt).  The unamortized deferredfinancing fees related to the then existing bank credit agreement of $9,058,000were written off in the second quarter of 2002 as an extraordinary loss net ofa tax benefit of $6,039,000. The deferred financing fees related to the 10-3/8%Notes, the 9-3/8% Notes and the 8-7/8% Notes are being amortized over tenyears. The deferred financing fees related to the current Credit Agreement arebeing amortized over two years. Amortization of deferred financing fees isclassified as non-cash interest expense on the consolidated statement ofoperations.

 

37

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*Propertyand equipment*

 

Propertyand equipment are recorded at cost and depreciated on a straight-line basisover their estimated useful lives ranging from three to 32 years.  Maintenance and repairs are charged tooperations as incurred.

 

*Film contract 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 ascurrent or noncurrent on that basis. The Company’s accounting for long-livedprogram assets requires judgement as to the likelihood that such assets willgenerate sufficient revenue to cover the associated expense.  The Company reviews its program inventoryfor impairment by projecting the amount of revenue the program will generateover the remaining life of the contract and comparing it to the program’sexpense.  The Company has written downthe value of certain programs by $8,522,000 and $5,600,000 in the years endedDecember 31, 2001 and 2002, respectively. Film contract rights payable are classified as current or noncurrent inaccordance with the payment terms of the various license agreements.  Film contract rights are reflected in theconsolidated balance sheet at the lower of unamortized cost or estimated netrealizable value.

 

At December 31, 2002, theobligation for programming that had not been recorded because the programrights were not available for broadcasting aggregated $44,495,000.

 

*Bartertransactions*

 

Revenue from barter transactions is recognized whenadvertisements are broadcast and merchandise or services received are chargedto expense when received or used. Barter revenue totaled $2,293,000, $1,723,000 and $1,922,000 for theyears ended December 31, 2000, 2001 and 2002 respectively.  Barter expense totaled $1,379,000,$1,487,000 and $1,090,000 for the years ended December 31, 2000, 2001 and 2002respectively.

 

*Advertising*

 

The cost of advertising isexpensed as incurred.  Advertisingexpense was $2,853,000, $2,028,000 and $3,511,000 for the years ended December31, 2000, 2001 and 2002 respectively.

 

*Use of estimates*

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

*Cash and cash equivalents*

 

Cash and cash equivalents include funds investedovernight in Eurodollar deposits and United States government obligations. Cashtotaling $9,286,000 and $1,777,115 at December 31, 2001 and 2002, respectively,is restricted in its use for the payment of interest on the Tranche B term loanfacility.

 

*Stock options*

* *

TheCompany has adopted the disclosure-only provisions of Statement of FinancialAccounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS123”).  Accordingly, no compensationexpense has been recognized for the stock option plans.  For purposes of SFAS 123 pro formadisclosures, the estimated fair value of the options is amortized to expenseover the options’ vesting period; therefore, the impact on pro forma net income(loss) in 2000, 2001 and 2002 may not be representative of the impact in futureyears.  The Company’s pro formainformation for years ended December 31, follows:

 

38

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|                                     |   | **2000**  |        | **2001**  |   | **2002**    |   |
|------------------------------------------|--------|-----------|-------------|-----------|--------|-------------|--------|
|                                     |   |      |        |      |   |        |   |
| Net loss, as reported                    |   | $         | (27,509,125 | )         | $      | (76,746,894 | )      | $ | (79,630,758 | ) |
| Pro forma compensation expense           |   | 2,513,674 |        | 2,113,526 |   | 2,300,977   |   |
|                                     |   |      |        |      |   |        |   |
| Pro forma net loss                       |   | $         | (30,022,799 | )         | $      | (78,860,420 | )      | $ | (81,931,735 | ) |
|                                     |   |      |        |      |   |        |   |
| Basic net loss per share, as  reported   |   | $         | (3.10       | )         | $      | (5.89       | )      | $ | (4.20 | ) |
| Pro forma compensation expense           |   | 0.14      |        | 0.11      |   | 0.12        |   |
| Pro forma basic net loss per  share      |   | $         | (3.24       | )         | $      | (6.00       | )      | $ | (4.32 | ) |
|                                     |   |      |        |      |   |        |   |
| Diluted net loss per share, as  reported |   | $         | (3.10       | )         | $      | (5.89       | )      | $ | (4.13 | ) |
| Pro forma compensation expense           |   | 0.14      |        | 0.11      |   | 0.12        |   |
| Pro forma diluted net loss per  share    |   | $         | (3.24       | )         | $      | (6.00       | )      | $ | (4.25 | ) |

 

The fair value for each optiongrant was estimated at the date of grant using the Black Scholes option pricingmodel with the following assumptions for the various grants made during 2000,2001 and 2002: risk-free interest rate of 4.80% in 2000, 4.08% in 2001 and3.00% in 2002; no dividend yield; expected volatility of 81% in 2000, 86% in2001 and 103% in 2002; and expected lives of four years in 2000 and 2002 andfive years in 2001.

 

The Black Scholes optionvaluation model was developed for use in estimating the fair value of traded options,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 employeestock options have characteristics significantly different from those of tradedoptions and changes in the subjective input assumptions can materially affectthe fair value estimate.

 

39

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*Net income (loss) per common share*

 

The following table sets forth the computation ofbasic and diluted earnings per share:

 
|                                                                                                                                                                                                   |   | **Years Ended December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                                                                                                                                   |   | **2000**                     |        | **2001** |   | **2002** |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Income (loss) from continuing  operations before extraordinary item and cumulative effect of a change in  accounting principle                                                                         |   | $                            | (31,219,329 | ) | $ | (75,539,813 | ) | $ | 79,905,810 |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Extraordinary (gain) loss on  early extinguishment of debt, net of tax expense of $2,473,470 and tax  benefit of $804,720 in 2000 and 2001, respectively and net of tax benefit of  $6,038,656 in 2002 |   | (3,710,204                   | )           | 1,207,081 |   | 9,057,985 |   |
| Cumulative effect of a change  in accounting principle, net of tax benefit                                                                                                                             |   | —                       |        | — |   | 150,478,583 |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Net loss                                                                                                                                                                                               |   | (27,509,125                  | )           | (76,746,894 | ) | (79,630,758 | ) |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Gain on retirement of cumulative  exchangeablepreferred stock                                                                                                                                          |   | —                       |        | — |   | (30,299,037 | ) |
| Cumulative exchangeable  preferred stock dividends                                                                                                                                                     |   | 28,335,855                   |        | 32,063,828 |   | 29,068,422 |   |
| Accretion on exchangeable  preferred                                                                                                                                                                   |   | 500,148                      |        | 500,148 |   | 407,794 |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Net loss attributable to common  shareholders                                                                                                                                                          |   | $                            | (56,345,128 | ) | $ | (109,310,870 | ) | $ | (78,807,937 | ) |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Weighted average common shares  outstanding for basic net income (loss) per share                                                                                                                      |   | 18,203,498                   |        | 18,568,811 |   | 18,749,363 |   |
| ADD:                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Effect of dilutive securities:                                                                                                                                                                         |   |                         |        |   |   |   |   |
| Stock options                                                                                                                                                                                          |   | —                       |        | — |   | 348,963 |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Adjusted weighted average  common shares outstanding – assuming dilution                                                                                                                          |   | 18,203,498                   |        | 18,568,811 |   | 19,098,326 |   |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Per basic common share:                                                                                                                                                                                |   |                         |        |   |   |   |   |
| Income (loss) from continuing  operations before extraordinary item and cumulative effect of a change in  accounting principle                                                                         |   | $                            | (3.30       | ) | $ | (5.82 | ) | $ | 4.31 |   |
| Extraordinary (gain) loss, net  of tax benefit                                                                                                                                                         |   | (0.20                        | )           | 0.07 |   | 0.48 |   |
| Cumulative effect of a change  in accounting principle, net of tax benefit                                                                                                                             |   | —                       |        | — |   | 8.03 |   |
| Basic net loss per share                                                                                                                                                                               |   | $                            |  (3.10 | ) | $ |  (5.89 | ) | $ |  (4.20 | ) |
|                                                                                                                                                                                                   |   |                         |        |   |   |   |   |
| Per fully diluted common share:                                                                                                                                                                        |   |                         |        |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations before extraordinary item and cumulative effect of  a change in accounting principle                                                                         |   | $                            | (3.30       | ) | $ | (5.82 | ) | $ | 4.23 |   |
| Extraordinary (gain) loss, net  of tax benefit                                                                                                                                                         |   | (0.20                        | )           | 0.07 |   | 0.48 |   |
| Cumulative  effect of a change in accounting principle, net of tax benefit                                                                                                                             |   | —                       |        | — |   | 7.88 |   |
| Diluted net loss per share                                                                                                                                                                             |   | $                            | (3.10       | ) | $ | (5.89 | ) | $ | (4.13 | ) |

 

Stock options totaling1,090,542 and 210,070 for the years ended December 31, 2000 and 2001,respectively were excluded from the computation of diluted earnings per sharedue to their anti-dilutive effect.

 

40

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*Recent Accounting Pronouncements*

 

In June 2001, the FASBissued Statement of Financial Accounting Standards No. 143, Accounting forAsset Retirement Obligations (“Statement 143”), effective for fiscal yearsbeginning after June 15, 2002. This standard provides the accounting for thecost of legal obligations associated with the retirement of long-lived assets.Statement 143 requires that companies recognize the fair value of a liabilityfor asset retirement obligations in the period in which the obligations are incurredand capitalize that amount as a part of the book value of the long-lived asset.That cost is then depreciated over the remaining life of the underlyinglong-lived asset. The Company is currently evaluating the impact that this newstandard will have on future results of operations and financial position.

 

In August 2001, the FASBissued Statement No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets (“Statement 144”). Statement 144 addresses financialaccounting and reporting for the impairment or disposal of long-lived assetsand supercedes Financial Accounting Standards Board Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assetsto be Disposed Of, and the accounting and reporting provisions of AccountingPrinciples Board Opinion No. 30, Reporting the Results of Operation for adisposal of a segment of a business. The Company adopted statement 144 onJanuary 1, 2002 and its adoption did not have a significant impact on itsfinancial position, results of operations, or cash flows.

 

On April 30, 2002, theFASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections. (“Statement145”) Statement 145 updates, clarifies and simplifies existing accountingpronouncements.  Statement 145 rescindsStatement 4, which required all gains and losses from extinguishments of debtto be aggregated and, if material, classified as an extraordinary item, net ofrelated income tax effect. Statement 145 is effective for fiscal yearsbeginning after June 15, 2002. The Company will adopt the Statement for theyear ended December 31, 2003.  All priorextraordinary items relating to the extinguishments of debt will beretroactively adjusted and reclassified to income from continuingoperations.  Upon adoption of Statement145, income from continuing operations will be reduced by $2,012,000 and$15,097,000 for the years ended December 31, 2001 and 2002, respectively.

 

In June 2002, the FASB issuedStatement of Financial Accounting Standards No. 146, Accounting for CostsAssociated with Exit or Disposal Activities (“Statement 146”).  Statement 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (“EITF”) issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (Including Certain Costs Incurred in a Restructuring).”  The provisions of Statement 146 areeffective for exit or disposal activities that are initiated after December 31,2002, with early application encouraged. The Company does not believe the adoption of Statement 146 will have asignificant impact on its financial position, results of operations, or cashflows.

 

**Note 3 – AssetDisposition**

 

On April 30, 2002, theCompany completed the sale of KNTV to NBC. NBC paid the Company $230,000,000, plus a working capital and otheradjustments of $14,545,000.  Inaddition, NBC refunded the Company $20,473,000 of the January 1, 2002affiliation payment due to NBC under the terms of the KNTV NBC affiliationagreement (“San Francisco Affiliation Agreement”), which the Company prepaid onMarch 6, 2001.  The Company repaid$170,000,000 of outstanding senior debt and $14,763,000 of deferred interestand other fees associated with the senior credit facility and the amendedcredit agreement discussed in Note 8 upon consummation of the sale.  The San Francisco Affiliation Agreementterminated upon the closing of the sale and the Company is not required to makeany further affiliation payments to NBC. The 4,500,000 warrants issued to NBC as part of the San FranciscoAffiliation Agreement have been returned to the Company.  The Company’s affiliation agreements forKSEE-TV, WEEK-TV, and KBJR-TV involve no payment obligations to NBC and have acontractual term through December 31, 2011. The Company recorded a pre-tax book gain of $192,406,000 on the sale.

 

 

41

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**Note 4 –Property and Equipment**

 

The major classifications ofproperty and equipment are as follows:

 
|                                 |   | **December 31,** |       |
|--------------------------------------|--------|------------------|------------|
|                                 |   | **2001**         |       | **2002** |   |
| Land                                 |   | $                | 1,546,960  |   | $ | 1,546,960 |   |
| Buildings and improvements           |   | 14,699,158       |       | 14,900,395 |   |
| Furniture and fixtures               |   | 7,802,668        |       | 7,983,447 |   |
| Technical equipment and other        |   | 39,857,966       |       | 52,073,472 |   |
|                                 |   | 63,906,752       |       | 76,504,274 |   |
|                                 |   |             |       |   |   |
| Less:  Accumulated depreciation |   | 30,295,284       |       | 34,690,925 |   |
|                                 |   |             |       |   |   |
| Net property and equipment           |   | $                | 33,611,468 |   | $ | 41,813,349 |   |

 

**Note 5 – OtherAccrued Liabilities**

 

Other accrued liabilities are summarized below:

 
|                                                   |   | **December 31,** |      |
|--------------------------------------------------------|--------|------------------|-----------|
|                                                   |   | **2001**         |      | **2002** |   |
|                                                   |   |             |      |   |   |
| Compensation and benefits                              |   | $                | 1,537,575 |   | $ | 1,933,272 |   |
| Severance and other costs  related to the sale of KNTV |   | —           |      | 3,152,558 |   |
| Other                                                  |   | 1,405,891        |      | 1,855,390 |   |
|                                                   |   |             |      |   |   |
| Total                                                  |   | $                | 2,943,466 |   | $ | 6,941,220 |   |

 

**Note 6 – OtherCurrent Liabilities**

 

Other current liabilities are summarized below:

 
|                        |   | **December 31,** |      |     |   |
|-----------------------------|--------|------------------|-----------|----------|--------|
|                        |   | **2001**         |      | **2002** |   |
|                        |   |             |      |     |   |
| WB affiliation payment, net |   | $                | 4,273,691 |     | $      | 2,073,070 |   |
| Barter payable              |   | 896,385          |      | 757,850  |   |
| Taxes payable               |   | 69,874           |      | 587,187  |   |
| Other                       |   | 568,364          |      | 163,136  |   |
|                        |   |             |      |     |   |
| Total                       |   | $                | 5,808,314 |     | $      | 3,581,243 |   |

 

42

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**Note 7 – OtherCurrent Assets**

 

Other current assets are summarized below:

 
|                         |   | **December 31,** |      |
|------------------------------|--------|------------------|-----------|
|                         |   | **2001**         |      | **2002** |   |
|                         |   |             |      |   |   |
| Income tax receivable        |   | $                | —    |   | $ | 5,334,846 |   |
| Barter and other receivables |   | 2,609,253        |      | 2,882,538 |   |
| Prepaid film contract rights |   | 1,006,703        |      | 24,854 |   |
| Other                        |   | 2,515,267        |      | 1,873,809 |   |
|                         |   |             |      |   |   |
| Total                        |   | $                | 6,131,223 |   | $ | 10,116,047 |   |

 

**Note 8 –Long-term Debt**

 

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

 
|                                                           |   | **December 31, 2001** |        | **December 31, 2002** |   |
|----------------------------------------------------------------|--------|-----------------------|-------------|-----------------------|--------|
|                                                           |   | **Carrying Amount**   |        | **Fair Value**        |   | **Carrying Amount** |   | **Fair Value** |   |
|                                                           |   |                  |        |                  |   |   |   |   |   |
| Senior Bank Debt                                               |   | $                     | 203,451,677 |                  | $      | 203,451,677 |   | $ | 115,000,000 |   | $ | 115,000,000 |   |
| 9-3/8% Senior  Subordinated Notes, net of unamortized discount |   | 34,591,067            |        | 26,622,199            |   | 34,608,659 |   | 28,023,259 |   |
| 10-3/8% Senior Subordinated  Notes                             |   | 100,717,000           |        | 91,148,885            |   | 100,717,000 |   | 86,616,620 |   |
| 8-7/8% Senior  Subordinated Notes, net of unamortized discount |   | 62,446,695            |        | 49,936,809            |   | 62,465,379 |   | 50,578,029 |   |
|                                                           |   |                  |        |                  |   |   |   |   |   |
| Total                                                          |   | $                     | 401,206,439 |                  | $      | 371,159,570 |   | $ | 312,791,038 |   | $ | 280,217,908 |   |

 

The fair value of the Company’sSenior Subordinated Notes is estimated based on quoted market prices.  The carrying amount of the Company’sborrowings under its Credit Agreement approximated fair value.

 

*Senior BankDebt*

 

Simultaneous with the closing on the sale of KNTV, theCompany entered into an amended and restated senior credit agreement (the“Credit Agreement”).  The CreditAgreement consists of (i) a committed $60,000,000 Tranche A term loan facility,(ii) a committed $80,000,000 Tranche B term loan facility, and (iii) an uncommitted$10,000,000 Tranche C supplemental term loan facility.  The obligations of the Company with respectto all of the loan facilities are secured by substantially all of the assets ofthe Company and its subsidiaries. The Company rolled over existing outstandingloans under the prior loan facility into an initial Tranche A borrowing in theamount of $35,000,000. The Company has $25,000,000 of borrowing capacityremaining under the Tranche A term loan facility.  The Company also borrowed the entire $80,000,000 Tranche B termloan facility during the year.  Proceedsfrom Tranche A and Tranche B term loans can be used for working capital andgeneral corporate purposes.  The TrancheA loans bear interest at the greater of 6.50% or LIBOR plus 4.50% and the TrancheB loans bear interest at the greater of 11% or LIBOR plus 9%.  All interest is payable monthly inarrears.   The Credit Agreement matureson April 15, 2004, at which time the Company must repay the principal amount ofall outstanding loans and all other obligations then due and owing under theCredit Agreement.  The Credit Agreementrequires the Company, among other matters, to maintain compliance with certainfinancial tests, including but not limited to, minimum net revenue, broadcastcash flow, EBITDA, working capital and cash balances. The Company is currentlyin compliance with all covenants under the Credit Agreement.

 

43

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*Senior Subordinated Notes*

 

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

 

The 10-3/8% Notes are redeemableat the option of the Company, in whole or in part from time to time, at 100% ofthe principal amount plus accrued interest. The Company is required to offer to purchase all outstanding 10-3/8%Notes at 101% of the principal amount plus accrued interest in the event of aChange of Control (as defined in the Indenture governing the 10-3/8% Notes).

 

The 10-3/8% Notes are subordinated in right of payment toall existing and future Senior Debt (as defined in the Indenture governing the10-3/8% Notes) and rank *pari passu* with all senior subordinateddebt and senior to all subordinated debt of the Company.  The Indenture governing the 10-3/8% Notescontains certain covenants that, among other things, limit the ability of theCompany and its subsidiaries to incur debt, pay cash dividends on or repurchasecapital stock, enter into agreements prohibiting the creation of liens orrestricting the ability of a subsidiary to pay money or transfer assets to theCompany, enter into certain transactions with their affiliates, dispose ofcertain assets and engage in mergers and consolidations.

 

In February 1996, the Company completed an offering of$110,000,000 principal amount of its 9-3/8% Senior Subordinated Notes (the“9-3/8% Notes”) due December 1, 2005 at a discount, resulting in net proceedsto the Company of $109,450,000.  Sincethen, the Company repurchased a total of $75,340,000 principal amount of its9-3/8% Notes at various prices.

 

The 9-3/8% Notes are redeemable at the option of theCompany, in whole or in part from time to time, at 100% of the principal amountplus accrued interest.  The Company isrequired to offer to purchase all outstanding 9-3/8% Notes at 101% of theprincipal amount plus accrued interest in the event of a Change of Control (asdefined in the Indenture governing the 9-3/8% Notes).

 

In May 1998, the Companycompleted an offering of $175,000,000 principal amount of its 8-7/8% SeniorSubordinated Notes, due May 15, 2008 (the “8-7/8% Notes”), at a discount,resulting in proceeds to the Company of $174,482,000.  Since then, the Companyrepurchased a total of $112,435,000 principal amount of its 8-7/8% Notes atvarious prices.

 

The8-7/8% Notes are redeemable in the event that on or before May 15, 2001 theCompany receives net proceeds from the sale of its Capital Stock (other thanDisqualified Stock (each as defined in the Indenture governing the 8-7/8%Notes)), in which case the Company may, at its option and from time to time,use all or a portion of any such net proceeds to redeem certain amounts of the 8-7/8%Notes with certain limitations.  Inaddition, the 8-7/8% Notes are redeemable at any time on or after May 15, 2003at the option of the Company, in whole or in part, at certain prices decliningannually to 100% of the principal amount on or after May 15, 2006, plus accruedinterest.  The Company is required tooffer to purchase all outstanding 8-7/8% Notes at 101% of the principal amountthereof plus accrued interest in the event of a Change of Control (as definedin the Indenture governing the 8-7/8% Notes).

 

The8-7/8% Notes are subordinate in right of payment to all existing and futureSenior Debt (as defined in the Indenture governing the 8-7/8% Notes) and rank *pari passu*with all senior subordinated debt and senior to all subordinated debt.  The Indenture governing the 8-7/8% Notescontains certain covenants that, among other things, limit the ability of theCompany and its subsidiaries to incur debt, make certain restricted payments,enter into certain transactions with their affiliates, dispose of certainassets, incur liens securing subordinated debt of the Company, engage inmergers and consolidations and restrict the ability of the subsidiaries of theCompany to make distributions and transfers to the Company.

 

During2000 the Company recognized an extraordinary gain of $3,710,000 related to therepurchase of subordinated debt.  Theextraordinary gain was the result of subordinated debt repurchased at adiscount, offset in part, by the write-off of related deferred financingfees.  During 2001, the Companyrecognized an extraordinary loss, net of tax, of $1,207,000 related to therepayment of all outstanding borrowings under the then existing bank creditagreement and the write-off of related deferred financing fees. During 2002,the Company recognized an extraordinary loss, net of tax, of $9,058,000 relatedto the repayment of all outstanding borrowings under the then existing bankcredit agreement and the write-off of related deferred financing fees.

 

44

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Thescheduled principal maturities on all long-term debt for the five yearssubsequent to December 31, 2002, are as follows:

 
| 2003                |   | $           | —      |   |
|---------------------|--------|-------------|-------------|--------|
| 2004                |   | 115,000,000 |        |
| 2005                |   | 135,377,000 |        |
| 2006                |   | —      |        |
| 2007 and thereafter |   | 62,565,000  |        |
|                |   | $           | 312,942,000 |   |

** **

**Note 9 –Commitments**

 

Future minimum lease payments under long-term operatingleases as of December 31, 2002 are as follows:

 
| 2003                |   | $         | 1,244,617 |   |
|---------------------|--------|-----------|-----------|--------|
| 2004                |   | 1,392,435 |      |
| 2005                |   | 654,950   |      |
| 2006                |   | 316,705   |      |
| 2007 and thereafter |   | 1,622,791 |      |
|                |   | $         | 5,231,498 |   |

 

Rentexpense, including escalation charges, was approximately $1,416,000, $1,412,000and $887,000 for the years ended December 31, 2000, 2001 and 2002,respectively.

 

Future payments under film contract rights agreements asof December 31, 2002 are as follows:

 
| 2003                 |   | $          | 30,147,004  |   |
|----------------------|--------|------------|-------------|--------|
| 2004                 |   | 22,966,115 |        |
| 2005                 |   | 20,221,693 |        |
| 2006                 |   | 11,946,245 |        |
| 2007                 |   | 8,152,546  |        |
| 2008  and thereafter |   | 11,043,961 |        |
|                 |   | $          | 104,475,564 |   |

 

**Note 10 –Redeemable Preferred Stock**

 

*Series APreferred 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 Stock were converted intoshares 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 the Series A Stock at anannual rate of $.40 per share which accumulated, without interest, ifunpaid.  Accrued but unpaid dividends onthe Series A Stock totaled $262,844 at December 31, 2001 and 2002 and arerecorded in other non-current liabilities on the Company’s balance sheet.  Accrued dividends are due and payable on thedate on which such dividends may be paid under the Company’s debt instruments.

* *

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

 

In January 1997, the Company authorized the issuance of400,000 shares of its 12-3/4% Cumulative Exchangeable Preferred Stock (the“12-3/4% Cumulative Exchangeable Preferred Stock”), par value $.01 per share.In connection with the Company’s acquisition of WDWB-TV, 150,000 shares of the12-3/4% Cumulative Exchangeable Preferred Stock were issued in January 1997 ata price of $1,000 per share.

 

45

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Holders of the 12-3/4%Cumulative Exchangeable Preferred Stock are entitled to receive dividends at anannual rate of 12-3/4% per share payable semi-annually on April 1 and October 1of each year.  The Company paid dividendson and prior 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 is restrictedby the terms of the indentures governing the Company’s senior subordinatednotes and is prohibited under the terms of the Credit Agreement. Consequentlythe Company did not pay the semi-annual dividend due to the holders of the PreferredStock on October 1, 2002.  If three ormore semi-annual dividend payments (whether or not consecutive) are not paid,the holders of the Preferred Stock will have the right to elect the lesser oftwo directors or that number of directors constituting 25% of the members ofthe Board of Directors.  The right ofthe holders of the Preferred Stock to elect members of the Board of Directorsas set forth above would continue until such time as all accumulated dividendsthat are required to be paid in cash and that are in arrears on the PreferredStock are paid in full in cash.  TheCompany does not anticipate paying cash dividends on the 12-3/4% CumulativeExchangeable Preferred Stock in the foreseeable future.  Dividends on the 12-3/4% CumulativeExchangeable Preferred Stock are cumulative and accrue without interest, ifunpaid.  Accrued but unpaid dividends onthe 12-3/4% Cumulative Exchangeable Preferred Stock totaled $19,161,000 as ofDecember 31, 2002 and are recorded in other non-current liabilities on theCompany’s balance sheet.

 

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

 

The12-3/4% Cumulative Exchangeable Preferred Stock is entitled to a preference of$1,000 per share initially, plus accumulated and unpaid dividends in the eventof liquidation or winding up of the Company ($219,536,000 liquidation value atDecember 31, 2002).  The Company isrequired, subject to certain conditions, to redeem all of the 12-3/4%Cumulative Exchangeable Preferred Stock outstanding on April 1, 2009, at aredemption price equal to 100% of the then effective liquidation preferencethereof, plus, without duplication, accumulated and unpaid dividends to thedate of redemption.

 

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

 

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

 

*Stock optionplans*

* *

In April 1990 the Company adopted a stock option plan(the “Stock Option Plan”) for officers and certain key employees. The StockOption Plan terminated on April 1, 2000. At December 31, 2001 and 2002, options granted under the Stock OptionPlan were outstanding for the purchase of 4,529,425 and 4,285,500 shares ofCommon Stock (Nonvoting), respectively.

 

OnApril 27, 2000, the Company adopted a new stock option plan (the “2000 StockOption Plan”) for officers and certain key employees.  The number of shares of Common Stock (Nonvoting) subject tooptions available for grant is 4,000,000. Options may be granted under the 2000 Stock Option Plan at an exerciseprice (for tax-qualified incentive stock options) of not less than 100% of thefair market value of the Common Stock (Nonvoting) on the date the option isgranted, or 110% of such fair market value for option recipients who hold 10%or more of the Company’s voting stock. The exercise price for non-qualified stock options may be less than,equal to or greater than the fair market value of the Common Stock (Nonvoting)on the date the option is granted. At December 31, 2001 and 2002, optionsgranted under the 2000 Stock Option Plan were outstanding for the purchase of649,500 and 1,627,500 shares of Common Stock (Nonvoting) respectively.

 

46

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During2000, certain officers of the Company exercised stock options.  The provisions of the Stock Option Planallow an option-holder to pay the exercise price and applicable federal andstate withholding taxes using previously owned shares as the method ofpayment.  Consequently, the Companywould have had to remit approximately $1,000,000 in withholding taxes on theincome generated from exercise.  Due toconcerns about the impact this payment would have had on the Company’s cashposition at that time, the board of directors approved a rescission of thoseoptions exercises. As a result, the Company recorded a one-time non-cash chargeto earnings of $1,192,000, representing the lost tax deduction the Companywould have received had the option exercises not been rescinded.

 

On March 1, 1994, the Company adopted a Director StockOption Plan (the “Director Option Plan”) providing for the grant, from time totime, of nonqualified stock options to non-employee directors of the Company topurchase an aggregate of 300,000 shares of Common Stock (Nonvoting).  On July 27, 1999, the Director Option Planwas amended to increase the shares of Common Stock (Nonvoting) subject tooptions available for grant to 1,000,000. As of December 31, 2001 and 2002,options granted under the Director Option Plan were outstanding for thepurchase of 809,060 and 808,435 shares of Common Stock (Nonvoting),respectively. The options granted under the Director Option Plan serve ascompensation for attendance at regularly scheduled meetings and for service oncertain committees of the Board of Directors.

 

The Company’s stock option information is as follows:

 
|                                                            |   | **2000**    |   | **2001**                                  |   | **2002**    |      |
|-----------------------------------------------------------------|--------|-------------|--------|-------------------------------------------|--------|-------------|-----------|
|                                                            |   | **Options** |   | **Weighted-  Average****Exercise  price** |   | **Options** |      | **Weighted-  Average****Exercise  price** |   | **Options** |   | **Weighted-  Average****Exercise  price** |   |
|                                                            |   |        |   |                                      |   |        |      |   |   |   |   |   |   |
| Outstanding at beginning of  year                               |   | 5,479,310   |   | $                                         | 8.10   |        | 6,115,785 |   | $ | 7.51 |   | 5,957,985 |   | $ | 6.98 |   |
| Granted                                                         |   | 720,375     |   | 2.97                                      |   | 25,000      |      | 1.50 |   | 1,030,500 |   | 2.34 |   |
| Exercised                                                       |   | (1,400      | )      | 6.64                                      |   | —      |      | — |   | (2,000 | ) | 1.50 |   |
| Forfeited                                                       |   | (82,500     | )      | 7.05                                      |   | (182,800    | )         | 9.23 |   | (265,050 | ) | 5.52 |   |
| Outstanding at end of year                                      |   | 6,115,785   |   | 7.51                                      |   | 5,957,985   |      | 6.98 |   | 6,721,435 |   | 6.33 |   |
| Exercisable at end of year                                      |   | 2,600,710   |   | 7.74                                      |   | 3,221,910   |      | 6.68 |   | 3,980,210 |   | 6.35 |   |
| Weighted-average fair value of  options granted during the year |   | $           | 1.84   |                                      |   |        | $         | 1.01 |   |   |   | $ | 1.65 |   |   |   |
|                                                                 |        |             |        |                                           |        |             |           |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                            |   | **Options Outstanding** |   | **Options Exercisable**                              |   |
|---------------------------------|--------|-------------------------|--------|------------------------------------------------------|--------|
| **Range of****Exercise Prices** |   | **at 12/31/02**         |   | **Weighted-Average   Remaining****Contractual Life** |   | **Weighted-  Average****Exercise Price** |   | **Number****Outstandingat   12/31/02** |   | **Weighted-  Average****Exercise Price** |   |
|                            |   |                    |   |                                                 |   |   |   |   |   |   |   |
| $ 1.47 - $2.70                  |   | 1,572,500               |   | 8.28 years                                           |   | $ | 2.05 |   | 453,650 |   | $ | 1.95 |   |
| $ 3.00 - $5.50                  |   | 301,300                 |   | 2.34 years                                           |   | 3.12 |   | 300,050 |   | 3.11 |   |
| $ 6.13 - $6.88                  |   | 1,565,200               |   | 6.12 years                                           |   | 6.47 |   | 1,394,000 |   | 6.46 |   |
| $ 7.00 - $9.75                  |   | 2,022,635               |   | 5.19 years                                           |   | 7.61 |   | 1,716,235 |   | 7.62 |   |
| $ 10.00 - $12.44                |   | 1,259,800               |   | 5.83 years                                           |   | 10.20 |   | 116,275 |   | 11.77 |   |
|                                 |        |                         |        |                                                      |        |  |  |  |  |  |  |  |  |

 

47

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*ManagementStock Plan*

 

In April 1993, the Company adopted a Management StockPlan providing for the grant from time to time of awards denominated in sharesof Common Stock (Nonvoting) (the “Bonus Shares”) to salaried executiveemployees of the Company.  On December2, 2002 the Company increased the reserve of shares from 1,500,000 to2,000,000.  Shares generally vest over afive-year period. As of December 31, 2002, the Company has allocated a total of1,686,906 Bonus Shares pursuant to the Management Stock Plan, 1,251,837 ofwhich had vested through December 31, 2002. For the years ended December 31, 2001 and 2002, 293,500 and 391,000shares, respectively, were granted pursuant to the Management Stock Plan.  The weighted-average grant-date fair valueof those shares is $2.49 and $2.27, respectively.

 

*Non-Employee Directors’ Stock Plan*

 

InApril 1997, the Company adopted a Non-Employee Directors’ Stock Plan (the“Director Stock Plan”), providing an annual grant of the Company’s Common Stock(Nonvoting) to each eligible non-employee director of a number of shares equalto $20,000 divided by the fair market value of the Common Stock (Nonvoting) onthe date of grant.  On December 2, 2002,the Company increased the reserve of shares of Common Stock (Nonvoting) forgrant under the Director Stock Plan from 400,000 shares to 600,000 shares.  Shares granted vest immediately.  For the years ended December 31, 2001 and2002, 160,000 and 77,672 shares, respectively, were granted pursuant to theDirector Stock Plan with weighted-average grant date fair values of $1.00 and$2.06, respectively.

 

*EmployeeStock Purchase Plan*

# ** **

On February 28, 1995, the Company adopted the GraniteBroadcasting Corporation Employee Stock Purchase Plan (the “Stock PurchasePlan”) for the purpose of enabling its employees to acquire ownership of CommonStock (Nonvoting) at a discount, thereby providing an additional incentive topromote the growth and profitability of the Company.  The Stock Purchase Plan enables employees of the Company topurchase up to an aggregate of 1,000,000 shares of Common Stock (Nonvoting) at85% of the then current market price through application of regularly madepayroll deductions.

 

In March 2001, the Company issued753,491 stock purchase warrants to its then senior lenders.  The warrants were issued at an exerciseprice of $1.75 and are exercisable at any time prior to March 6, 2006.

 

The total number of common sharesoutstanding at December 31, 2002 assuming the exercise of all outstanding stockoptions and warrants is as follows:

 
| Class A Common Stock     |   | 178,500    |   |
|--------------------------|--------|------------|--------|
| Common Stock (Nonvoting) |   | 18,581,510 |   |
| Stock options            |   | 6,721,435  |   |
| Warrants                 |   | 753,491    |   |
|                     |   |       |   |
|                     |   | 26,234,936 |   |

 

**Note 12 – IncomeTaxes**

 

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.

 

48

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The provision (benefit) for income taxes for the years ended December31 consists of the following:

 
|                                  |   | **2000**    |        | **2001**    |   | **2002**    |   |
|---------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| Current  taxes:                       |   |        |        |        |   |        |   |
| Federal                               |   | $           | (18,616,000 | )           | $      | —      |   | $ | 21,756,370 |   |
| State                                 |   | 2,801,000   |        | 214,000     |   | 3,224,864   |   |
|                                  |   | (15,815,000 | )           | 214,000     |   | 24,981,234  |   |
| Deferred taxes:                       |   |        |        |        |   |        |   |
| Federal                               |   | 6,971,000   |        | (25,210,000 | )      | 30,187,913  |   |
| State                                 |   | (2,034,000  | )           | (1,749,000  | )      | 5,074,240   |   |
|                                  |   | 4,937,000   |        | (26,959,000 | )      | 35,262,153  |   |
|                                  |   |        |        |        |   |        |   |
| Provision (benefit) for income  taxes |   | $           | (10,878,000 | )           | $      | (26,745,000 | )      | $ | 60,243,387 |   |

 

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

 
|                             |   | **December 31,** |   |
|----------------------------------|--------|------------------|--------|
|                             |   | **2001**         |   | **2002** |   |
| Deferred tax liability:          |   |             |   |   |   |
| Depreciation and amortization    |   | $106,447,474     |   | $52,164,637 |   |
| Interest on NBC obligation       |   | 9,274,452        |   | — |   |
| Total deferred tax liability     |   | 115,721,926      |   | 52,164,637 |   |
|                             |   |             |   |   |   |
| Deferred tax assets:             |   |             |   |   |   |
| Net operating loss carry forward |   | 49,964,109       |   | 8,988,492 |   |
| Other                            |   | 3,761,406        |   | 6,385,146 |   |
| Alternative minimum tax credit   |   | 1,898,100        |   | — |   |
| Valuation allowance              |   | (8,769,973       | )      | (8,988,492 | ) |
| Total deferred tax assets        |   | 46,853,642       |   | 6,385,146 |   |
| Net deferred tax liability       |   | $68,868,284      |   | $45,779,491 |   |

 

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

 
|                                        |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                        |   |     |   |     |   |     |   |
| U.S.  statutory rate                        |   | 35.0     | %      | 35.0     | %      | 35.0     | %      |
| Nondeductible  amortization                 |   | (3.3     | )      | (1.3     | )      | —   |   |
| State  and local taxes                      |   | (3.3     | )      | 1.0      |   | 3.9      |   |
| Increase (decrease) in  valuation allowance |   | (2.5     | )      | (8.6     | )      | 0.2      |   |
| Other                                       |   | —   |   |     |   | (0.5     | )      |
|                                        |   |     |   |     |   |     |   |
| Effective tax rate                          |   | 25.9     | %      | 26.1     | %      | 38.6     | %      |

 

At December 31, 2002, the Company had a net operating loss carry forward for federal taxpurposes of approximately $16,000,000. These losses, which are set to expire in2002 through 2013, relate to WKBW, and are subject to limitation under theSeparate Return Limitation Rules of the Internal Revenue Code.  Pursuant to these rules, approximately $2,700,000of these net operating losses will be available in the current year to offsetthe income of WKBW on a stand-alone basis.

 

The valuation allowanceincreased by $218,519 during 2002 and decreased by $8,769,973 and $2,500,000during 2001 and 2000 respectively.

 

49

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During 2002, new tax legislation was enacted thatallows for a five year carry back of alternative minimum tax net operatinglosses to 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.

 

**Note 13 – Defined Contribution Plan**

 

The Company has a trusteed profitsharing and savings plan (the “Plan”) covering substantially all of itsemployees.  Contributions by the Companyto the Plan are based on a percentage of the amount of employee contributionsto the Plan and are made at the discretion of the Board of Directors.  Company contributions, which are fundedmonthly, amounted to $778,378, $847,494 and $735,158 for the years endedDecember 31, 2000, 2001 and 2002 respectively.

 

**Note 14 – Related Party**

 

Between 1995 and 1998, theCompany loaned an officer $2,911,000 in four separate transactions.  On January 1, 2001, the Company loaned thisofficer 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 new promissory notematures on January 25, 2006 or, if earlier, 30 days after the officer’stermination of employment. The new promissory note does not bear interest, butinterest at an annual rate of 6.75 % will be imputed as additional compensationto the officer.  The new promissory noteallows for the loan to be forgiven in one-third increments if the Company’sCommon Stock (Nonvoting) trades for ten consecutive trading days at $15, $20,and $25, respectively, or if the per share consideration received by theCompany’s common stockholders in a Change of Control (as defined in theIndentures governing the Company’s senior subordinated notes) equals at least$15, $20 or $25, respectively. In addition, on February 15, 2001 the Companyforgave $232,247 of interest accrued on the old loans during the year-endedDecember 31, 2000.  TheCompany took a charge for this amount in 2001.

 

In 1995, the Company loanedanother officer $221,200. On February 15, 2001, the Company agreed tocancel this note and issue a new promissory note in the same amount. The newpromissory note matures on January 25, 2006 or, if earlier, 30 days after theofficer’s termination of employment. The new promissory note does not bearinterest, but interest at an annual rate of 6.75 % will be imputed asadditional compensation to the officer. The new promissory note allows for theloan to be forgiven in one-third increments if the Company’s Common Stock(Nonvoting) trades for ten consecutive trading days at $15, $20, and $25,respectively, or if the per share consideration received by the Company’scommon stockholders in a Change of Control (as defined in the Indenturesgoverning the Company’s senior subordinated notes) equals at least $15, $20 or$25, respectively.  In addition, onFebruary 15, 2001 the Company forgave $19,908 of interest accrued on the oldloan during the year-ended December 31, 2000.  The Company took a charge for this amount in2001.

 

**Note 15 – Price Range of Common Stock (Nonvoting) andCumulative Convertible Exchangeable Preferred Stock (unaudited)**

 

The Company’s Common Stock (Nonvoting) is traded in theover-the-counter market and is quoted on the NASDAQ Small Cap Market under thesymbol “GBTVK”.  The following tablesets forth the closing market price ranges per share of Common Stock(Nonvoting) during 2001 and 2002, as reported by NASDAQ:

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| 2001           |   |     |   |    |   |
| First Quarter  |   | $        | 3 9/16 |    | $      | 1 5/16 |   |
| Second Quarter |   | 3 3/20   |   | 1 3/8   |   |
| Third Quarter  |   | 3        |   | 1 9/32  |   |
| Fourth Quarter |   | 2 35/64  |   | 1 1/64  |   |
|           |   |     |   |    |   |
| 2002           |   |     |   |    |   |
| First Quarter  |   | 2 9/20   |   | 2 1/50  |   |
| Second Quarter |   | 3 3/5    |   | 2 1/25  |   |
| Third Quarter  |   | 2 19/50  |   | 1 7/20  |   |
| Fourth Quarter |   | 2 1/2    |   | 1 3/10  |   |
|                |        |          |        |         |        |  |  |

 

50

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As of March 6, 2003 the closingprice per share for the Company’s Common Stock (Nonvoting), as reported byNASDAQ was $1.42 per share.

 

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

 

The following is a summary of thequarterly results of operations for the years ended December 31, 2001 and 2002:

 
|                           |   | **March 31,  2001** |       | **June 30,  2001** |   | **September 30,  2001** |   | **December 31,  2001** |       |
|--------------------------------|--------|---------------------|------------|--------------------|--------|-------------------------|--------|------------------------|------------|
|                           |   |                |       |               |   |                    |   |                   |       |
| Net revenue                    |   | $                   | 26,848,304 |               | $      | 30,506,207              |   | $                      | 25,502,449 |   | $ | 30,218,316 |   |
| Operating loss                 |   | (11,907,100         | )          | (5,756,100         | )      | (12,063,111             | )      | (17,543,822            | )          |
| Loss before extraordinary item |   | (13,834,353         | )          | (12,186,672        | )      | (16,880,017             | )      | (32,638,771            | )          |
| Net loss                       |   | (15,041,434         | )          | (12,186,672        | )      | (16,880,017             | )      | (32,638,771            | )          |
| Per common share:              |   |                |       |               |   |                    |   |                   |       |
| Loss before extraordinary item |   |                |       |               |   |                    |   |                   |       |
| Basic                          |   | $                   | (1.17      | )                  | $      | (1.09                   | )      | $                      | (1.34      | ) | $ | (2.22 | ) |
| Diluted                        |   | (1.17               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |
| Net loss                       |   |                |       |               |   |                    |   |                   |       |
| Basic                          |   | (1.23               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |
| Diluted                        |   | (1.23               | )          | (1.09              | )      | (1.34                   | )      | (2.22                  | )          |

 
|                                                                                               |   | **March 31,  2002** |       | **June 30,  2002** |   | **September 30,  2002** |   | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------|--------|-------------------------|--------|------------------------|------------|
|                                                                                               |   |                |       |               |   |                    |   |                   |       |
| Net revenue                                                                                        |   | $                   | 43,542,357 |               | $      | 32,553,314              |   | $                      | 26,083,671 |   | $ | 33,164,809 |   |
| Operating loss                                                                                     |   | (381,206            | )          | (1,230,353         | )      | (1,605,933              | )      | (1,328,108             | )          |
| (Loss) income before  extraordinary item and cumulative effect of a change in accounting principle |   | (13,055,513         | )          | 98,875,144         |   | (2,651,690              | )      | (3,262,131             | )          |
| Net (loss) income                                                                                  |   | (163,534,096        | )          | 89,817,159         |   | (2,651,690              | )      | (3,262,131             | )          |
|                                                                                               |   |                |       |               |   |                    |   |                   |       |
| Per common share:                                                                                  |   |                |       |               |   |                    |   |                   |       |
| (Loss) income before  extraordinary item                                                           |   |                |       |               |   |                    |   |                   |       |
| Basic                                                                                              |   | $                   | (1.16      | )                  | $      | 6.37                    |   | $                      | (0.39      | ) | $ | (0.52 | ) |
| Diluted                                                                                            |   | (1.16               | )          | 5.89               |   | (0.39                   | )      | (0.52                  | )          |
| Net (loss) income                                                                                  |   |                |       |               |   |                    |   |                   |       |
| Basic                                                                                              |   | (9.19               | )          | 6.31               |   | (0.39                   | )      | (0.52                  | )          |
| Diluted                                                                                            |   | (9.19               | )          | 5.83               |   | (0.39                   | )      | (0.52                  | )          |

 

51

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**SCHEDULE II****GRANITE 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,  2000 |   | $                                  | 430,360 |                                       | $      | 1,453,709                  |   | $                            | 1,235,207 |   | $ | 648,862 |   |
|                                  |   |                               |    |                                       |   |                       |   |                         |      |
| For  the year ended December 31, 2001 |   | 648,862                            |    | 541,646                                    |   | 660,235                    |   | 530,273                      |      |
|                                  |   |                               |    |                                       |   |                       |   |                         |      |
| For the year ended December 31,  2002 |   | $                                  | 530,273 |                                       | $      | 952,499                    |   | $                            | 735,252   |   | $ | 747,520 |   |

 

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(1)           Net of recoveries.

 

52

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**Item 9.****    Changes and Disagreements with Accountantson Accounting and Financial Disclosure**

 

None.

 

53

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**PART III**

 

**Item 10.  ****Directors and Executive Officers of the Registrant**

 

The following table sets forthinformation concerning the executive officers and directors of the Company asof March 21, 2003:

 
| **Name**                          |   | **Age** |   | **Position**                                                |
|-----------------------------------|--------|---------|--------|-------------------------------------------------------------|
|                              |   |    |   |                                                        |
| W. Don Cornwell (1)               |   | 55      |   | Chairman of the Board, Chief Executive Officer and Director |
| Stuart J. Beck(1)                 |   | 56      |   | President, Secretary and Director                           |
| Robert E. Selwyn, Jr.             |   | 59      |   | Senior Operating Advisor and Director                       |
| Lawrence I. Wills                 |   | 42      |   | Senior Vice President–Chief Administrative Officer     |
| Ellen  McClain                    |   | 38      |   | Senior  Vice President–Chief Financial Officer         |
| John Deushane                     |   | 46      |   | Chief  Operating Officer                                    |
| James L. Greenwald(2)             |   | 75      |   | Director                                                    |
| Martin F. Beck                    |   | 85      |   | Director                                                    |
| Edward Dugger, III                |   | 53      |   | Director                                                    |
| Thomas R. Settle(1)(3)(4)         |   | 62      |   | Director                                                    |
| Charles J. Hamilton, Jr.(2)(3)(4) |   | 55      |   | Director                                                    |
| M. Fred Brown(2)                  |   | 56      |   | Director                                                    |
| Jon E. Barfield(3)                |   | 51      |   | Director                                                    |
| Veronica Pollard(3)               |   | 57      |   | Director                                                    |

 

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(1)   Member of the Stock Option Committee.  The stock option committee is only authorized to grant stockoptions to employees other than executive officers.

(2)   Member of the Audit Committee.

(3)   Member of the Compensation Committee.

(4)   Member of the Management Stock Plan Committee.

 

Mr. Cornwell is a founder of the Company and has beenChairman of the Board of Directors and Chief Executive Officer of the Companysince February 1988.  Mr. Cornwellserved as President of the Company, which office then included the duties ofchief executive officer, until September 1991 when he was elected to the newlycreated office of Chief Executive Officer. Prior to founding the Company, Mr. Cornwell served as a Vice Presidentin the Investment Banking Division of Goldman, Sachs & Co. (“GoldmanSachs”) from May 1976 to July 1988.  Inaddition, Mr. Cornwell was the Chief Operating Officer of the Corporate FinanceDepartment of Goldman Sachs from January 1980 to August 1987. Mr. Cornwell is adirector of Avon Products, Inc., Pfizer, Inc. and CVS Corporation.  Mr. Cornwell received a Bachelor of Artsdegree from Occidental College in 1969 and a Masters degree in BusinessAdministration from Harvard Business School in 1971.

 

Mr. Stuart Beck is a founder of the Company and hasbeen a member of the Board of Directors and Secretary of the Company sinceFebruary 1988 and President of the Company since September 1991.  Prior to founding the Company, Mr. Beck wasan attorney in private practice of law in New York, New York and Washington, DC.Mr. Beck received a Bachelor of Arts degree from Harvard College in 1968 and aJuris Doctor degree from Yale Law School in 1971.  Mr. Beck is the son of Martin F. Beck.

 

Mr. Selwyn has been Senior Operating Advisor of theCompany since January 1, 2003 and a member of the Board of Directors since May11, 1998.  In addition, Mr. Selwynserved as Chief Operating Officer from 1996 to 2002.  Prior to joining the Company, Mr. Selwyn was employed by NewWorld Communications, Inc. from May 1993 to June 1996 serving as Chairman andChief Executive Officer of the New World Television Station Group.  Mr. Selwyn received a bachelor of sciencedegree from the University of Tennessee in 1968.  From 1990 until 1993, Mr. Selwyn was the President ofBroadcasting for SCI Television, Inc.

 

54

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Mr. Wills has been Senior Vice President–ChiefAdministrative Officer since February 2001. In addition, Mr. Wills served as Vice President—Finance and Controllerof the Company from 1990 to 2001.  Priorto joining the Company, Mr. Wills was employed by Ernst & Young LLP from1982 to 1990 in various capacities, the most recent of which was as senioraudit manager responsible for managing and supervising audit engagements.  Mr. Wills is a director of JuniorAchievement of New York, Inc.  Mr. Willsreceived a bachelor’s degree in Business Administration from Iona College in1982.

 

Ms. McClain has been Senior Vice President–ChiefFinancial Officer since February 2001. In addition, Ms. McClain served as Vice President—Corporate Developmentand Treasurer of the Company from 1994 to 2001.  Prior to joining Granite, Ms. McClain attended Harvard BusinessSchool, where she received a Masters degree in Business Administration in June1993.  From 1990 to 1991, Ms. McClainwas an Assistant Vice President with Canadian Imperial Bank of Commerce, whereshe served as a lender in the Bank’s Media Group and from 1986 to 1990 wasemployed by Bank of New England, N.A. in various capacities including as alender in the Communications Group.  Ms.McClain is a director of the National Association of Black OwnedBroadcasters.  Ms. McClain received aBachelor of Arts Degree in Economics from Brown University in 1986.

 

Mr. Deushane has been Chief Operating Officer sinceJanuary 1, 2003.  Mr. Deushane served asRegional Vice President — Midwest from 1998 to 2002.  Prior to his position as Regional Vice President – Midwest, Mr.Deushane served as President and General Manager of KSEE-TV during 1997 andPresident and General Manager of WEEK-TV from 1991 to 1996. Mr. Deushanecurrently sits on the Sales Advisory Committee of the Television Bureau ofAdvertising, a not-for-profit trade association of America’s broadcasttelevision industry.  Mr. Deushanegraduated magna cum laude from Bradley University with a bachelor of sciencedegree in broadcast management and journalism.

 

Mr. Greenwald has been a member of the Board ofDirectors of the Company since December 1988. Mr. Greenwald was the Chairmanand Chief Executive 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 TelevisionSociety and Vice President of the Broadcast Pioneers.  Mr. Greenwald is a director of Paxson Communications Corp. andSource Media Inc.  Mr. Greenwaldreceived a Bachelor of Arts degree from Columbia University in 1949 and anHonorary Doctorate Degree in Commercial Science from St. Johns University in1980.

 

Mr. Martin Beck has been a member of the Board ofDirectors of the Company since December 1988. Mr. Beck has served as Chairmanof Beck-Ross Communications, Inc., a New York-based group owner of FM radiostations, from June 1966 until April 1995, at which time he retired.  Mr. Beck has served as President of the NewYork State Broadcasters Association, the Long Island Broadcasters Associationand the National Association of Broadcasters Radio Board. Mr. Beck received aBachelor of Arts degree from Cornell University in 1938.  Mr. Beck is the father of Stuart J. Beck.

 

Mr. Dugger has been a member of the Board of Directorsof the Company since December 1988.  Mr.Dugger has been 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 the Board ofDirectors of the Company since July 1992. Mr. Hamilton was a partner in the New York law firm of Battle Fowler LLPfrom 1983 to 2000.  On June 8, 2000Battle Fowler LLP merged with the law firm Paul, Hastings, Janofsky &Walker LLP, where he is a partner.  Mr.Hamilton received a Bachelor of Arts degree from Harvard College in 1969, aJuris Doctor degree from Harvard Law School in 1975 and a Masters degree inCity Planning (MCP) from the Massachusetts Institute of Technology in1975.  Mr. Hamilton is a member of theBoard of Directors of the Environmental Defense Fund and Phoenix HouseFoundation, Inc. Mr. Settle has been a member of the Board of Directors of theCompany since July 1992.  Mr. Settlefounded and is currently a director of The Winchester Group, Inc., aninvestment advisory firm, since 1990. Mr. Settle was 

 

55

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the chief investment officer at Bernhard Management Corporation from1985 to 1989.  He was a ManagingDirector of Furman Selz Capital Management from 1979 until 1985.  Mr. Settle received a Bachelor of ArtsDegree from Muskingum College in 1963 and a Masters degree in BusinessAdministration from Wharton Graduate School in 1965.

 

Mr. Brown has been a member of the Board of Directorssince April 1999.  Mr. Brown founded andhas been President of Aerodyne Capital, Inc., a California company specializingin the trading and leasing of commercial jet aircraft and high-bypass jetengines since 1993.  Prior to foundingAerodyne, Mr. Brown was Senior Vice-President and Managing Director ofMarketing for Blenhiem Aviation from 1989-1993.  In addition, Mr. Brown served as Vice-President at Goldman Sachs& Co.  While at Goldman Sachs &Co., Mr Brown was seconded to Freedom National Bank NA as its SeniorVice-President and Chief Financial Officer. Mr. Brown is Chairman of the Board of Directors of San Francisco JazzOrganization.  Mr. Brown received aBachelor of Arts degree from Middlebury College in 1969.  He received a Juris Doctor degree and aMasters degree in Business Administration from the University of California atBerkeley in 1973.

 

Mr. Barfield has been a member of the Board ofDirectors since April 1999.  Mr.Barfield has been Chairman and Chief Executive Officer of The Bartech Group, anengineering and information technology firm, since 1995.  In addition, Mr. Barfield served asPresident of The Bartech Group from 1981 to 1995.  Prior to joining The Bartech Group, Mr. Barfield practicedcorporate and securities law with the Chicago based law firm of Sidley, Austin,Brown and Wood from 1977 to 1981.  Mr.Barfield is a director of the National City Corporation, BMC Software, Inc.,Tecumseh Products Company, Pantellos Group Limited Partnership, Inc., BlueCross Blue Shield of Michigan, Reading is Fundamental and the CommunityFoundation for Southeastern Michigan. He is also a Trustee Emeritus of Princeton University and a Trustee ofHenry Ford Museum of Greenfield Village and Kettering University.  Mr. Barfield received a Bachelor of Artsdegree from Princeton University in 1974 and received a Juris Doctor degreefrom Harvard Law School in 1977.

 

Ms. Pollard has been a member of the Board ofDirectors since January 2000.  Ms.Pollard is Group Vice President, Corporate Communications, Toyota Motor NorthAmerica, Inc.  She had been VicePresident-External Affairs for Toyota Motor North America (formerly ToyotaMotor Corporate Services of North America, Inc.) since joining Toyota in1998.  Prior to joining Toyota MotorCorporate Services of North America, Inc., Ms. Pollard was VicePresident-Corporate Public Relations for ABC, Inc. from 1994 to 1998.  Ms. Pollard is a trustee of the Museum ofAfrican 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.

 

All members of the Board of Directors hold officeuntil the next annual meeting of shareholders of the Company or until theirsuccessors are duly elected and qualified. All officers are elected annually and serve at the discretion of theBoard of Directors.

 

Directors are separately reimbursed by the Company fortheir travel expenses incurred in attending Board or committee meetings andreceive securities under each of the Company’s Non-Employee Directors StockPlan and Director Option Plan (each as defined herein and collectively referredto as the “Director Plans”).

 

*Section 16(a)Beneficial Ownership Reporting Compliance*

 

Each director and officer of the Company who issubject to Section 16 of the Securities Exchange Act of 1934, as amended (the“Exchange Act”), is required to report to the Securities and ExchangeCommission, by a specified date, his or her beneficial ownership of, or certaintransactions in, the Company’s securities.  Except as set forth below,based solely upon a review of such reports, the Company believes that allfiling requirements under Section 16 were complied with on a timely basis.

 

For fiscal year 2002, Messrs.Cornwell, Brown and Stuart Beck did not report, on a timely basis, onetransaction on one Form 4, Mr. Dugger did not report, on a timely basis, twotransactions on one Form 4,  Ms. McClainand Messrs. Selwyn and Wills did not report, on a timely basis, one transactionon two Form 4s and Ms. Pollard and Messrs. Greenwald, Barfield, and Hamiltondid not report, on a timely basis, one transaction on Form 5.  All of the reports referred to above havebeen filed.

 

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

 

The following table sets forth the cash compensation paidby the Company to its Chief Executive Officer and each of its most highlycompensated executive officers whose total cash compensation exceeded $100,000for each of the three years in the period ended December 31, 2002:

 

Summary Compensation Table

 
|                            |     |                    |           |      |             |      |       | **Long-Term Compensation** |         |             |       |
|---------------------------------|----------|-------------------------|----------------|-----------|------------------|-----------|------------|----------------------------|--------------|------------------|------------|
|                            |     |                    |           |      |             |      |       | **Awards**                 |         |             |       |
|                            |     |                    |           |      |             |      |       |                       |         | **Securities**   |       |   |   |
|                            |     |                    |           |      |             |      |       | **Restricted**             |         | **Underlying**   |       | **All Other** |   |
| **Name and Principal Position** |     | **Annual Compensation** |           | **Bonus** |             | **Stock** |       | **Options/**               |         | **Compensation** |       |
|                            | **Year** |                    | **Salary ($)** |      | **($) (1)** |      | **Awards** |                       | **SARs (#)** |             | **($)(2)** |   |
|                            |     |                    |           |      |             |      |       |                       |         |             |       |   |   |
| W. Don Cornwell                 |     | 2002                    |           | $         | 600,000          |      | $          | 553,191                    |         | $                | 297,500    | (3) | 160,000 |   | $ | 5,500 |   |
| Chief Executive                 |     | 2001                    |           | 600,000   |             | 420,000   |       | 210,000                    | (4)          | —           |       | 5,250 |   |
| Officer                         |     | 2000                    |           | 600,000   |             | 469,600   |       | —                     |         | —           |       | 5,250 |   |
|                            |     |                    |           |      |             |      |       |                       |         |             |       |   |   |
| Stuart J. Beck                  |     | 2002                    |           | $         | 600,000          |      | $          | 391,319                    |         | $                | 238,000    | (5) | 213,000 |   | $ | 15,100 |   |
| President                       |     | 2001                    |           | 600,000   |             | 302,000   |       | 288,750                    | (6)          | —           |       | 14,850 |   |
|                            |     | 2000                    |           | 600,000   |             | 336,000   |       | —                     |         | —           |       | 14,850 |   |
|                            |     |                    |           |      |             |      |       |                       |         |             |       |   |   |
| Robert E. Selwyn, Jr.           |     | 2002                    |           | $         | 396,250          |      | $          | 119,000                    |         | $                | 17,850     | (7) | — |   | $ | 15,100 |   |
| Senior Operating                |     | 2001                    |           | 386,250   |             | 57,938    |       | 54,375                     | (8)          | —           |       | 14,850 |   |
| Advisor                         |     | 2000                    |           | 375,000   |             | 46,875    |       | —                     |         | 50,000           |       | 14,850 |   |
|                            |     |                    |           |      |             |      |       |                       |         |             |       |   |   |
| Lawrence I. Wills               |     | 2002                    |           | $         | 206,000          |      | $          | 175,000                    |         | $                | 23,800     | (9) | 10,000 |   | $ | 23,500 |   |
| Senior Vice President -         |     | 2001                    |           | 200,000   |             | 100,000   |       | —                     |         | —           |       | 17,250 |   |
| Chief Administrative Officer    |     | 2000                    |           | 177,000   |             | 100,000   |       | —                     |         | 121,250          |       | 5,250 |   |
|                            |     |                    |           |      |             |      |       |                       |         |             |       |   |   |
| Ellen McClain                   |     | 2002                    |           | $         | 206,000          |      | $          | 175,000                    |         | $                | 23,800     | (9) | 10,000 |   | $ | 23,500 |   |
| Senior Vice President -         |     | 2001                    |           | 200,000   |             | 100,000   |       | —                     |         | —           |       | 17,250 |   |
| Chief Financial Officer         |     | 2000                    |           | 177,000   |             | 100,000   |       | —                     |         | 125,000          |       | 4,050 |   |

 

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(1)Represents bonuses for service rendered in 2000, 2001 and 2002 that were paidin the following year.

 

(2) The amounts shown inthis column consists of a matching Company contribution under the Company’sEmployees’ Profit Sharing and Savings (401(k)) Plan and an annual perquisiteallowance for Messrs. Beck and Selwyn of $9,600 each and $18,000 each for Mr.Wills and Ms McClain in 2002 and $12,000 each for Mr. Wills and Ms. McClain in2001.

 

(3) Represents the marketvalue on the date of award of 125,000 Bonus Shares awarded under the Company’sManagement Stock Plan on April 23, 2002 for services rendered during theyear-ended December 31, 2001.  Mr.Cornwell has deferred the receipt of these shares to December 31, 2003.

 

(4) Represents the marketvalue on the date of award of 80,000 Bonus Shares awarded under the Company’sManagement Stock Plan on January 26, 2001 for services rendered during theyear-ended December 31, 2000.

 

(5) Represents the marketvalue on the date of award of 100,000 Bonus Shares awarded under the Company’sManagement Stock Plan on April 23, 2002 for services rendered during the yearended December 31, 2001.

 

57

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(6) Represents the marketvalue on the date of award of 110,000 Bonus Shares awarded under the Company’sManagement Stock Plan on January 26, 2001 for services rendered during theyear-ended December 31, 2000.

 

(7) Represents the marketvalue on the date of award of 7,500 Bonus Shares awarded under the Company’sManagement Stock Plan on April 23, 2002.

 

(8) Represents the marketvalue on the date of award of 30,000 Bonus Shares awarded under the Company’sManagement Stock Plan on January 5, 2001.

 

(9) Represents the marketvalue on the date of award of 10,000 Bonus Shares awarded under the Company’sManagement Stock Plan on April 23, 2002.

 

*EmploymentAgreements and Compensation Arrangements*

 

Mr. Cornwell and Mr. Stuart Beckeach have an employment agreement with the Company.  The agreements provide for a two-year employment term, which isautomatically renewed for subsequent two-year terms unless advance notice ofnonrenewal is given (the current term under such agreements, which were renewedin 2001, expires September 19, 2003). The agreements stipulate that Mr.Cornwell and Mr. Beck will devote their full time and efforts to the Companyand will not engage in any business activities outside the scope of theiremployment with the Company unless approved by a majority of the Company’sindependent directors. Under the agreements, Mr. Cornwell and Mr. Beck arepermitted to exchange any or all of their shares of Voting Common Stock forshares of Common Stock (Nonvoting), provided that such exchange does notjeopardize the Company’s status as a minority-controlled entity under FCC regulationsand that, after such exchange is effected, there will continue to be shares ofvoting stock of the Company outstanding.

 

The Compensation Committee of theBoard of Directors annually develops a compensation model to determine salaryand incentive compensation for Mr. Cornwell and Mr. Beck. The base salary was$600,000 for each of 2000, 2001 and 2002. Mr. Cornwell and Mr. Beck were eligible to receive a salary increase for2003 if certain broadcast cash flow targets for 2002 were achieved.  The Company over-achieved its broadcast cashflow target for 2002, resulting in an increase in base salary for 2003 to$672,000 each for Mr. Cornwell and Mr. Beck. Messrs Cornwell and Beck were eligible to receive incentive compensationfor 2002 if certain Corporate objectives were achieved.  Those objectives included the attainment ofbroadcast cash flow targets, restructuring of the Company’s capital structureand growth through acquisitions or other structures permitted by the FCC.  Incentive compensation  can includes cash bonuses, stock options,shares of Common Stock (Nonvoting) or a combination thereof. As previouslymentioned, the Company over-achieved its broadcast cash flow target for 2002and was successful in purchasing shares of the Company’s 12 3/4% CumulativeExchangeable Preferred Stock at a significant discount.  As a result, cash bonuses totaling $553,191and $391,319 were awarded to Mr. Cornwell and Mr. Beck, respectively for 2002.Mr. Selwyn has an employment agreement with the Company.  The current employment term was extended toDecember 31, 2005.  The agreementstipulates that Mr. Selwyn will devote his full time and effort to the Companyand will not engage in any business activities outside of the scope of hisemployment with the Company other than permitted hereunder.  In addition to his base salary, Mr. Selwynis eligible to receive shares of the Company’s Common Stock (Nonvoting) underthe Management Stock Plan, provided that certain quantitative and qualitativegoals are achieved. He has been granted options to purchase shares of CommonStock (Nonvoting) under the Company’s stock option plans and is eligible toparticipate in the Company’s Employee Stock Purchase Plan. The annual basesalary determined by the Compensation Committee of the Board of Directors was$375,000 for 2000, $386,250 for 2001 and $396,000 for 2002.  Mr. Selwyn’s base salary for 2003 is$400,000.  (See “—Employee StockPurchase Plan,” “—Stock Option Plan” and “—Management Stock Plan.”)

 

Under an employment arrangementwith the Company, Mr. Wills is eligible to receive an annual cash bonus basedupon the Company’s financial performance and the achievement of certainqualitative and strategic goals during that year, such bonus to be determinedby Messrs. Cornwell and Beck.  Mr.Wills’ 2002 base salary was fixed at $206,000 and his base salary for 2003 is$242,500.

 

Under an employment arrangement with the Company, Ms.McClain is eligible to receive an annual cash bonus based upon the Company’sfinancial performance and the achievement of certain qualitative and strategicgoals during that year, such bonus to be determined by Messrs. Cornwell andBeck.  Ms. McClain’s 2002 base salarywas fixed at $206,000 and her base salary for 2003 is $242,500.

 

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Mr. Deushane has a two-yearemployment agreement with the Company that expires on December 31, 2005. Mr.Deushane’s 2002 base salary was fixed at $212,180 and his base salary for 2003is $275,000.  In addition to his basesalary, Mr. Deushane is eligible to receive shares of the Company’s CommonStock (Nonvoting) under the Management Stock Plan, has been granted options topurchase shares of Common Stock (Nonvoting) under the Company’s stock optionplans and is eligible to participate in the Company’s Employee Stock PurchasePlan.

* *

*401(k) ProfitSharing and Savings Plan*

 

Effective January 1990, the Company adopted the GraniteBroadcasting Corporation Employees’ Profit Sharing and Savings (401(k)) Plan(the “401(k) Plan”) for the purpose of providing retirement benefits forsubstantially all of its employees. Both the employee and the Company make contributions to the 401(k)Plan.  The Company matches 50% of thatpart of an employee’s deferred compensation that does not exceed 5% of suchemployee’s salary.  Company-matchedcontributions vest at a rate of 20% for each year of an employee’s service tothe Company.

 

A contribution to the 401(k) Plan of $735,000 was madeduring 2002.

* *

*Employee StockPurchase Plan*

 

On February 28, 1995, the Company adopted the GraniteBroadcasting Corporation Employee Stock Purchase Plan (the “Stock PurchasePlan”) for the purpose of enabling its employees to acquire ownership of CommonStock (Nonvoting) at a discount, thereby providing an additional incentive topromote the growth and profitability of the Company.  The Stock Purchase Plan enables employees of the Company topurchase up to an aggregate of 1,000,000 shares of Common Stock (Nonvoting) at85% 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 company to administer theday-to-day functions of the Stock Purchase Plan.  Purchases under the Stock Purchase Plan commenced on June 1,1995.

 

*Stock OptionPlan*

 

InApril 1990, the Company adopted a Stock Option Plan (the “Stock Option Plan”)providing for the grant, from time to time, of Options to key employees and officers of the Company orits affiliates to purchase shares of Common Stock (Nonvoting).  The Stock Option Plan terminated on April 1,2000. As of March 6, 2003, options granted under the Stock Option Plan wereoutstanding for the purchase of 4,285,500 shares of Common Stock (Nonvoting).

 

On April 27, 2000, the Company adopted a new stock optionplan (the “2000 Stock Option Plan”) for officers and certain key employees ofthe Company and its affiliates (collectively, the “ParticipatingPersons”).  The 2000 Stock Option Planprovides for the grant of (i) Options intended to qualify as Incentive StockOptions (“ISOs”) as defined in Section 422 of the Code and (ii) Options whichdo not qualify as ISOs (“NQSOs”) to employees, officers, directors andconsultants of the Company or its affiliates to purchase an aggregate of4,000,000 shares of Common Stock (Nonvoting). No Participating Person may be granted ISOs which, when firstexercisable in any calendar year (combined with ISOs under all incentive stockoption plans of the Company and its affiliates) will permit such person topurchase stock of the Company having an aggregate fair market value (determinedas of the time the ISO was granted) of more than $100,000. As of March6, 2003, options granted under the 2000 Stock Option Plan were outstanding forthe purchase of 1,627,500 shares of Common Stock (Nonvoting).

 

The2000 Stock Option Plan is administered by the Stock Option Committee whichconsists of not less than three members of the Board of Directors appointed bythe Board, and the Company’s Compensation Committee, which consists of not lessthan two members all of whom are non-employee directors (collectively, the“Committee”).  The members of the StockOption Committee are Mr. Cornwell, Mr. Stuart Beck and Mr. Settle.  The members of the Compensation Committeeare Mr. Hamilton, Mr. Barfield, Ms. Pollard and Mr. Settle.  The Stock Option Committee is onlyauthorized to grant Options to persons who are not then “covered employees”within the meaning of Section 162(m) of the Internal Revenue Code or who arenot then officers of the Company or holders of 10% or more of the Voting CommonStock.  The Compensation Committee isauthorized to make determinations with respect to all other persons.  Subject to the provisions of the 2000 StockOption Plan, the committee is empowered to, among other things,

 

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grant Options under the 2000 Stock Option Plan;determine which employees may be granted Options under the 2000 Stock OptionPlan, the type of Option granted (ISO or NQSO), the number of shares subject toeach Option, the time or times at which Options may be granted and exercisedand the exercise price thereof; construe and interpret the 2000 Stock OptionPlan; determine the terms of any option agreement pursuant to which Options aregranted (an “Option Agreement”), and amend any Option Agreement with theconsent of the recipient of Options (the “Optionee”).

 

The Board of Directors may amend or terminate the 2000Stock Option Plan at any time, except that approval of the holders of amajority of the outstanding Voting Common Stock of the Company is required foramendments which decrease the minimum option price for ISOs, extend the term ofthe 2000 Stock Option Plan beyond 10 years or the maximum term of the Optionsgranted beyond 10 years, withdraw the administration of the 2000 Stock OptionPlan from the Committee, change the class of eligible employees, officers ordirectors or increase the aggregate number of shares which may be issuedpursuant to the provisions of the 2000 Stock Option Plan.  Notwithstanding the foregoing, the Board ofDirectors may, without the need for shareholder approval, amend the 2000 StockOption Plan in any respect to qualify ISOs as Incentive Stock Options underSection 422 of the Code.

 

The exercise price per share for all ISOs may not be lessthan 100% of the fair market value of a share of Common Stock (Nonvoting) onthe 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 the Company or any ofits affiliates (a “10% Holder”)).  Theexercise price per share for NQSOs may be less than, equal to or greater thanthe fair market value of a share of Common Stock (Nonvoting) on the date suchNQSO is granted.  Options are notassignable or transferable other than by will or the laws of descent anddistribution.

 

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

 

Unless sooner terminated by the Board of Directors, the2000 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 the Company whichconfers eligibility to be granted Options and (i) for a period of 30 days aftertermination of such relationship, (ii) for a period of 3 months afterretirement by the Optionee with the consent of the Company, or (iii) for aperiod of 12 months after the death or disability of the Optionee.

 

*ManagementStock Plan*

 

In April 1993, the Company adopted a Management StockPlan (the “Management Stock Plan”) providing for the grant from time to time ofawards denominated in shares of Common Stock (Nonvoting) (the “Bonus Shares”)to all salaried executive employees of the Company.  The purpose of the Management Stock Plan is to keep seniorexecutives in the employ of the Company and to compensate such executives fortheir contributions to the growth and profits of the Company and itssubsidiaries.  On February 15, 2001, theCompany increased the reserve of shares of Common Stock (Nonvoting) for grantunder the Management Stock Plan to 1,500,000 from 1,000,000.  All salaried executive employees (includingofficers and directors, except for persons serving as directors only) areeligible to receive a grant under the Management Stock Plan.  On December 2, 2002, the Company increasedthe reserve to 2,000,000 from 1,500,000. The Management Stock Plan is administered by a committee appointed bythe Board of Directors which consists of not less than two members of the Boardof Directors (the “Management Stock Plan Committee”). Effective January 1,2003, the Company amended the Management Stock Plan (i) to provide for thegrant of stock or cash awards based on achievement of performance goals(Performance Awards) and (ii) to allow for the deferral of settlement of BonusShare awards and Perfromance Awards.   The Management Stock Plan Committee, from time to time, selects eligibleemployees to receive a discretionary bonus of Bonus Shares or a PerformanceAwardbased upon such employee’s position, responsibilities, contributions andvalue to the Company and such other factors as the Management Stock PlanCommittee deems appropriate.  The ManagementStock Plan Committee has discretion to determine the date 

 

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on which the Bonus Shares or Performance Awardsallocated 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 payment will be made to such employee as of the date the correspondingshares of Common Stock (Nonvoting) would otherwise be issued to such employeeand shall be in an amount equal to the fair market value of such shares ofCommon Stock (Nonvoting) on that date.

 

Effective January 1, 2003, theCompany amended the Management Stock Plan (i) to provide for the grant ofPerformance Awards and (ii) to allow for the deferral of settlement of BonusShare awards and Perfromance Awards.  Asof March 6, 2003, the Company has allocated a total of 1,686,906 Bonus Sharespursuant to the Management Stock Plan, 1,251,837 of which had vested throughMarch 6, 2003.

 

*Director StockOption Plan*

 

On March 1, 1994, the Companyadopted a Director Stock Option Plan (the “Director Option Plan”) providing forthe grant, from time to time, of Options to non-employee directors of theCompany (“Director Participants”) to purchase Common Stock (Nonvoting).  On July 27, 1999, the Company increased thenumber of shares of Common Stock (Nonvoting) allocated for grant under theDirector Option Plan to 1,000,000 from 300,000. As of March 6, 2003, Optionsgranted under the Director Option Plan were outstanding for the purchase of808,435 shares of Common Stock (Nonvoting).

 

The Director Option Plan provides for the grant ofNQSOs to Director Participants. On February 25, 1997, all non-employeedirectors automatically received an option to purchase 18,000 shares of CommonStock (Nonvoting) as compensation for attendance at regular quarterly meetingsduring the three-year period beginning on such date in lieu of cashcompensation. On April 27, 1999, the Director Option Plan was amended toprovide that all Director Participants automatically receive on April 27, 1999(and on each five year anniversary thereafter) an option to purchase 62,500 sharesof Common Stock (Nonvoting) as compensation for attendance at regular quarterlymeetings during the five year period beginning on February 25, 2000 (or eachfive year anniversary thereof, as the case may be) in lieu of cashcompensation.  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.  In addition,under the Director Option Plan, non-employee directors receive AutomaticCommittee Awards for certain committees of the Board of Directors on which theyserve.

 

Between February 25, 1997 and April 26, 1999, Optionsto purchase 1,500 shares of Common Stock (Nonvoting) became exercisable on thedate of attendance in person of a Director Participant at each regularquarterly meeting of the Board of Directors. Options to purchase 500 shares ofCommon Stock (Nonvoting) became exercisable if such Director Participantattended the meeting by telephonic means. Since April 27, 1999, Options topurchase 3,125 shares of Common Stock (Nonvoting) become exercisable on thedate of attendance, in person or by telephonic means, of a Director Participantat each regular quarterly meetings of the Board of Directors. Between February25, 1997 and February 24, 2000, Options to purchase 1,500 shares of CommonStock (Nonvoting) became exercisable on the date of attendance in person ateach regularly scheduled meeting of the Audit Committee and the CompensationCommittee of any Director Participant who is a member of such committees. SinceFebruary 25, 2000, Options to purchase 625 shares of Common Stock (Nonvoting)(875 in the case of Committee chairs) become exercisable upon the date ofattendance, in person or by telephonic means, at each regular meeting of theAudit Committee and the Compensation Committee of any Director Participant whois a member of such committees. The exercise price per share of all Options isthe fair market value on the date of grant.

 

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 Director Participantwill automatically be granted a “reload option” for the number of shares ofCommon Stock (Nonvoting) used to pay the exercise price plus the number ofshares withheld to pay for taxes associated with the Option exercise (a “ReloadOption”).  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.

 

Unlessotherwise specifically provided in a Director Participant’s Option Agreementand except in the case of Reload Options as described above, each Optiongranted under the Director Option Plan expires no later than 10 years after thedate the Option is granted.  Options maybe exercised only during the period that the original optionee 

 

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is a non-employee director and (i) for a period of 6 months after thedeath or disability of the Director Participant or (ii) for a period of 2 yearsafter termination of the Director Participant’s directorship for any otherreason.

 

*Non-EmployeeDirectors Stock Plan*

 

On April 29, 1997, the Company adopted a Non-EmployeeDirectors Stock Plan (the “Non-Employee Directors Stock Plan”) for the purpose ofproviding a means to attract and retain highly qualified persons to serve asnon-employee directors of the Company and to enable such persons to acquire orincrease a proprietary interest in the Company. The Non-Employee DirectorsStock Plan provides that on January 1st of each calendar year(beginning in 1999) during the term of the Non-Employee Directors Stock Plan,non-employee directors of the Company (“Directors Stock Plan Participants”)shall receive a number of shares of Common Stock (Nonvoting) equal to $20,000divided by the fair market value per share on the date of grant.  If a person first becomes a non-employeedirector after January 1st of any calendar year, such a person receives aprorated grant based on the number of regular board meetings scheduled from thedate of his or her commencement of service as a director until December 31st of that year. On December 2, 2002, the Company increased the number of shares ofCommon Stock (Nonvoting) available for issuance under the Non-Employee DirectorsStock Plan to 600,000 from 400,000, and increased the compensation to bereceived on January 1st of each calender year beginning January 1,2003 to a number of shares of Common Stock (Nonvoting) equal to $50,000 dividedby the fair market value per share on the date of grant; provided, that, anyDirectors Stock Plan Participant may elect prior to the grant date to be paidup to $30,000 of such grant in cash in lieu of shares having an aggregate fairmarket value equal to the amount of such cash payment.  Each Directors Stock Plan Participant mayelect to defer the payment of shares of Common Stock (Nonvoting) by filing anirrevocable written election with the Secretary of the Company.

 

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 the Company and the Directors Stock Plan Participants have no furtherrights or obligations under the Non-Employee Directors Stock Plan.

 

As of March 6, 2003, 417,851 shares had been grantedunder the Non-Employee Directors Stock Plan.

 

The following table sets forth information with respectto Options granted to the executive officers of the Company during 2002:

 

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Option/SAR Grants in Last FiscalYear

 
|              |   |                         |   |                          |   |                        |   |                 |    | **Potential Realizable  Value  at assumed Annual Rates  of Stock Price  Appreciation  for Option Term** |   |        |
|-------------------|--------|------------------------------|--------|-------------------------------|--------|-----------------------------|--------|----------------------|---------|---------------------------------------------------------------------------------------------------------|--------|-------------|
|              |   |                         |   | **% of Total Options/SARs**   |   |                        |   |                 |    |                                                                                                    |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                         |
| **Granted to**    |
| **Name**          |   | **Option/SARs  Granted (#)** |   | **Employees in  Fiscal Year** |   | **Exercise or  Base Price** |   | **Expiration  Date** |    | **5% ($)**                                                                                              |   | **10% ($)** |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| W. Don Cornwell   |   | 60,000                       |   | 5.8                           | %      | $                           | 2.70   |                 | 2/26/07 |                                                                                                    | $      | 44,758      |   | $ | 98,903 |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| Stuart J. Beck    |   | 60,000                       |   | 5.8                           | %      | 2.70                        |   | 2/26/07              |    | 44,758                                                                                                  |   | 98,903      |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| W. Don Cornwell   |   | 100,000                      |   | 9.7                           | %      | 2.45                        |   | 2/26/12              |    | 154,079                                                                                                 |   | 390,467     |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| Stuart J. Beck    |   | 153,000                      |   | 14.9                          | %      | 2.45                        |   | 2/26/12              |    | 229,006                                                                                                 |   | 597,414     |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| Lawrence I. Wills |   | 10,000                       |   | 1.0                           | %      | 2.38                        |   | 4/23/12              |    | 14,968                                                                                                  |   | 37,931      |   |   |
|              |   |                         |   |                          |   |                        |   |                 |    |                                                                                                    |   |        |   |   |
| Ellen McClain     |   | 10,000                       |   | 1.0                           | %      | 2.38                        |   | 4/23/12              |    | 14,968                                                                                                  |   | 37,931      |   |   |
|                   |        |                              |        |                               |        |                             |        |                      |         |                                                                                                         |        |             |  |  |  |  |  |   |

 

The following table sets forth, as of December 31,2002, the number of options and the value of unexercised options held by theCompany’s executive officers that held options as of that date, and the optionsexercised and the consideration received therefore by such persons duringfiscal 2002:

 

Aggregated Option/SARExercisesIn Last Fiscal Year AndFY-End Option/SAR Values
|                  |   |            |   |             |   | **Number of  Securities Underlying  Unexercised Options  at December 31, 2002** |   | **Value of Unexercised  in-the-Money Options  at December 31, 2002 ($)** |
|-----------------------|--------|-----------------|--------|------------------|--------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|
|                  |   | **Shares**      |   |             |   |                                                                            |
|                  |   | **Acquired**    |   |             |   |                                                                            |
|                  |   | **on Exercise** |   | **Value**        |   |                                                                            |
| **Name**              |   | **(#)**         |   | **Realized ($)** |   | **Exercisable**                                                                 |   | **Unexercisable**                                                        |   | **Exercisable** |   | **Unexercisable** |   |
|                  |   |            |   |             |   |                                                                            |   |                                                                     |   |   |   |   |   |
| W. Don Cornwell       |   | —          |   | —           |   | 1,188,000                                                                       |   | 855,000                                                                  |   | — |   | — |   |
|                  |   |            |   |             |   |                                                                            |   |                                                                     |   |   |   |   |   |
| Stuart J. Beck        |   | —          |   | —           |   | 1,060,050                                                                       |   | 768,450                                                                  |   | — |   | — |   |
|                  |   |            |   |             |   |                                                                            |   |                                                                     |   |   |   |   |   |
| Robert E. Selwyn, Jr. |   | —          |   | —           |   | 320,000                                                                         |   | 30,000                                                                   |   | 11,000 |   | 16,500 |   |
|                  |   |            |   |             |   |                                                                            |   |                                                                     |   |   |   |   |   |
| Lawrence I. Wills     |   | —          |   | —           |   | 97,100                                                                          |   | 84,150                                                                   |   | 24,475 |   | 36,713 |   |
|                  |   |            |   |             |   |                                                                            |   |                                                                     |   |   |   |   |   |
| Ellen McClain         |   | —          |   | —           |   | 101,100                                                                         |   | 83,900                                                                   |   | 25,300 |   | 37,950 |   |

 

*CompensationCommittee Interlocks and Insider Participation*

 

During 2002, Thomas R. Settle, Charles J. Hamilton, Jr.,Veronica Pollard and Jon E. Barfield served as members of the CompensationCommittee of the Board of Directors of the Company.

 

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**Item 12.**  **Security Ownership of Certain Beneficial Owners andManagement**

 

Thefollowing table sets forth certain information, as of March 6, 2003, regardingbeneficial ownership of the (i) the Company’s Voting Common Stock by each shareholder who is known by the Company toown beneficially more than 5% of the outstanding Voting Common Stock, eachdirector, each executive officer and all directors and officers as a group, and(ii) beneficial ownership of the Company’s 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.  The Company also has 284,296shares of its 12.75% Cumulative Exchangeable Preferred Stock outstanding, noneof which are owned by any officers or directors of the Company.  Except as set forth in the footnotes to thetable, each shareholder listed below has informed the Company that suchshareholder has (i) sole voting and investment power with respect to suchshareholder’s shares of stock, except to the extent that authority is shared byspouses under applicable law and (ii) record and beneficial ownership withrespect to such shareholder’s shares of stock.

 
|                                       |   | **Voting Common Stock**       |   | **Common Stock (Nonvoting)**  |   |
|--------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                                       |   | **Shares Beneficially Owned** |   | **Shares Beneficially Owned** |   |
|                                       |   | **Number**                    |   | **Percent**                   |   | **Number** |   | **Percent(1)** |   |
|                                       |   |                          |   |                          |   |   |   |   |   |
| W. Don Cornwell                            |   | 98,250                        |   | 55.0                          | %      | 1,698,800 | (2) | 7.6 | % |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Stuart J. Beck                             |   | 80,250                        |   | 45.0                          | %      | 1,501,945 | (3) | 6.7 | % |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Robert E. Selwyn, Jr.                      |   |                          |   |                          |   | 445,781  | (4) | 2.0 | % |
|                                       |   |                          |   |                          |   |   |   |   | * |
| Lawrence I. Wills                          |   |                          |   |                          |   | 147,419 | (5) |   |   |
|                                       |   |                          |   |                          |   |   |   |   | * |
| Ellen McClain                              |   |                          |   |                          |   | 139,050 | (6) |   |   |
|                                       |   |                          |   |                          |   |   |   | 1.5 | % |
| Martin F. Beck                             |   |                          |   |                          |   | 334,492 | (7) |   |   |
|                                       |   |                          |   |                          |   |   |   | 1.0 | % |
| James L. Greenwald                         |   |                          |   |                          |   | 233,113 | (8) |   |   |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Edward Dugger III                          |   |                          |   |                          |   | 117,534 | (9) |   | *  |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Thomas R. Settle                           |   |                          |   |                          |   | 301,100 | (10) | 1.3 | % |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Charles J. Hamilton, Jr.                   |   |                          |   |                          |   | 187,009 | (11) |   | * |
|                                       |   |                          |   |                          |   |   |   |   |   |
| M. Fred Brown                              |   |                          |   |                          |   | 118,492 | (12) |   | * |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Jon E. Barfield                            |   |                          |   |                          |   | 115,923 | (13) |   | * |
|                                       |   |                          |   |                          |   |   |   |   |   |
| Veronica Pollard                           |   |                          |   |                          |   | 104,940  | (14) |   | * |
|                                       |   |                          |   |                          |   |   |   |   |   |
| All directors and officers as a  group(13) |   | 178,500                       |   | 100.0                         | %      | 5,444,598 |   | 24.3 | % |

 

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*              Less than 1%.

 

(1)           Percentage figures assume the exercise of options for thepurchase of Common Stock (Nonvoting) held by such shareholder, which conversionor exercise is at the option of the holder within sixty days.

 

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(2)           Includes 1,218,000 shares issuable upon exercise ofoptions granted to Mr. Cornwell under the Stock Option Plan that areexercisable at the option of the holder within sixty days and a total of 29,200shares held by Mr. Cornwell’s immediate family.  Mr. Cornwell disclaims beneficial ownership with respect tosuch 29,200 shares.  The businessaddress of Mr. Cornwell is Granite Broadcasting Corporation, 767 ThirdAvenue, 34th Floor, New York, New York, 10017.

 

(3)           Includes 1,087,050 shares issuable upon exercise ofoptions granted to Stuart J. Beck under the Stock Option Plan which areexercisable at the option of the holder within sixty days and a total of 8,000shares held in trust for Mr. Beck’s children. Mr. Beck disclaims beneficial ownership with respect to such 8,000 shares.  The business address of Mr. Stuart Beckis Granite Broadcasting Corporation, 767 Third Avenue, 34th Floor, New York,New York, 10017.

 

(4)           Includes 320,000 shares issuable upon exercise of optionsgranted to Mr. Selwyn under the Stock Option Plan that are exercisable at theoption of the holder within sixty days.

 

(5)           Includes 104,500 shares issuable upon the exercise ofoptions granted to Mr. Wills under the Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(6)           Includes 108,500 shares issuable upon exercise of optionsgranted to Ms. McClain under the Stock Option Plan that are exercisable at theoption of the holder within sixty days.

 

(7)           Includes 8,250 shares held by Mr. Beck’s wife, 29,264shares held by the Martin F. Beck Family Foundation and 80,475 issuable uponexercise of options granted under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.  Mr. Beck disclaims beneficial ownershipwith respect to shares held by his spouse and by the Martin F. Beck FamilyFoundation.

 

(8)           Includes 112,400 shares issuable upon exercise of optionsgranted to Mr. Greenwald under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(9)           Includes 75,375 shares issuable upon exercise of Optionsgranted to Mr. Dugger under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(10)         Includes 3,000 shares held by Mr. Settle’s wife ascustodian for his children and 114,235 shares issuable upon exercise of optionsgranted 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.

 

(11)         Includes 2,800 shares held by Mr. Hamilton’s wife ascustodian for their minor children under the UGMA and 127,200 shares issuableupon exercise of options granted to Mr. Hamilton under the Directors’ StockOption Plan, which are exercisable at the option of the holder within sixtydays.  Mr. Hamilton disclaims beneficialownership with respect to the shares held by his spouse.

 

(12)         Includes 200 shares held by Mr. Brown’schildren and 74,625 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.

 

(13)         Includes39,465 shares held in trust and 72,500 shares issuable upon exercise of optionsgranted to Mr. Barfield under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(14)         Includes62,500 shares issuable upon exercise of options granted to Ms. Pollard underthe Directors’ Stock  Option Plan thatare exercisable at the option of the holder within sixty days.

 

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**Item 13****.**  **Certain Relationships and Related Transactions**

 

Between 1995 and 1998, theCompany loaned Mr. Cornwell, Chief Executive Officer and Chairman of the Boardof Directors, $2,911,000 in four separate transactions to pay the exerciseprice on stock options exercises and certain personal income taxes.  On January 1, 2001, the Company loaned Mr.Cornwell an additional $375,000. On February 15, 2001, the Companyagreed to consolidate the five loans into one loan in the amount of $3,286,000.The new promissory note matures on January 25, 2006 or, if earlier, 30 daysafter the officer’s termination of employment. The new promissory note does notbear interest, but interest at an annual rate of 6.75% will be imputed asadditional compensation to the officer. The new promissory note allows for the loan to be forgiven in one-thirdincrements if the Company’s Common Stock (Nonvoting) trades for ten consecutivetrading days at $15, $20, and $25, respectively, or if the per shareconsideration received by the Company’s common stockholders in a Change ofControl (as defined in the Indentures governing the Company’s seniorsubordinated notes) equals at least $15, $20 or $25, respectively.  In addition, on February 15, 2001 theCompany forgave $232,247 of interest accrued on Mr. Conrwell’s loans during theyear ended December 31, 2000.

 

In1995, the Company loaned Mr. Stuart Beck, President and a member of the Boardof Directors, $221,200 to pay for certain personal taxes. On February 15, 2001, the Company agreedto cancel this loan and issue a new loan in the same amount. The new promissorynote matures on January 25, 2006 or, if earlier, 30 days after the officer’stermination of employment. The new promissory note does not bear interest, butinterest at an annual rate of 6.75% will be imputed as additional compensationto the officer.  The new promissory noteallows for the loan to be forgiven in one-third increments if the Company’sCommon Stock (Nonvoting) trades for ten consecutive trading days at $15, $20,and $25, respectively, or if the per share consideration received by theCompany’s common stockholders in a Change of Control (as defined in theIndentures governing the Company’s senior subordinated notes) equals at least$15, $20 or $25, respectively. In addition, on February 15, 2001 the Companyforgave $19,908 of interest accrued on Mr. Beck’s loan during the year-endedDecember 31, 2000.

 

**Item 14.  ****Controls and Procedures**

 

As of December 31, 2002,an evaluation was carried out under the supervision and with the participationof Granite Broadcasting’s management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rule 13a-14(c) underthe Securities 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, 2002. No significant changes were made in our internal controls orin other factors that could significantly affect these controls subsequent tothe date of their evaluation.

 

66

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**PART IV**

 

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

 
| (a)1 | Financial statements  and the schedule filed as a part of this report are listed on the “Index to  Consolidated Financial Statements”at page 31 herein.  All other schedules are omitted because  they are not applicable to the Company. |   |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

 

(a)2  Exhibits

 
| 3.1d/   |   | Third Amended and Restated Certificate of Incorporation of the  Company, as amended.                                                                                                                                                                                                                                              |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 3.2r/   |   | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 3.3g/   |   | Certificate of Designations of the Powers, Preferences and Relative,  Participating, Optional and Other Special Rights of the Company’s 123⁄4%,  Cumulative Exchangeable Preferred Stock and Qualifications, Limitations and Restrictions  Thereof.                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.37b/  |   | Indenture, dated as of May 19, 1995, between Granite Broadcasting  Corporation and United States Trust Company of New York for the Company’s  $175,000,000 Principal Amount 10-3/8% Senior Subordinated Notes due May 15,  2005.                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.38c/  |   | Form of 10-3/8% Senior Subordinated Note due May 15, 2005.                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.41f/  |   | Indenture, dated as of February 22, 1996, between Granite Broadcasting  Corporation and The Bank of New York relating to the Company’s $110,000,000  Principal Amount 9-3/8% Series A Senior Subordinated Notes due December 1,  2005.                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.42f/  |   | Form of 9-3/8% Series A Senior Subordinated Note due December 1, 2005.                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.44g/  |   | Indenture, dated as of January 31, 1997, between Granite Broadcasting  Corporation and The Bank of New York for the Company’s 123⁄4% Series A Exchange  Debentures and 123⁄4% Exchange Debentures due April 1, 2009.                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.45g/  |   | Form of 123⁄4% Exchange Debenture due April 1, 2009 (included in the  Indenture filed as Exhibit 4.44).                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.49l/  |   | Indenture dated as of May 11, 1998, between the Company and The Bank  of New York, as Trustee, relating to the Company’s 8-7/8% Senior Subordinated  Notes due May 15, 2008 (including form of note).                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.54q/  |   | Credit Agreement dated as of March 6, 2001, among Granite Broadcasting  Corporation, as Borrower, the Lenders party thereto, Goldman Sachs Credit  Partners L.P., as Administrative Agent, Tranche B Collateral Agent, Sole Lead  Arranger and Sole Bookrunner, and Foothill Capital Corporation, as Tranche A  Collateral Agent. |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.55q/  |   | Warrant to purchase 753,491 shares of Common Stock (Nonvoting) of  Granite Broadcasting Corporation issued March 6, 2001 to Goldman Sachs &  Co.                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 4.56u/  |   | Amended and Restated Credit Agreement dated as of April 30, 2002 among  Granite Broadcasting Corporation, as a Borrower, and the Lenders party  thereto and Goldman Sachs Credit Partners L.P. as Administrative Agent, as  Collateral Agent, as Sole Lead Arranger and Sole Bookrunner.                                          |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.1n/  |   | Granite Broadcasting Corporation Stock Option Plan, as amended through  October 26, 1999.                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                              |
| 10.12f/ |   | Network Affiliation Agreement (WPTA-TV).                                                                                                                                                                                                                                                                                          |

 

67

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| 10.13a/  |   | Employment Agreement dated as of September 20, 1991 between Granite  Broadcasting Corporation and W. Don Cornwell.                                                                                                                                                                                                                                                                      |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.14a/  |   | Employment Agreement dated as of September 20, 1991 between Granite  Broadcasting Corporation and Stuart J. Beck.                                                                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.15    |   | Granite Broadcasting Corporation Management Stock Plan, as amended  through January 1, 2003.                                                                                                                                                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.19n/  |   | Granite Broadcasting Corporation Directors’ Stock Option Plan, as  amended through October 26, 1999.                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.20b/  |   | Network Affiliation Agreement (WTVH-TV).                                                                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.25d/  |   | Granite Broadcasting Corporation Employee Stock Purchase Plan, dated  February 28, 1995.                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.28e/  |   | Network Affiliation Agreement (WKBW).                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.30g/  |   | Employment Agreement dated as of September 19, 1996 between Granite  Broadcasting Corporation and Robert E. Selwyn, Jr.                                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.31    |   | Non-Employee Directors Stock Plan of Granite Broadcasting Corporation,  as amended through December 2, 2002.                                                                                                                                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.32h/  |   | Stock Purchase Agreement, dated as of October 3, 1997, by and among  Granite Broadcasting Corporation, Pacific FM Incorporated, James J. Gabbert  and Michael P. Lincoln.                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.34i/  |   | First Amendment to Purchase and Sale Agreement, dated as of July 20,  1998 among Granite Broadcasting Corporation, Pacific FM Incorporated, James  J. Gabbert and Michael P. Lincoln.                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.36j/  |   | Stock Purchase Agreement, dated as of June 26, 1998, between Granite  Broadcasting Corporation and The Michael Lincoln Charitable Remainder  Unitrust.                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.37k/  |   | Stock Purchase Agreement, dated as of June 26, 1998, between Granite  Broadcasting Corporation and The James J. Gabbert Charitable Remainder  Unitrust.                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10. 38m/ |   | Extension Letter, dated February 28, 1999 between Granite Broadcasting  Corporation and Robert E. Selwyn, Jr. extending the term of Mr. Selwyn’s  Employment Agreement to January 31, 2003.                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.46o/  |   | The Granite Broadcasting Corporation 2000 Stock Option Plan, dated as  of April 25, 2000.                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.47p/  |   | Network Affiliation Agreement, dated as of May 31, 2000 among Granite  Broadcasting Corporation, the Parties set forth on Schedule I thereto, and  NBC Television Network (KSEE, KBJR and WEEK-TV).                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.51q/  |   | Amended and Restated Network Affiliation Agreement, dated as of March  6, 2001 among Granite Broadcasting Corporation, the Parties set forth on  Schedule I thereto, and NBC Television Network (KSEE, KBJR-TV and WEEK-TV).                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.52s/  |   | First Amendment, dated as of October 5, 2001, to the Credit Agreement,  dated as of March 6, 2001, by and among Granite Broadcasting Corporation, the  Lenders party thereto, Goldman Sachs Credit Partners L.P., as agent for the  Lenders, as sole lead arranger and book runner and as Tranche B Collateral  Agent, and Foothill Capital Corporation, as Tranche A Collateral Agent. |

 

68

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| 10.53t/ |   | Stock Purchase Agreement, dated as of December 14, 2001, by and among  National Broadcasting Company, Inc., Granite Broadcasting Corporation, KNTV  Television, Inc. and KNTV License, Inc.                                                                                                                                                                                                                                |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.54   |   | First Amendment, dated as of March 5, 2003, to the Amended and  Restated Credit Agreement dated as of April 30, 2002 among Granite  Broadcasting Corporation, the Lenders party thereto and Goldman Sachs Credit  Partners L.P. as Administrative Agent, as Collateral Agent, as Sole Lead  Arranger and as Sole Bookrunner, and for purposes of Section IV therof, the  subsidiaries of Granite Broadcasting Corporation. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21.     |   | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 23.     |   | Consent of Independent Auditors (Ernst & Young LLP).                                                                                                                                                                                                                                                                                                                                                                   |

 

----

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

 

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

 

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

 

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

 

e/                             Incorporatedby reference to the similarly numbered exhibit to the Company’s Current Reporton Form 8-K filed on July 14, 1995.

 

f/                             Incorporatedby reference to the similarly numbered exhibit to the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 1995, filed on March 28,1996.

 

g/                            Incorporatedby reference to the similarly numbered exhibit to the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 1996, filed on March 21,1997.

 

h/                            Incorporatedby reference to Exhibit Number 1 to the Company’s Current Report on Form 8-K,filed on October 17, 1997.

 

i/                              Incorporatedby reference to Exhibit Number 2.5 to the Company’s Current Report on Form 8-K,filed on August 13, 1998.

 

j/                              Incorporatedby reference to Exhibit Number 2.3 to the Company’s Current Report on Form 8-K,filed on July 1, 1998.

 

k/                             Incorporatedby reference to Exhibit Number 2.4 to the Company’s Current Report on Form 8-K,filed on July 1, 1998.

 

l/                              Incorporatedby reference to the similarly numbered exhibit to the Company’s RegistrationStatement No. 333-56327 filed on June 8, 1998.

 

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

 

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

 

69

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o/                            Incorporatedby reference to the similarly numbered exhibit to the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2000, filed on May 15,2000.

 

p/                            Incorporatedby reference to the similarly numbered exhibit to the Company’s QuarterlyReport on Form 10-Q for the quarter ended June 30, 2000, filed on August 14,2000.

 

q/                            Incorporatedby reference to the similarly numbered exhibit to the Company’s Current Reporton Form 8-K, filed on March 9, 2001.

 

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

 

s/                             Incorporatedby reference to the similarly numbered exhibit to the Company’s Current Reporton Form 8-K, filed on October 24, 2001.

 

t/                             Incorporatedby reference to the similarly numbered exhibit to the Company’s Current Reporton Form 8-K, filed on December 19, 2001.

 

u/                            Incorporated byreference to the similarly numbered exhibit to the Company’s Amendment No. 1 toAnnual Report on Form 10-K, filed on May 7, 2002.

 

(b)  Reports on Form8-K.

 

Current Report on Form8-K filed September 13, 2002, disclosing that the Company received a letterfrom Nasdaq stating that its nonvoting common stock (“Common Stock”) did notcomply with the $35 million market capitalization requirement for continuedlisting on the Nasdaq SmallCap Market (Marketplace Rule 4310(c)(2)(B)(ii)).

 

Current Report on Form8-K filed February 13, 2002, disclosing that Granite Broadcasting Corporation,on February 11, 2002, filed an Opposition to Petition to Deny, attached as anexhibit thereto, with the Federal Communication Commission in connection withthe application to transfer control of station KNTV to National BroadcastingCompany, Inc.

 

Current Report on Form8-K filed January 7, 2002, disclosing the Company’s solicitation of consents toamend the indenture governing its 9 3/8% Senior Subordinated Notes due December1, 2005 terminated at 5:00 p.m., New York City time, on January 4, 2002,without all of the conditions set forth in the Consent Solicitation Statementhaving been satisfied.

 

70

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in the City of New York, State of NewYork, on the 28th day of March, 2003.

 
|   | 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 ofthe Securities Exchange Act of 1934, this report has been signed by thefollowing persons on behalf of the Registrant in the capacities and on thedates indicated:

 

 
| **Signature**                             |   | **Title**                                          |   | **Date**       |
|-------------------------------------------|--------|----------------------------------------------------|--------|----------------|
|                                      |   |                                               |   |           |
| /s/ W. DON CORNWELL                       |   | Chief Executive Officer                            |   | March 28, 2003 |
| (W. Don Cornwell)                         |   | (Principal Executive Officer) and Chairman of      |   |           |
|                                      |   | the Board of Directors                             |   |           |
|                                      |   |                                               |   |           |
| /s/ STUART J. BECK                   |   | President and Secretary                            |   | March 28, 2003 |
| (Stuart J. Beck)                          |   | and Director                                       |   |           |
|                                      |   |                                               |   |           |
|  /s/  LAWRENCE I. WILLS         |   | Senior Vice President – Chief Administrative  |   | March 28, 2003 |
| (Lawrence I. Wills)                       |   |  Officer  (Principal Accounting Officer)      |   |           |
|                                      |   |                                               |   |           |
|  /s/  ELLEN MCCLAIN             |   | Senior Vice President – Chief Financial  |   | March 28, 2003 |
| (Ellen McClain)                           |   | Officer (Principal Financial Officer)              |   |           |
|                                      |   |                                               |   |           |
|  /s/ ROBERT E. SELWYN, JR.      |   | Senior Operating Advisor and Director              |   | March 28, 2003 |
| (Robert E. Selwyn, Jr.)                   |   |                                               |   |           |
|                                      |   |                                               |   |           |
| /s/ MARTIN F. BECK                   |   | Director                                           |   | March 28, 2003 |
| (Martin F. Beck)                          |   |                                               |   |           |
|                                      |   |                                               |   |           |
| /s/ JAMES L. GREENWALD                    |   | Director                                           |   | March 28, 2003 |
| (James L. Greenwald)                      |   |                                               |   |           |
|                                      |   |                                               |   |           |
|  /s/ EDWARD DUGGER III               |   | Director                                           |   | March 28, 2003 |
|  (Edward  Dugger III)                |   |                                               |   |           |
|                                      |   |                                               |   |           |
|  /s/ THOMAS R. SETTLE                |   | Director                                           |   | March 28, 2003 |
| (Thomas R. Settle)                        |   |                                               |   |           |
|                                      |   |                                               |   |           |
|  /s/ CHARLES J. HAMILTON, JR.   |   | Director                                           |   | March 28, 2003 |
| (Charles J. Hamilton, Jr.)                |   |                                               |   |           |
|                                      |   |                                               |   |           |
| /s/ M. FRED BROWN                         |   | Director                                           |   | March 28, 2003 |
| (M. Fred Brown)                           |   |                                               |   |           |
|                                      |   |                                               |   |           |
|  /s/ JON E. BARFIELD                 |   | Director                                           |   | March 28, 2003 |
| (Jon E. Barfield)                         |   |                                               |   |           |
|                                      |   |                                               |   |           |
|  /s/ VERONICA POLLARD                |   | Director                                           |   | March 28, 2003 |
| (Veronica Pollard)                        |   |                                               |   |           |

 

71

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#### **CERTIFICATIONS**

#### ** **

I, W. Don Cornwell,certify that:

 

1. I have reviewed thisannual report on Form 10-K of Granite Broadcasting Corporation;

 

2. Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c) presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this annual report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 28th, 2003. |
|-------------------------|
|                    |
| /s/ W. Don Cornwell     |   |
| W. Don Cornwell         |
| Chief Executive Officer |

 

72

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#### **CERTIFICATIONS**

#### ** **

I, Ellen McClain, certify that:

 

1. I have reviewed thisannual report on Form 10-K of Granite Broadcasting Corporation;

 

2. Based on my knowledge,this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisannual report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c) presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this annual report whether therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: March 28th, 2003. |
|-------------------------|
|                    |
| /s/  Ellen McClain      |   |
| Ellen  McClain          |
| Chief Financial Officer |

 

73

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