**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

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

 

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F**or the fiscal year ended December 31, 2005**

 

**Commissionfile number 0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**              | ** ** | **13-3458782**                        |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification No.) |
|                      |       |                                  |

 

**767 ThirdAvenue, 34th FloorNew York, New York 10017(212) 826-2530**

(Address,including zip code, and telephone number,including area code, of registrant’s principal executive offices)

 

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

**None**

 

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

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

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes    o   No   ý

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.  Yes    o   No   ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   ý   No   o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in any definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act.(Check one):                           Large accelerated filer  o Accelerated filer o Non-accelerated filer ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   o  Yes   ý  No

 

As of March 15,2006, 19,756,246 shares of Granite Broadcasting Corporation Common Stock(Nonvoting) were outstanding.  Theaggregate market value (based upon the last reported sale price on the Over-the-CounterBulletin Board on June 30, 2005) of the shares of Common Stock (Nonvoting)held by non-affiliates was approximately $3,624,000 (For purposes ofcalculating the preceding amounts only, all directors and executive officers ofthe registrant are assumed to be affiliates.) As of March 15, 2006, 98,250 shares of Granite BroadcastingCorporation Class A Voting Common Stock were outstanding, all of whichwere held by an affiliate.

 

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**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**GRANITEBROADCASTING CORPORATION**

 

**Form 10-K**

**Table ofContents**

 
| ** **    | **Page** |
|---------------|----------|
| PART I   | 4        |
|          |     |   |   |   |
|          | Item 1.  |   | Business | 4 |
|          | Item 1A. |   | Risk Factors | 21 |
|          | Item 1B. |   | Unresolved  Staff Comments | 27 |
|          | Item 2.  |   | Properties | 28 |
|          | Item 3.  |   | Legal Proceedings | 29 |
|          | Item 4.  |   | Submission  of Matters to a Vote of Security Holders | 29 |
|          |     |   |   |   |
| PART II  | 30       |
|          |     |   |   |   |
|          | Item 5.  |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 30 |
|          | Item 6.  |   | Selected Financial  Data | 30 |
|          | Item 7.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operation | 33 |
|          | Item 7A. |   | Quantitative  and Qualitative Disclosures About Market Risk | 47 |
|          | Item 8.  |   | Consolidated  Financial Statements and Supplementary Data | 48 |
|          | Item 9.  |   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosures | 76 |
|          | Item 9A. |   | Controls and  Procedures | 76 |
|          | Item 9B. |   | Other Information | 76 |
|          |     |   |   |   |
| PART III | 77       |
|          |     |   |   |   |
|          | Item 10. |   | Directors  and Executive Officers of the Registrant | 77 |
|          | Item 11. |   | Executive  Compensation | 80 |
|          | Item 12. |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters | 87 |
|          | Item 13. |   | Certain  Relationships and Related Transactions | 89 |
|          | Item 14. |   | Principal  Accountant Fees and Services | 90 |
|          |     |   |   |   |
| PART IV  | 91       |
|          |     |   |   |   |
|          | Item 15. |   | Exhibits and  Financial Statement Schedules | 91 |
|          |     |   |   |   |
| SIGNATURES    |     |

 

Granite Broadcasting Corporation was incorporated in1988 under the laws of the State of Delaware. As used in this Annual Report onForm 10-K and unless the context otherwise requires, (1) ”Granite,”the “Company,” “we,” “us” and “our” refer to Granite Broadcasting Corporation,together with its direct and indirect subsidiaries, (2) ”Malara BroadcastGroup” and “Malara” refer to Malara Broadcast Group, Inc., together withits direct and indirect subsidiaries, and (3) “Four Seasons Broadcast Company”and “Four Seasons” refer to Four Seasons Broadcast Company, together with itsdirect and indirect subsidiaries.  Ourprincipal executive offices are located at 767 Third Avenue, 34th Floor, NewYork, NY 10017, and our telephone number at that address is (212) 826-2530. Ourweb site is located at http://www.granitetv.com. The information on our website is not part of this report.

 

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

 

Asof September 1, 2005, we have local service agreements relating to onetelevision station owned by Four Seasons Broadcast Company, but do not own anyof the equity interests in Four Seasons Broadcast Company. For a description ofthe relationship between us and Four Seasons Broadcast Company, see Item 1. “Business—RecentDevelopments.”

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Anystatements that are included or incorporated by reference in this report orthat are otherwise attributable to us or persons acting on our behalf, otherthan statements of historical fact, which address activities, events ordevelopments that we expect or anticipate will or may occur in the future,including, without limitation, statements regarding expected financialperformance; future capital expenditures; projected revenue growth or synergiesresulting from acquisitions and other transactions; anticipated completion ofsales of assets under contracts of sale; efforts to control or reduce costs;contingent liabilities; development or purchase of new programming; financingand restructuring efforts; expected competition; use of digital spectrum; andbusiness strategy, are “forward-looking statements”—that is, statements relatedto future, not past, events that are subject to risks and uncertainties. Theseforward-looking statements generally can be identified as statements thatinclude phrases such as “believe”, “project”, “target”, “predict”, “estimate”, “forecast”,“strategy”, “may”, “goal”, “expect”, “anticipate”, “intend”, “plan”, “foresee”,“likely”, “will”, “should” or other similar words or phrases.  Although we believe such statements are basedon reasonable assumptions, actual outcomes and results may differ materiallyfrom those projected.  Accordingly, allforward-looking statements should be evaluated with the understanding of theirinherent uncertainty.  Important factorsthat could cause actual results to differ materially from our expectationsinclude, but are not limited to, those factors described under Item 1A. “RiskFactors” and elsewhere in this report and the following factors:

 

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

 

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

 

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

 

•                                        pricingfluctuations in national and local advertising;

 

•                                        volatility orincreases in programming costs;

 

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

 

•                                        the impact ofchanges in national and regional economies;

 

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

 

•                                        our ability toservice our outstanding debt;

 

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

 

•                                        successfulresults of local services arrangements with Malara Broadcast Group stations inFort Wayne, Indiana and Duluth, Minnesota;

 

•                                        anextraordinary, newsworthy event, including hostilities or terrorist attack;

 

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

 

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

 

•                                        technologicalchange and innovation in the broadcasting industry.

 

We undertake no obligation to update forward-looking statements,whether as a result of new information, future developments or otherwise, anddisclaim any obligation to do so.

 

**AVAILABLEINFORMATION**

 

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

 

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**PART I**

 

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

 

We are a televisionbroadcasting company, focused on developing and operating small tomiddle-market television broadcast stations in the United States.  We presently own and operate sixmiddle-market stations and, since March 8, 2005, have shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) to provide advertising, sales, promotion andadministrative services, and selected programming to two additional stationsowned by Malara Broadcast Group, all of which Granite and Malara stations areaffiliated with either ABC, NBC or CBS, our Big Three Affiliates. As ofDecember 31, 2005, we owned two stations affiliated with the Warner BrothersTelevision Network, or WB Network, which were under contract to be disposed ofby sale to third parties.  However, theunexpected decision by the WB Network to no longer provide programming tocurrent WB affiliates effective in September 2006 has made sales of thosestations on an acceptable basis much less certain at the current time.  Since September 1, 2005, we have had localservice agreements to provide advertising, sales, promotion and administrativeservices to a station owned by Four Seasons Peoria, LLC, which is affiliatedwith UPN.  As of March 15, 2006, in threeof the six markets that we serve, we own, operate, program or provide sales andother services to more than one station. All of the Big Three Affiliates areleading providers of local news, weather and sports in their respectivemarkets. All but one of the television stations we own are operated throughseparate wholly-owned subsidiaries.

 

The following table setsforth general information for each of the television stations that we own,operate, program or provide sales and other services to, as of December 31,2005:

 
| **TV  Station**       | ** ** | **Market  Area**                       | ** ** | **DMA  Rank(1)(2)** | ** ** | **Network  Affiliation** | ** ** | **Status(3)** | ** ** | **Households(2)** | ** ** | **Channel/  Frequency** | ** ** | **Other  Commercial  Stations  in DMA (4)** | ** ** |
|-----------------------|------------|----------------------------------------|------------|---------------------|------------|--------------------------|------------|---------------|------------|-------------------|------------|-------------------------|------------|-------------------------------------------------------|------------|
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| KBWB-TV (5)           |       | San Francisco - Oakland - San Jose, CA |       | 6                   |       | WB                       |       | O&O       |       | 2,356,000         |       | 20/UHF                  |       | 17                                                    |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WDWB-TV (5)           |       | Detroit, MI                            |       | 11                  |       | WB                       |       | O&O       |       | 1,936,000         |       | 20/UHF                  |       | 7                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WKBW-TV               |       | Buffalo, NY                            |       | 49                  |       | ABC                      |       | O&O       |       | 644,000           |       | 7/VHF                   |       | 8                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| KSEE-TV               |       | Fresno- Visalia, CA                    |       | 56                  |       | NBC                      |       | O&O       |       | 546,000           |       | 24/UHF                  |       | 9                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WTVH-TV               |       | Syracuse, NY                           |       | 76                  |       | CBS                      |       | O&O       |       | 398,000           |       | 5/VHF                   |       | 6                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WISE-TV (6)           |       | Fort Wayne, IN                         |       | 106                 |       | NBC                      |       | O&O       |       | 271,000           |       | 33/UHF                  |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WPTA-TV  (6) (7) |       | Fort Wayne, IN                         |       | 106                 |       | ABC                      |       | LSA           |       | 271,000           |       | 21/UHF                  |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WEEK-TV               |       | Peoria - Bloomington, IL               |       | 117                 |       | NBC                      |       | O&O       |       | 242,000           |       | 25/UHF                  |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| WAOE(TV) (8)          |       | Peoria - Bloomington, IL               |       | 117                 |       | UPN                      |       | LSA           |       | 242,000           |       | 59/UHF                  |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| KBJR-TV               |       | Duluth, MN - Superior, WI              |       | 137                 |       | NBC                      |       | O&O       |       | 169,000           |       | 6/VHF                   |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| KDLH-TV (7)           |       | Duluth, MN - Superior, WI              |       | 137                 |       | CBS                      |       | LSA           |       | 169,000           |       | 3/VHF                   |       | 4                                                     |       |
|                  |       |                                   |       |                |       |                     |       |          |       |              |       |                    |       |                                                  |       |
| KRII(TV) (9)          |       | Duluth, MN - Superior, WI              |       | 137                 |       | CBS                      |       | O&O       |       | 169,000           |       | 11/VHF                  |       | 4                                                     |       |

 

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(1)                                  “DMArank” refers to the size of the television market or Designated Market Area (“DMA”)as defined by the A.C. Nielsen Company (“Nielsen”).

 

(2)                                 Source:Nielsen Media Research (www.nielsenmedia.com). These DMA ranks are for the 2005-2006 television season which started onSeptember 20, 2005.

 

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

 

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

 

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(5)                                  On September 8, 2005, we entered into separatedefinitive agreements to sell KBWB-TV, UHF Channel 20, the WB affiliate servingSan Francisco, California and WDWB-TV, UHF Channel 20, the WB affiliate servingDetroit, Michigan to affiliates of AM Media Holdings, LLC.  However, the unexpected decision bythe WB Network to no longer provide programming to current WB affiliateseffective in September 2006 has made sales of those stations on an acceptablebasis much less certain at the current time.

 

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

 

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

 

(8)                                 On September 1, 2005, we entered into astrategic arrangement with Four Seasons Broadcast Company, under which we willprovide advertising sales, promotion and administrative services to FourSeasons Broadcast Company-owned station WAOE (TV) in return for certain feesthat will be paid by Four Seasons Broadcast Company to us.

 

(9)                                 KRII, Channel 11, Chisholm, Minnesota, is asatellite station that transmits the signal of KBJR into the northern sectionof the DMA.  Although KRII predominantlyrebroadcasts the KBJR signal, KRII broadcasts unique news and weather content,as well as certain commercials, separately to this region.  KRII multicasts Weather Plus over one of KBJR’sdigital streams.  KBJR also broadcastsUPN programming on one of its digital streams, which programming is alsocarried in an analog format by certain of the cable systems in the Duluth,Minnesota-Superior, Wisconsin, DMA.

 

**RecentDevelopments**

** **

On September 8, 2005, weentered into a definitive agreement (the “KBWB Purchase and Sale Agreement”) tosell substantially all of the assets of KBWB-TV, the WB affiliate serving theSan Francisco, California television market, to AM Broadcasting KBWB, Inc.(the “KBWB Buyer”).  In addition, onSeptember 8, 2005, we entered into a definitive agreement (the “WDWB Purchase andSale Agreement” and together with the KBWB Purchase and Sale Agreement,the “Purchase and Sale Agreements”) to sell substantially all of the assets ofWDWB-TV, the WB affiliate serving the Detroit Michigan television market, to AMBroadcasting WDWB, Inc. (the “WDWB Buyer”).  The Purchase and Sale Agreements contain covenantsby us not to compete in the San Francisco, California and Detroit, Michiganmarkets for a period of five years. The aggregate consideration to be receivedby us for the sale of KBWB-TV was $72,500,000, before closing adjustments,which was payable $71,250,000 in cash and $1,250,000 in equity in AM MediaHoldings, LLC. The aggregate consideration to be received by us for the sale ofWDWB-TV was $87,500,000, before closing adjustments, which was payable$86,250,000 in cash and $1,250,000 in equity in AM Media Holdings, LLC. Theconsideration for each covenant not to compete in the San Francisco and Detroitmarkets was $10 million, respectively. As of December 31, 2005 theaggregate assets held for sale totaled $116,183,000 and the aggregateliabilities held for sale totaled $36,931,000. At December 31, 2004, theaggregate assets held for sale totaled $158,143,000 and the aggregateliabilities held for sale totaled $46,057,000. Pursuant to the agreements, wewill retain the rights to the existing cash and cash equivalents as well as theaccounts receivable which we will retain the rights to collect. Cash and cashequivalents totaled $520,000 as of December 31, 2005 and $649,000 as ofDecember 31, 2004 is included in our consolidated balance sheets. Accountsreceivable totaled $5,464,000 (net of allowance of $222,000) as of December 31,2005 and $6,091,000 (net of allowance of $415,000) as of December 31, 2004 andare included in our consolidated balance sheets. Net loss from discontinuedoperations was $34,051,000, $24,003,000 and $12,693,000 for the years endedDecember 31, 2005, 2004 and 2003 respectively. Net revenues from discontinuedoperations were $31,457,000, $33,266,000 and $35,211,000 for the years endedDecember 31, 2005, 2004 and 2003, respectively.

 

On January 24, 2006, the WBNetwork announced that it will no longer provide programming to current WBaffiliates effective in September2006.  The KBWB Buyer has advised us thatas a result thereof, the KBWB Buyer will not be able to proceed with thetransaction as contemplated.  While theremay be further discussions between us and the KBWB Buyer about the transaction,we are actively engaging in dialogue with other potential buyers because we donot presently have an agreement in principle with the KBWB Buyer with respectto KBWB-TV.  On February 14, 2006, we entered into an amendment (the “KBWBAmendment”) to the KBWB Purchase and Sale Agreement.  Pursuant to the KBWB Amendment(i) Section 6.2 of the KBWB Purchase and Sale Agreement, a no shop provision,was deleted in its entirety and (ii) the KBWB Buyer and the Company eachhave the right to terminate the KBWB Purchase and Sale Agreement, at any time,by providing written notice to the other party with no liability or obligationto such other party.

 

On January 24, 2006, the WBNetwork announced that it will no longer provide programming to current WBaffiliates effective in September2006. The WDWB Buyer has advised us that as a result of the WB Networkannouncement, the WDWB Buyer will not be able to proceed with the transactionas contemplated.  While there may be further discussions between us andthe WDWB Buyer about the transaction, we are actively engaging in dialogue withother potential buyers because we do not presently have an agreement inprinciple with the WDWB Buyer with respect to WDWB-TV.  On February 14,2006, we entered into an amendment (the “WDWB Amendment”) to the WDWB Purchaseand Sale Agreement.  Pursuant to the WDWBAmendment (i) Section 6.2 of the WDWB Purchase and Sale Agreement, a noshop provision, was deleted in its entirety and (ii) the WDWB Buyer and theCompany each have the right to terminate the WDWB Purchase and Sale Agreement,at any time, by providing written notice to the other party with no liabilityor obligation to such other party.

 

On September 1, 2005, weentered into a strategic arrangement with Four Seasons Broadcast Company, underwhich we will provide advertising sales, promotion and administrative servicesto Four Seasons Broadcast Company-owned station WAOE-TV, the UPN affiliateserving Peoria-Bloomington, Illinois, in return for certain fees that will bepaid by Four Seasons Broadcast Company to us.

 

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OnMarch 7, 2005, we completed the sale of WPTA-TV, the ABC affiliate servingFort Wayne, Indiana, to a subsidiary of Malara Broadcast Group forapproximately $45.4 million, pursuant to the terms and conditions of an assetpurchase agreement, dated April 23, 2004.  In addition, onMarch 8, 2005, we completed the purchase of WISE-TV, the NBC affiliateserving Fort Wayne, Indiana, from New Vision Group, LLC (“New Vision Television”)for approximately $43.5 million, pursuant to the terms and conditions of astock purchase agreement, dated April 23, 2004.

 

Inaddition, a subsidiary of Malara Broadcast Group on March 8, 2005,acquired CBS affiliate KDLH-TV, Duluth, Minnesota-Superior, Wisconsin from NewVision Television and certain of its subsidiaries for approximately $9.5million, pursuant to the terms and conditions of an asset purchase agreement,dated April 23, 2004. We currently own and operate KBJR-TV, the NBCaffiliate serving Duluth-Superior.

 

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

 

MalaraBroadcast Group financed its acquisition of WPTA-TV and KDLH-TV with theproceeds of borrowings pursuant to a Malara Broadcast Group credit agreement(the “Malara Broadcast Group Senior Credit Facility”).  The Malara Broadcast Group Senior CreditFacility provides for two term loans totaling $48.5 million and a revolvingloan of $5 million.  The $23.5 millionMalara Broadcast Group Tranche A Term Loan, which was secured by aletter of credit, was paid offFebruary 10, 2006, as discussed below. The $25 million Malara Broadcast Group Tranche B Term Loan and the $5million revolving loan are secured by the assets of WPTA-TV and KDLH-TV, andguaranteed on an unsecured basis by Granite Broadcasting Corporation.

 

Wedo not own Malara Broadcast Group or its television stations. However, as aresult of Granite Broadcasting Corporation’s guarantee of the obligationsincurred under Malara Broadcast Group’s Senior Credit Facility with respect tothe Tranche B Term Loan and the revolving loan and due to our arrangementsunder the local service agreements and put or call option agreements, underGenerally Accepted Accounting Principles in the United States (“U.S. GAAP”),specifically, Financial Accounting Standards Board (“FASB”) Interpretation No.46, Consolidation of Variable Interest Entities (“Interpretation 46”) we arerequired to consolidate Malara Broadcast Group’s financial position, results ofoperations and cash flows as of December 31, 2004. As we will continue toconsolidate WPTA-TV in accordance with the provisions of Interpretation 46, wewill not account for the sale of assets of WPTA-TV to Malara Broadcast Groupand no gain or loss will be recognized in the consolidated statements ofoperations.

 

OnFebruary 10, 2006, in accordance with the terms of the Malara Broadcast GroupSenior Credit Facility, the letter of credit issued in March 2005 to supportthe $23.5 million Tranche A Term Loan was drawn upon in satisfaction of MalaraBroadcast Group’s obligations to such lenders under the Malara Tranche A TermLoan following non-renewal of the letter of credit.  We paid the reimbursement obligation to theletter of credit issuer on February 10, 2006, using U.S. government securitieswhich had been pledged in support of such obligation.

 

Undera Reimbursement Agreement, dated as of March 8, 2005 (the “ReimbursementAgreement”), among the Company, Malara Broadcast Group and certain ofMalara Broadcast Group’s subsidiaries (the “Malara Borrowers”), the MalaraBorrowers agreed to repay us any amounts drawn on the letter of credit plusinterest at a rate of 8% per annum.  We reduced to $16.6 million theamount due from the Malara Borrowers to Granite under the ReimbursementAgreement.

 

OnJanuary 13, 2006, we and certain of our subsidiaries entered into adefinitive agreement with Television Station Group Holdings, LLC and certain ofits subsidiaries to purchase substantially all of the assets of WBNG-TV,Channel 12, the CBS-affiliated television station serving Binghamton andElmira, New York, for $45 million in cash, subject to closing adjustments (the “WBNGPurchase and Sale Agreement”).  Asof February 8, 2006, the sellershave a right to terminate the WBNG Purchase and Sale Agreement because thesales of two stations affiliated with the WB Network were not completed as of such date.  As of March 30, 2006, the sellers have notexercised their right to terminate the WBNG Purchase and Sale Agreement.  On March 8, 2006, the application seekingconsent to assign the WBNG-TV license to our subsidiary was granted by theFederal Communications Commission (“FCC”).

 

**Operating Strategy**

 

We seek to increaseoperating profitability through the following strategies:

 

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

 

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*Emphasizelocal news, weather and sports. *Thetelevision stations that we own, operate, program or provide sales and otherservices to provide high quality, locally produced news, weather and sportsprogramming on the Big Three affiliated stations, with five of the Big Threeaffiliated stations ranked as the number 1 or number 2 news providers in theirrespective markets.  The stations stronglocal news differentiates us from other media alternatives and helps to attracta loyal audience, which is appealing to advertisers.  In addition, the cost of producing local newsis generally lower than the cost of syndicated programming and incrementallocal news programming can be added with relatively small increases inoperating costs.

 

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

 

*Implementingand maintaining cost controls. *Weemphasize strict control of station operating expenses through a detailedannual budgeting and monthly forecasting process. We also maintain tightcontrol over staffing levels and capital expenditures.  Through the normal course of maintaining andupdating the stations’ technical operations and infrastructure, certainprocesses will be automated in order to reduce long term operating costs.  During 2005, we continued to implement costcontrol initiatives at our stations and corporate office. We will continue ourcost control initiatives during 2006, and we plan to continually monitor andreview each location to ensure we maintain our cost controls. In developing theselection of syndicated programs, we evaluate a program’s cost and projectedprofitability and its potential relative to other programmingalternatives.  We anticipate our annualprogramming obligations to continue to decline on a same station basis.

 

***TheStations and Markets***

* *

The stations that we ownand the stations to which we provide services under local services agreementsoperate in geographically diverse markets, which minimize the impact ofregional economic downturns.  Withrespect to the stations we own, as of December 31, 2005, two stations arelocated in the west region (KBWB—San Francisco, California and KSEE—Fresno,California), four stations are located in the mid-west region (WDWB— Detroit,Michigan, WEEK—Peoria, Illinois, WISE—Fort Wayne, Indiana and KBJR—Duluth,Minnesota) and two stations are located in the northeast region (WKBW—Buffalo,New York and WTVH— Syracuse, New York). As of December 31, 2005, four of theeight stations we own are affiliated with NBC, one is affiliated with ABC, oneis affiliated with CBS and two are affiliated with the WB Network which hasannounced that it will no longer provide programming to current WB affiliateseffective in September 2006.  All threeof the stations to which we provide services under local services agreementsare located in the mid-west region (WPTA-Fort Wayne, Indiana, KDLH-Duluth,Minnesota and WAOE- Peoria, Illinois). WPTA is affiliated with ABC, KDLH is affiliated with CBS and WAOE isaffiliated with UPN.

 

**OwnedStations.**  Thefollowing is a description of each of the television stations we own, as ofDecember 31, 2005:

 

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

# ** **

KBWB, commencedbroadcasting in 1968 and became a WB affiliate in 1995. On January 24, 2006, the WB Network announcedthat it will no longer provide programming to current WB affiliateseffective in September 2006. OnSeptember 8, 2005, we entered into a definitive agreement to sell KBWB to anaffiliate of AM Media Holdings, LLC. However, the unexpected decision bythe WB Network to no longer provide programming to current WB affiliateseffective in September 2006 has made the sale of KBWB-TV on an acceptable basismuch less certain at the current time.  Weacquired KBWB from Pacific FM, Incorporated in July 1998.  San Francisco-Oakland-San Jose is currentlythe 6th largest DMA in the country, comprising ten counties andapproximately 2.4 million television households, according to Nielsen.

 

KBWB’s strength is in itsability to attract teens, young adults and families.  A WB affiliate since 1995, KBWB’s prime timeline up includes popular WB programs such as *GilmoreGirls, Smallville, Everwood, 7th Heaven, Charmed, One Tree Hill* and *Reba*.  The station’ssyndicated programming includes talk-relationship shows such as *Jerry Springer and Blind Date*and situation comedies such as*My Wife & Kids,**King of theHill,,**Home Improvement and Fresh Prince ofBel-Air.  According to Jim*,the hit ABC sitcom, joins the line-up in September 2006.  In the fall 2006 KBWB will become a trueindependent serving the Bay Area.  Thestation is in the process of creating a new station brand and prime timeprogram schedule that will allow the station to thrive as an independent, toprovide new flexibility for sponsorship and added value for advertisers, and torealize a significant increase in advertisement inventory.

 

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

 

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

# ** **

WDWB, commencedbroadcasting in 1968 and is a WB affiliate. On January 24,2006, the WB Network announced that it will no longer provideprogramming to current WB affiliates effective in September 2006. We acquired WDWB from WXON-TV, Incorporatedin January 1997.  On September 8, 2005, we entered into a definitive agreement to sellWDWB to an affiliate of AM Media Holdings, LLC. However, the unexpecteddecision by the WB Network to no longer provide programming to current WBaffiliates effective in September 2006 has made the sale of WDWB on anacceptable basis much less certain at the current time.

 

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Detroit is currently the11th largest DMA in the country, comprising nine counties andapproximately 1.9 million television households.

 

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

 

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

 

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

 

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

# ** **

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

 

Buffalo is currently the49th largest DMA in the country, comprising ten counties andapproximately 644,000 television households.

 

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

 

The Buffalo economy iscentered on manufacturing, government, health services and financialservices.  The average householdeffective buying income, or EBI, in the DMA was $40,000 according to estimatesprovided in the BIA Report.  Leadingemployers in the area include General Motors, Ford Motor Company, American Axleand Manufacturing, M&T Bank, HSBC Bank, Roswell Park Cancer Institute,Buffalo General Hospital, Tops Markets and Verizon.

 

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

# ** **

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

 

Fresno-Visalia iscurrently the 56th largest DMA in the country, comprising sixcounties and approximately 546,000 television households.

 

KSEE is a strongnews station which competitively battles and often surpasses long-time newsleader KSFN, an ABC owned and operated station, in the key demographics. TheFresno broadcast market consists of nine over-the-air television stations whichincludes three Hispanic stations.  KSEE broadcasts 5 hours of localnews per weekday, including the market’s first locally produced 4:00 p.m.newscast, launched in September 2002.  The station’s syndicatedprogramming includes shows such as *Dr. Phil and InsideEdition.*

 

The Fresno-Visaliamarket is a diverse and growing populace which is expected to grow by 1.7%through 2008. Although agriculture is the backbone of the market, new businesscontinues to expand to the market to take advantage of the growing populationand the low cost of living for a major California city. No single employer orindustry dominates the local economy.  The average household EBI in theDMA was $40,571, according to estimates provided in the BIA Report.  TheFresno-Visalia DMA is also the home of several universities, includingCalifornia State University- Fresno.

 

*WTVH,Syracuse, New York*

 

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

 

Syracuse is currently the76th largest DMA in the country, comprising eight counties andapproximately 398,000 television households. The station’s prime timeprogramming generally ranks first or second in the adults’ 25-54 ratingscategory.

 

WTVH broadcasts 4.5 hoursof locally produced programming per weekday. In addition, WTVH broadcasts 1.5hours of news per day (7.5 hours per week) for WSYT (FOX) as part of a sharedservices agreement which will cease in April 2006.  The station’s syndicated programming includesshows such as *Martha Stewart, Wheel of Fortune and**Jeopardy.*WTVH is also the exclusivehome in Syracuse of the NFL’s Buffalo Bills pre-season games and coaches shows.

 

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

 

*WISE,Fort Wayne, Indiana*

 

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

 

Fort Wayne is currentlythe 105th largest DMA in the country, comprising twelve counties andapproximately 271,000 television households.

 

The station’s syndicatedprogramming includes shows such as *Live with Regis andKelly,Ellen and in the fall 2006, Dr. Phil and Seinfeld.*

 

The Fort Wayne economy iscentered on manufacturing, healthcare, communications, insurance, financialservices and aerospace.  The averagehousehold EBI in the DMA was $45,100, according to estimates provided in theBIA Report.  Leading employers located inthe area include Lincoln National Life Insurance, General Electric, GeneralMotors, Verizon, Dana, Uniroyal Goodrich and ITT Aerospace.  Fort Wayne is also the home of severaluniversities, including the joint campus of Indiana University and PurdueUniversity at Fort Wayne.  Two majorhospital systems, Lutheran Health and Parkview Health, make Fort Wayne aregional medical center that serves four states.

 

*WEEK,Peoria-Bloomington, Illinois*

 

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

 

Peoria-Bloomington is currently the 117th largest DMA in thecountry, comprising ten counties and approximately 242,000 televisionhouseholds.  The station’s newscasts andprime time programming rank number 1 in the adults 25-54 ratings category.

 

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

 

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

 

The economy ofBloomington is focused on insurance, education, agriculture and manufacturing.Leading employers located in Bloomington include State Farm Insurance Company,Country Companies Insurance Company and Diamond-Star Motors Corporation (asubsidiary of Mitsubishi).  ThePeoria-Bloomington area is also the home of numerous institutions of highereducation including Bradley University, Illinois Central College, IllinoisWesleyan University, Illinois State University, Eureka College and theUniversity of Illinois College of Medicine.  The average household EBI in the DMA was$46,300, according to estimates provided in the BIA Report.

 

*KBJR,Duluth, Minnesota-Superior, Wisconsin*

 

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

 

Duluth, MN-Superior, WIis currently the 137th largest DMA in the country, comprising twelvecounties and approximately 169,000 television households.  The station’s newscasts rank number 1 inevery time period in total audience and in the key adults 25-54 ratingscategory.  Prime time programminggenerally ranks higher than the average for NBC affiliates.

 

KBJR is a strongcompetitor in the market, broadcasting 4 hours of local news per weekday.  The station’s syndicated programming includesshows such as *The Tony Danza Show*, *Dr. Phil, Jeopardy* and *Wheel ofFortune*.  We also own Channel11 License, Inc., the licensee of television station KRII, Channel 11,Chisholm, Minnesota, a satellite station that transmits the signal of KBJR intothe northern section of the DMA. Although KRII predominantly rebroadcaststhe KBJR signal, KRII broadcasts unique news and weather content, as well ascertain commercials, separately to this region. KBJR also airs United ParamountNetworks, or UPN, programming over its DTV signal that is carried by virtuallyall cable operators in the DMA.

 

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

 

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

 

*WPTA,Fort Wayne, Indiana*

 

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

 

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

 

Fort Wayne is currentlythe 105th largest DMA in the country, comprising twelve counties andapproximately 271,000 television households. See the description of television station WISE-TV above for additionalinformation on the Fort Wayne, Indiana area.

 

*KDLH,Duluth, Minnesota-Superior, Wisconsin*

 

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

 

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

 

Duluth, MN-Superior, WIis currently the 137th largest DMA in the country, comprising twelvecounties and approximately 169,000 television households.  See the description of television stationKBJR-TV above for additional information on the *Duluth,Minnesota-Superior, Wisconsin* area.

 

**Stationowned by****FourSeasons Broadcast Company to which we provide services.**  The following is a description of the televisionstations to which we provide services under local service agreements, as ofSeptember 1, 2005:

 

*WAOE,Peoria-Bloomington, Illinois*

 

WAOE commencedbroadcasting in 1998 and is a UPN affiliate (and will be an affiliate ofMyNetworkTV effective September 2006). Four Seasons Broadcast Company has owned and operated WAOE since itsinception.  We entered into localservices agreements with respect to WAOE on September 1, 2005.

 

The station’s syndicatedprogramming includes shows such as *Friends, That 70’s Show,Malcolm in the Middle, Judge Judy and Jerry Springer.*

 

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

 

The economy ofBloomington is focused on insurance, education, agriculture and manufacturing.Leading employers located in Bloomington include State Farm Insurance Company,Country Companies Insurance Company and Diamond-Star Motors Corporation (asubsidiary of Mitsubishi).  ThePeoria-Bloomington area is also the home of numerous institutions of highereducation including Bradley University, Illinois Central College, IllinoisWesleyan University, Illinois State University, Eureka College and theUniversity of Illinois College of Medicine. The average household EBI in the DMA was $46,300, according to estimatesprovided in the BIA Report.

 

**Employees**

 

As of March 15,2006, we employed 749 persons, comprised of 684 full-time and 65 part-time ortemporary employees, of whom 261 are represented by three unions pursuant toagreements expiring at various times in 2006, 2007 and 2008.  We believe our relations with our employeesare good.

 

**NetworkAffiliation**

** **

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

 

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In contrast, fullyindependent stations purchase or produce all of their programming, resulting inhigher programming costs, but allowing independent stations to retain entireadvertising inventory and revenue. However, barter and cash-plus-barterarrangements are becoming increasingly popular. Under these arrangements, a national program distributor typicallyretains up to 50% of the available advertising time for programming itsupplies, in exchange for reduced fees for such programming from theindependent stations.

 

 

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

 

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

 

Under the affiliationagreements with the WB network, KBWB and WDWB each pays an affiliation fee forthe programming each station receives pursuant to its affiliation agreement. OnJanuary 24, 2006, the WB network announced that effective September 2006, theWB network and the UPN network will form a new network and no longer provideprogramming to their respective networks. The unexpected decision by the WB Network to no longer provideprogramming to current WB affiliates has made our planned sales of KBWB andWDWB on an acceptable basis much less certain at the current time.

 

The network affiliationagreements expire on the following dates:

 
| **Station** | ** ** | **Network  affiliation** | ** ** | **Status (1)** | ** ** | **Affiliation  agreement  expiration date** |
|-------------|------------|--------------------------|------------|---------------------|------------|--------------------------------------------------|
| WDWB        |       | WB                       |       | O&O (4)         |       | May 31,  2007 (5)                           |
| WKBW        |       | ABC                      |       | O&O             |       | June 30,  2013                              |
| WPTA        |       | ABC                      |       | LSA (2), (3)        |       | June 30,  2013                              |
| WISE        |       | NBC                      |       | O&O (2)         |       | January 1,  2011                            |
| WTVH        |       | CBS                      |       | O&O             |       | December 31,  2015                          |
| KBWB        |       | WB                       |       | O&O (4)         |       | January 9,  2008 (5)                        |
| KSEE        |       | NBC                      |       | O&O             |       | December 31,  2011                          |
| WEEK        |       | NBC                      |       | O&O             |       | December 31,  2011                          |
| KBJR        |       | NBC                      |       | O&O             |       | December 31,  2011                          |
| KDLH        |       | CBS                      |       | LSA (3)             |       | June 30,  2015                              |

 

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

 

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

 

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

 

(4)            OnSeptember 8, 2005, we entered into a separate definitive agreements to sellKBWB-TV, UHF Channel 20, the WB affiliate serving San Francisco, California andWDWB-TV, UHF Channel 20, the WB affiliate serving Detroit, Michigan toaffiliates of AM Media Holdings, LLC.  However, the unexpected decision by the WBNetwork to no longer provide programming to current WB affiliates effective inSeptember 2006 has made sales of those stations on an acceptable basis muchless certain at the current time.  For information regarding the current statusof such agreements, please see “Recent Developments.”

 

(5)            OnJanuary 24, 2006 the WB network announced that effective September 2006, the WBnetwork will no longer provide programming to current WB affiliates of theirnetwork.

 

In addition to these network affiliation agreements, we deliver WBprogramming on leased cable channels in Fort Wayne, Indiana and Duluth,Minnesota—Superior, Wisconsin. In the Duluth, Minnesota—Superior, Wisconsin, wedeliver UPN programming on one of KBJR’s digital streams, which programming isretransmitted in analog format by certain major cable systems in the DMA.  In addition, KRII multicasts Weather Plus onanother of KBJR’s digital streams.

 

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Under each of theaffiliation agreements, the networks may terminate the agreement upon advancewritten notice under the circumstances specified in the agreements.  On January 24, 2006, the WB network announcedthat effective September 2006, the WB network and the UPN network will form anew network and no longer provide programming to their respective networks.With the exception to the WB network affiliations (as discussed above), we haveno reason to believe that the our network affiliation agreements for our otherstations that we own, operate, program or provide sales and other services towill not be renewed when they expire.

 

**IndustryOverview**

** **

Commercial televisionbroadcasting began in the United States on a regular basis in the 1940s.  Currently, there are a limited number ofchannels available for broadcasting in any one geographic area and the licenseto operate a broadcast station is granted by the FCC.  Television stations can be distinguished bythe frequency on which they broadcast. Television stations which broadcast over the very high frequency, orVHF, band of the spectrum generally have some competitive advantage overtelevision stations that broadcast over the ultra-high frequency, or UHF, bandof the spectrum because VHF stations usually have better signal coverage andoperate at a lower transmission cost. In television markets in which all localstations are UHF stations, such as Fort Wayne, Indiana, Peoria-Bloomington,Illinois and Fresno- Visalia, California, there is no competitive disadvantageto broadcasting over a UHF band.

 

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

 

**Competition**

** **

The financial success ofour television stations is dependent on audience ratings and advertisingrevenues within each station’s geographic market.  The stations compete for revenues with othertelevision stations in their respective markets, as well as with otheradvertising media, such as newspapers, radio, magazines, outdoor advertising,transit advertising, yellow page directories, the Internet, direct mailand local cable systems.  Somecompetitors are part of larger companies with substantially greater financialresources than us.

 

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

 

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

 

•                  managementexperience;

 

•                  signalcoverage;

 

•                  localprogram acceptance;

 

•                  networkaffiliation;

 

•                  audiencecharacteristics;

 

•                  assignedfrequency; and

 

•                  strengthof local competition.

 

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

 

Alternate programming,entertainment and video distribution systems can increase competition for abroadcasting station by bringing distant broadcasting signals into its marketwhich are not otherwise available to the station’s audience and also by servingas distribution systems for non-broadcast programming.  Programming is now being distributed to cabletelevision systems by both terrestrial microwave systems and by satellite.  Our stations also compete with homeentertainment systems, including video cassette recorders and playback systems,video discs and television game devices, the Internet, multi-point distributionsystems, multi-channel multi-point distribution systems, video programmingservices available through the Internet and other video delivery systems.

 

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

 

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

 

We are unable to predictthe effect that these or other technological changes will have on our businessor ability of the stations to compete in their markets.  Commercial television broadcasting may facefuture competition from interactive video and data services that providetwo-way interaction with commercial video programming, along with informationand data services that may be delivered by commercial television stations,cable television, direct broadcast satellites, multi-point distributionsystems, multi-channel multi-point distribution systems or other video deliverysystems.  In addition, actions by theFCC, Congress and the courts all suggest an increased future involvement in theprovision of video services by telephone companies.  The Telecommunications Act of 1996 lifted theprohibition on the provision of cable television services by telephonecompanies in their own telephone areas subject to regulatory safeguards andpermits telephone companies to own cable systems under certaincircumstances.  SBC Communications Inc. and VerizonCommunications Inc. have recently begun to expand their respective fiber-opticnetworks in order to offer Internet Protocol-based video services to theircustomers.  The entry into thevideo programming distribution market by these entities and other telephonecompanies could increase the competition the stations face from other distributorsof video programming.

 

**FCCRegulation of Television Broadcasting**

** **

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

 

*License Issuance and Renewal*

 

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

 

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

 

•                hasserved the public interest, convenience, and necessity;

 

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

 

•                hascommitted no other violations of the Communications Act or the FCC’srules which would constitute a pattern of abuse.

 

Ifthe FCC cannot make this finding, it may deny a renewal application, and acceptother applications to operate the station 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 ourexisting licenses are in effect and with the exception of WDWB, either havelicense renewal applications pending or will file renewal applications during2006 and 2007.  The main station licensesfor our, Malara Broadcast Group’s, and Four Season Broadcast Company’stelevision stations expire on the following dates:

 

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| **Station**   | ** ** | **Status(1)** | ** ** | **License  expiration date** |
|---------------|------------|---------------|------------|-----------------------------------|
| WPTA(TV)      |       | LSA (2)(3)    |       | August  1, 2005                   |
| WISE-TV       |       | O&O (2)   |       | August  1, 2005                   |
| WDWB(TV)  (4) |       | O&O       |       | October  1, 2013                  |
| WEEK-TV       |       | O&O       |       | December  1, 2005                 |
| WAOE(TV)      |       | LSA(5)        |       | December  1, 2005                 |
| KBJR-TV       |       | O&O       |       | December  1, 2005                 |
| KRII(TV)  (6) |       | O&O       |       | April  1, 2006                    |
| KDLH(TV)      |       | LSA (3)       |       | April  1, 2006                    |
| KSEE(TV)      |       | O&O       |       | December  1, 2006                 |
| KBWB(TV) (4)  |       | O&O       |       | December  1, 2006                 |
| WTVH(TV)      |       | O&O       |       | June  1, 2007                     |
| WKBW-TV       |       | O&O       |       | June  1, 2007                     |

 

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

 

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

 

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

 

(4)                                 OnSeptember 8, 2005, we entered into a separate definitive agreements to sellKBWB-TV, UHF Channel 20, the WB affiliate serving San Francisco, California andWDWB-TV, UHF Channel 20, the WB affiliate serving Detroit, Michigan toaffiliates of AM Media Holdings, LLC. However, the unexpected decision by theWB Network to no longer provide programming to current WB affiliates effectivein September 2006 has made sales of those stations on an acceptable basis muchless certain at the current time.  For information regarding the current statusof such agreements, please see “Recent Developments”.

 

(5)                                 On September 1, 2005, we entered into astrategic arrangement with Four Seasons Broadcast Company, under which we willprovide advertising sales, promotion and administrative services to FourSeasons Broadcast Company-owned station WAOE (TV) in return for certain feesthat will be paid by Four Seasons Broadcast Company to us.

 

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

 

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

 

*Ownership Restrictions*

 

The Communications Actalso prohibits the assignment of a license or the transfer of control of alicensee without prior approval of the FCC. In its review process, the FCC considers financial and legalqualifications of the prospective assignee or transferee and also determineswhether the proposed transaction complies with rules limiting the commonownership of certain attributable interests in broadcast, cable, and newspapermedia on a local and national level.  TheFCC’s restrictions on multiple ownership could limit the acquisitions andinvestments that we make or the investments other parties make in us.  However, none of our officers, directors orholder of voting common stock currently has attributable or non-attributableinterests that violate the FCC’s ownership rules currently in effect. Asdiscussed below, the FCC released a comprehensive media ownership order onJuly 2, 2003 in which it revised many of its media ownership rules.

 

OnJune 2, 2003, the FCC modified its media ownership rules.  The revised media ownership rules were tobecome effective on September 4, 2003. However, on September 3, 2003, the U.S. Court of Appeals for the ThirdCircuit stayed the effectiveness of the new rules.  On June 24, 2004, the Third Circuit issued adecision finding virtually all of the modified media ownership rules without supportand remanding the proceeding back to the FCC for further consideration.  The stay of the modified media ownershiprules remains in effect pending the FCC’s review on remand except with respectto certain limited aspects of the FCC’s media ownership order, including theFCC’s revised definition of local radio market. The modified media ownership rules also are subject to pending petitionsfor reconsideration filed with the FCC. We are unable to predict the eventual outcome of the reconsiderationpetitions, or the outcome of the FCC’s review on remand.  We are unable to predict the potential effectany changes would have on our business.

 

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*Attribution*

 

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

 

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

# ** **

In addition, for purposesof its national and local multiple ownership rules, the FCC attributes localmarketing agreements in which the broker provides more than 15% of the brokeredstation’s weekly program time.  This meansthat, if an entity owns one television station in a market and has a qualifyinglocal marketing agreement with another station in the same market, thisarrangement must comply with all of the FCC’s ownership rules includingthe television duopoly rule. Local marketing agreements entered into prior toNovember 5, 1996 are grandfathered until the FCC initiates a futureproceeding when their status will be reviewed on a case by case basis.  Local marketing agreements entered into on orafter November 5, 1996 were grandfathered temporarily untilAugust 2001 only.  We do not operateany stations pursuant to a grandfathered local marketing agreement.

 

In its recent mediaownership order, the FCC concluded that a radio joint advertising salesagreement in which a same-market radio station was the broker for more than 15percent of the brokered radio station’s weekly advertising time wouldconstitute an attributable interest for the broker in the brokered radiostation.  As a result, the FCC wouldcount the brokered radio station towards the broker’s permissible ownershiptotals under the revised radio ownership rules. The Third Circuitaffirmed the FCC’s decision with respect to attribution of these radio jointsales agreements. The FCC did not attribute same-market joint salesagreements for television stations in its media ownership order. However, onAugust 2, 2004, the FCC initiated a proceeding to seek comment on whetherto attribute same-market television joint sales agreements.  We cannot predict whether the FCC will decideto attribute television joint sales agreements.

 

The Company has enteredinto shared services and advertising representation agreements with MalaraBroadcast Group of Duluth Licensee LLC, the licensee of television stationKDLH, Duluth, Minnesota, and Malara Broadcast Group of Fort Wayne Licensee LLC,the licensee of television station WPTA, Fort Wayne, Indiana.  Under these agreements, the Company providesup to 15% of the stations’ weekly programming and also sells all of thestations’ available advertising time.  Apetition to deny the Malara application to acquire KDLH was filed with the FCCjointly by two competing television station licensees in the Duluthmarket.  On December 14, 2004, theFCC’s Media Bureau (“Bureau”) released a decision in which it denied the jointpetition and consented to the assignment of KDLH’s license to Malara.  In reaching this decision, the Bureaudetermined the agreements do not give the Company *de facto*control of KDLH or result in the Company’s having an attributable interest inKDLH under the FCC’s existing attribution rules. In January 2005, thepetitioning broadcasters filed an application for review seekingCommission-level review of the Bureau’s decision.  Malara filed an opposition to the applicationfor review, and the petitioning broadcasters filed a response to thatopposition.  The FCC has not yet ruled onthe application for review.  Although webelieve that the application for review is without merit and anticipate thatthe FCC will affirm the grant of the assignment application for KDLH, it is notpossible to predict how the FCC will rule on the application forreview.  It also is not possible topredict any remedial action that may be imposed by the FCC in the event that itgrants the application for review.  FCCgrant of the application for review ultimately could result in a reformation orrescission of these agreements, the assignment of the KDLH license back to NewVision Group, L.L.C., or a sale by Malara of its ownership of KDLH.

 

TheCompany has entered into shared services and advertising representationagreements with Four Seasons Peoria, LLC, the licensee of television stationWAOE, Peoria, Illinois.  Under thisagreement, the Company provides certain administrative services and sells allof the station’s available advertising time.

 

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*National Ownership Rules*

 

Prior to the 2002biennial review, FCC rules provided that no individual or entity couldhave an attributable interest in television stations that reach more than 35%of the national television viewing audience. For purposes of this calculation, stations in the UHF band, which coverschannels 14—69, receive a “UHF discount” and are attributed with only 50% ofthe households attributed to stations in the VHF band, which covers channels2—13.  In the June 2, 2003 mediaownership order, the FCC raised the national ownership cap from 35% to 45% andmaintained the UHF discount.  Thesedecisions were appealed before the Third Circuit and, as a result, the revisedrules were stayed pending the court’s review.  However, the Consolidated Appropriations Actof 2004 amended Section 202(c) of the Telecommunications Act of 1996by increasing the national ownership cap to 39 percent.  As a result, the Third Circuit determinedthat challenges to the FCC’s decision to raise the cap to 45% and to retain theUHF discount were rendered moot.  Priorto the Third Circuit’s June 24, 2004 decision, on February 19, 2004,the FCC  sought comment on whether tomodify or eliminate the UHF discount. The court’s decision did not foreclose further FCC consideration of theUHF discount, but the FCC has not yet taken action on the comments itreceived.  We are unable to predict theoutcome of this proceeding.

 

*Television Duopoly Rule*

 

Prior to the adoption ofthe July 2003 media ownership order, the FCC’s television duopolyrule permitted parties to own up to two television stations in the samedesignated market area as long as at least eight independently owned and operatingfull-power television stations, or “voices,” would remain in the marketpost-acquisition, and at least one of the two stations was not among the topfour ranked stations in the designated market area based on specified audienceshare measures.  Under the duopoly rule,once a company acquires a television station duopoly, the joint owner is notrequired to divest either station if the number of voices within the marketsubsequently falls below eight, or if either of the two jointly-owned stationslater is ranked among the top four stations in the market; however, themultiple television station owner can sell the television combination to athird party only if the joint ownership is in compliance with the duopolyrule at the time of the sale to the third party.

 

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

 

Under its previous rules,the FCC could grant a waiver of the television duopoly rule if one of thetwo television stations was a failed or failing station, if the proposedtransaction would result in the construction of an unbuilt television stationor if compelling public interest factors were present, provided that a waiverapplicant demonstrated that no reasonable out-of-market buyer wasavailable.  The FCC generally retainedthis waiver standard in the media ownership order but removed its requirementthat an applicant demonstrate the absence of an out-of-market buyer.  In addition, the FCC provided for acase-by-case review of waiver requests other than those based on a failed, failing, or unbuilt station inmarkets with 11 or fewer stations, in recognition that consolidation in marketsof this size could lead to significant public interest benefits in somecircumstances.  The FCC also imposed twolimitations on waivers once they are granted. First, at the end of the merged stations’ license terms, the combinedstations’ owner must provide a specific factual showing of the public interestbenefits provided from the merger and must certify that the public interestbenefits promised by the merger are being fulfilled. Second, a combinationowner may not assign or transfer a station combination involving a stationacquired pursuant to a waiver unless the assignee or transferee demonstratesthat the proposed transaction complies with the waiver standard at the time ofthe acquisition.

 

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

 

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

 

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*Cross-Ownership Rules*

 

Thereare no FCC rules governing broadcast/cable cross-ownership.  Prior to the adoption of the mediaownership order the FCC’s broadcast/newspaper cross-ownership rule furtherprohibited the common ownership of a broadcast television station and a dailynewspaper in the same local market.  TheFCC’s radio/television cross-ownership rule also restricted the commonownership of television and radio stations in the same market.  Under the previous rules, one entity couldown up to two television stations and six radio stations in the same marketprovided that:

 

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

 

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

 

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

 

The FCC revised its cross-ownershiprules in the media ownership order. The new cross-media ownership rules, which limit the number and type ofmedia outlets a single entity may own in a local market, replace both the priorbroadcast/newspaper cross-ownership rule and the prior radio/televisioncross-ownership rule.  The newcross-media ownership rules permit cross-media combinations according tothe number of television stations within a market.  In markets with nine or more televisionstations, there are no cross-media ownership limits.  In markets with between four and eighttelevision stations, one of the following combinations is permitted:

 

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

 

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

 

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

 

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

 

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

 

*Antitrust Review*

 

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

 

*Alien Ownership*

 

Foreign governments, representativesof foreign governments, non-citizens, representatives of non-citizens, andcorporations or partnerships organized under the laws of a foreign nation arebarred from holding broadcast licenses. Non-citizens, however, may own up to 20% of the capital stock of alicensee and up to 25% of the capital stock of a United States corporationthat, in turn, owns a controlling interest in a licensee.  A broadcast license may not be granted to orheld by any corporation that is controlled, directly or indirectly, by anyother corporation of which more than one-fourth of the capital stock is ownedor voted by non-citizens or their representatives, by foreign governments ortheir representatives, or by non-U.S. corporations, if the FCC finds that thepublic interest will be served by the refusal or revocation of suchlicense.  Non-citizens may serve asofficers and directors of a broadcast licensee and any corporation controlling,directly or indirectly, such licensee. As a result, we are restricted by the Communications Act from havingmore than one-fourth of our capital stock owned by non-citizens, foreigngovernments or foreign corporations, but not from having an officer or directorwho is a non-citizen.

 

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*Equal Employment Opportunity*

 

On November 20,2002, the FCC released a new set of equal employment opportunityrules which became effective on March 10, 2003. The newrules require us to comply with certain recruiting, outreach, recordkeeping and reporting requirements in addition to complying with the generalprohibition against employment discrimination. On February 6, 2003, interested parties filed a joint petition forpartial reconsideration of the FCC’s new rules, which remains pending.  In addition, on June 4, 2004, the FCCreleased an order reinstating the requirement that certain stations prepare andfile annual employment reports with the FCC and seeking comment on whetheremployment data submitted to the FCC should be withheld from public inspection.  On July 23, 2004, interested partiesfiled a joint petition for reconsideration or clarification of thisrequirement.  We are unable to predictthe resolution of the petitions for reconsideration.  The new rules remain in effect pendingthe resolution of these petitions for reconsideration.

 

*Indecency*

 

In 2004, the FCC imposedsubstantial fines on television broadcasters for the broadcast of indecentmaterial in violation of the Communications Act and its rules. The FCC alsorevised its indecency review analysis to more strictly prohibit the use ofcertain language on  televisionstations.  On March 15, 2006, the FCCreleased several orders in which it imposed fines on television stations forthe broadcast of indecent content.  Inone of these orders, the FCC assessed against KDLH a monetary forfeiture in theamount of $32,500 for its broadcast of the CBS program “Without a Trace.”  Because the programming broadcast by stationsowned by us and Malara Broadcast Group is in large-part comprised of programmingprovided by the networks with which the stations are affiliated, we and MalaraBroadcast Group do not have full control over what is broadcast on ourstations, and we and Malara Broadcast Group may be subject to the imposition offines if the FCC finds such programming to be indecent. In addition, Congresscurrently is considering legislation that will substantially increase themaximum amount the FCC can fine broadcasters for the broadcast of indecentprogramming and may consider permitting the FCC to institute license revocationproceedings against any station which repeatedly violates the indecencyregulations.

 

*Must Carry/Retransmission Consent*

 

The Cable TelevisionConsumer Protection and Competition Act of 1992, or Cable Act, and the FCC’simplementing regulations give television stations the right to control the useof their signals on cable television systems. Under the Cable Act, at three year intervals beginning inJune 1993, every qualified television station is required to elect whetherit wants to avail itself of must-carry rights or, alternatively, to grantretransmission 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, 2005, for the period fromJanuary 1, 2006 through December 31, 2008.  Television stations that failed to make anelection by the specified deadline are deemed to have elected must-carry statusfor the relevant three-year period.  Forthe three year period beginning January 1, 2006, each of our stations haseither elected its must-carry rights, entered into retransmission consentagreements, or obtained an extension to permit us to continue negotiating aretransmission consent agreement with substantially all cable systems in itsdesignated market area.

 

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

 

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

 

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

 

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

 

•                  permitsthe continued importation of network signals that originate outside of asatellite subscriber’s local television market or designated market areas forcertain existing subscribers;

 

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

 

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

 

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

 

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

 

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

 

OnNovember 30, 2005, the FCC released an order establishing rules for satellitecarriage of “significantly viewed” analog and digital television signals.  Among other things, these rules require thata subscriber receive the analog signal of the local network affiliate as aprecondition to receiving the analog signal of a “significantly viewed” stationaffiliated with the same network and that satellite carriers offer the localnetwork affiliate and the “significantly viewed” signals at a comparative bitrate.  On January 26, 2006, DirecTV, Inc.and EchoStar Satellite LLC filed with the FCC a petition for reconsideration ofthese rules.  We are unable to predictthe eventual outcome of the reconsideration petition or the outcome of thepotential effect any changes would have on our business.

 

Pursuant to the satellitecompulsory license, satellite carriers have begun to offer local broadcastsignals to subscribers in some of the nation’s large and mid-sized televisionmarkets.  As of March 2006,satellite carriers DirecTV and EchoStar both carried the signals of ourstations KBWB, and WDWB,which are under separate contracts of sale to affiliates of AM Media Holdings,LLC, and WKBW, KSEE and KBJR.

 

*Digital Television*

 

Pursuant to theTelecommunications Act of 1996, the FCC has adopted rules authorizing andimplementing digital television, or DTV, service, technology that shouldimprove the quality of both the audio and video signals of television stations.The FCC has “set aside” channels within the existing television spectrum forDTV and limited initial DTV eligibility to existing television stations andcertain applicants for new television stations. The FCC has adopted a DTV table of allotments as well as service andlicensing rules to implement DTV service. The DTV allotment table provides a channel for DTV operations for eachexisting broadcaster and is intended to enable existing broadcasters toreplicate their existing analog service areas. The affiliates of CBS, NBC, ABC and Fox in the ten largest U.S.television markets were required to initiate commercial DTV service with adigital signal by May 1, 1999. Affiliates of these networks located in the 11th through the 30thlargest U.S. television markets were required to begin DTV operation byNovember 1, 1999.  All other commercialstations were required to construct DTV facilities by May 1, 2002.  KBWB, WEEK, KSEE, WDWB, WKBW and WPTA have initiated full-poweroperation of their DTV facilities pursuant to an FCC license.

 

In November 2001,the FCC modified its digital television transition rules in an effort toease the burden of the required build out. Among other changes, the FCC relaxedits build out requirements by allowing stations to seek special temporaryauthorizations to construct the minimum DTV facilities required to serve theirrespective community of license. Stations operating pursuant to such special temporary authorizations areconsidered to have met their respective DTV construction deadline. Pursuant to the FCC’s relaxed DTV build outrequirements, WISE, KBJR, WTVH, and KDLH completed construction of their DTVfacilities and operate their DTV facilities pursuant to special temporaryauthorizations for reduced power operation. We may request additional six-month extensions of WISE’s, KBJR’s, WTVH’sand KDLH’s special temporary authorizations as necessary, which we believe arelikely to be granted under the FCC’s current rules.

 

Congress has mandatedthat broadcasters convert to DTV service, terminate their existing analogservice and surrender one of their two television channels to the FCC, on orbefore February 17, 2009.

 

On September 7,2004, the FCC completed its second periodic review of its rules andpolicies affecting the national transition to digital television.  In the order, the FCC established deadlinesby which DTV stations are required to replicate their respective analog serviceareas.  DTV stations in the top 100television markets which are affiliated with the top-four networks (*i.e.*, ABC, CBS, Fox, and NBC) are required to replicatetheir respective analog service areas by July 1, 2005, or risk losinginterference protection to their unreplicated service areas.  All other DTV stations must replicate theirrespective analog service areas by July 1, 2006, or risk losinginterference protection to their unreplicated service areas.  KBWB, WDWB, WKBW, KSEE, and WTVH were subject to the July 1, 2005deadline.  On July 1, 2005, WTVH filedwith the FCC a request for an extension of the July 1, 2005 deadline, whichrequest remains pending.  If the FCCdenies WTVH’s request, WTVH will lose interference protection for a portion ofits analog service area.  We are unableto predict whether the FCC will grant WTVH’s request.  All other DTV stations must replicate theirrespective analog service areas by July 1, 2006, or risk losing interferenceprotection to their unreplicated service areas. Granite-owned stations WISE, WEEK, KBJR, and KRII, are subject to theJuly 1, 2006 deadline, as are Malara Broadcast Group-owned stations WPTA andKDLH and Four Seasons Broadcast Company-owned station WAOE.  The Company anticipates that these stationswill fully replicate their respective service areas by this date.

 

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Inaddition, in the second periodic review order, the FCC instituted a DTV channelelection process under which television stations, including satellitetelevision stations, must select the DTV channel on which they plan to operatedigitally at the end of the DTV transition period.  This DTV channel election process is beingimplemented in several rounds.  The firstround of DTV channel elections occurred on February 10, 2005 and the secondround of DTV channel elections occurred on October 24, 2005.  The third round of DTV channel elections isexpected to occur during the first half of  2006. Following the conclusion of the final round of DTV channel elections,the FCC will issue a new DTV table of allotments.  In the first round of DTV channel elections,KBWB, WDWB, WKBW, KSEE, WTVH, WISE-TV, WPTA, KBJR, and KDLH elected theircurrent digital channel assignment for their post-transition DTVoperations.  WEEK, KRII, and WAOE electedtheir current analog station for their post-transition DTV operations.  With the exception of KBWB and WEEK, the FCCapproved these tentative channel selections on June 23, 2005.  The FCC determined that channel conflictexists with respect to KBWB’s and WEEK’s channel election and, on August 8,2005, KBWB and WEEK filed channel conflict resolution applications with theFCC, which applications remain pending.

 

The FCC also has adoptedrules that permit DTV licensees to offer ancillary or supplementaryservices on their DTV channels under certain circumstances.  The FCC rules further require DTVlicensees to pay a fee of 5% of the gross revenues received from any ancillaryor supplemental uses of the DTV spectrum for which the company chargessubscription fees or other specified compensation.  No fees will be due for commercialadvertising revenues received from free over-the-air broadcasting services.  The FCC recently adopted rules intendedto protect digital television transmissions from unauthorized redistribution.Specifically, the FCC adopted use of a mechanism known as the “broadcast flag”to protect digital transmissions from unauthorized redistribution and alsoestablished rules to ensure that equipment on both the transmission andreception side is capable of giving effect to the broadcast flag.  The FCC also has initiated a notice ofinquiry to examine whether additional public interest obligations should beimposed on DTV licensees.  Variousproposals in this proceeding would require DTV stations to increase theirprogram diversity, focus more programming and resources on addressing localissues and political discourse, increase access for disabled viewers andimprove emergency warning systems.  Thisproceeding remains pending.  OnNovember 24, 2004, the FCC released an order requiring DTV stations toprovide children’s educational and informational programming on their primaryDTV program stream and on any additional DTV program streams.  The FCC also has sought comment on adoptingregulations governing the use of interactive technologies during children’stelevision programming.  OnFebruary 2, 2005, interested parties filed petitions for reconsiderationof certain aspects of the order imposing children’s television programmingobligations on DTV broadcasters. Interested parties have also filed petitions for judicial review in theU.S. Court of Appeals for the Sixth Circuit and the U.S. Court of Appeals forthe District of Columbia Circuit.  Thesepetitions have been consolidated in the U.S. Court of Appeals for the SixthCircuit.  On February 9, 2006, thepetitioning parties filed with the FCC a joint proposal recommendingmodifications or clarifications for several of the children’s televisionrules.  The petitioning parties agreedthat if the FCC adopts the joint proposal, they will withdraw their respectivelegal challenges to the FCC’s rules.  OnMarch 17, 2006, the FCC adopted a second further notice of proposed rulemakingseeking public comment on the joint proposal.We are unable to predict how theFCC will act on the joint proposal.

 

As discussed above, KRII is a satellitetelevision station that transmits the signal of KBJR into the northernsection of the Duluth, Minnesota DMA. Unlike our other stations, KRII was not allotted a paired DTV channel inthe FCC’s initial DTV table of channel allotments because the station had notyet received an analog construction permit or license at the time the table wasissued.  The FCC has determined thatsingle-channel satellite television stations like KRII will be permitted toswitch, or “flash cut,” from analog to DTV transmissions on their existingchannel at the end of the DTV transition period.

 

*Class A Television Stations*

 

In November 1999,Congress enacted the Community Broadcasters Protection Act, which created a newClass A status for low power television stations.  Under this statute, low power televisionstations which previously had secondary status to full power televisionstations are eligible for Class A status and are entitled to protectionfrom future displacement by modifications to full-power television stationsunder certain circumstances.  The FCC hasadopted rules governing the extent of interference protection that must beafforded to Class A stations and the eligibility criteria for thesestations.  Because Class A stationsare required to provide interference protection to previously authorizedfull-power television stations, these new facilities are not expected toadversely affect the operations of our television stations.

 

*Proposed Legislation and Regulations*

 

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

 

•                  penaltiesfor the broadcast of indecent programming;

 

•                  broadcastownership limits;

 

•                  minorityand female involvement in the broadcasting industry;

 

•                  publicinterest obligations of broadcasters;

 

•                  technicaland frequency allocation matters; and

 

•                  changesto broadcast technical requirements;

 

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

 

**Item 1A.  Risk Factors**

 

We cannot identify norcan we control all circumstances that could occur in the future that mayadversely affect our business and results of operations.  Some of the circumstances that may occur andmay impair our business are described below. If any of the following circumstances were to occur, our business couldbe materially adversely affected.

 

**We havelimited sources of liquidity and no working capital facility or other creditfacility and therefore will not be able to service all of our obligations,absent changes in our operations or capital structure.**

 

Our sources of availableliquidity is our cash (approximately $8,300,000 as of March 15, 2006).  Absent changes to our capital structure andstation ownership we will not have enough cash to make the interest payment of$19,744,000 on our Notes on June 1, 2006 or otherwise service our existingobligations on an ongoing basis.  Lack ofliquidity would have a material adverse effect on our ability to implement ourbusiness strategy and continue as a going concern. We have engaged the servicesof Houlihan Lokey Howard & Zukin as our financial advisor to assist us inthe evaluation of strategic options and to advise us on available financing andcapital restructuring alternatives. There can be no assurance that anytransaction will occur or, if one is undertaken, of its potential terms ortiming. See “Liquidity and Capital Resources” in our Management’s Discussionand Analysis for further details.

 

**Ourprincipal strategy, seeking growth through acquisitions of television stationsand operating arrangements with in-market television stations, may not beachievable absent dispositions of certain of our television stations.**

 

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

 

We also pursue selectiveacquisitions of television stations with the goal of improving their operatingperformance by applying our management’s business and growth strategy.  However, we may not be successful inidentifying attractive acquisition targets. Future acquisitions involve inherent risks, such as increasing leverageand debt service requirements and combining company cultures and facilities,which could have a material adverse effect on our operating results,particularly during the period immediately following any acquisitions. We maynot be able to successfully implement effective cost controls, increaseadvertising revenues or increase audience share with respect to any acquiredstation. In addition, our future acquisitions may result in our assumption ofunexpected liabilities and may result in the diversion of management’s attentionfrom the operation of our business.

 

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

 

The Indenture, whichgoverns our Notes, limits, and future debt obligations may limit, our abilityto pursue our acquisition strategy, including certain limitations in theIndenture with respect to acquisitions for cash. If our acquisition strategy isnot successful, our ability to make payments on the Notes could be adverselyaffected. Even if our acquisition strategy is successful, we may be unable tomake payments on the Notes due to events which are beyond our control such asprevailing business, financial and economic conditions.

 

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

 

**The FCCcould reverse, rescind or otherwise modify the Media Bureau’s consent to theassignment of the license of KDLH-TV to Malara Broadcast Group.**

 

In May 2004, anapplication was filed with the FCC seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between Malara and theCompany.  The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application inDecember 2004.  InJanuary 2005, the petitioning broadcasters filed an application for reviewseeking Commission-level review of the Bureau’s decision.  Malara filed an opposition to the applicationfor review, and the petitioning broadcasters filed a response to thatopposition.  The FCC has not yet ruled onthe application for review.  Although webelieve that the application for review is without merit and anticipate that theFCC will affirm the grant of the assignment application for KDLH, it is notpossible to predict how the FCC will rule on the application forreview.  It also is not possible topredict any remedial action or possible sanction that may be imposed by the FCCin the event that it grants the application for review.  FCC grant of the applications for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, L.L.C., or a sale byMalara of its ownership of KDLH.

 

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**FCCownership rules and policies may limit our ability to create or maintainarrangements with in-market television stations, which would impair ourstrategy.**

 

We would like to own orprovide services to affiliated television stations with a strong local newspresence, particularly in television markets in which we already operate astation. We are actively pursuing this strategy which includes the creation ofarrangements with in-market television stations through ownership of onestation and a combination of agreements (such as shared services, localservices, sales representation, marketing, operating, guarantees or otheragreements and arrangements) with a second station in that market. While theseagreements take varying forms, a typical local services agreement, for example,is an agreement between two separately owned television stations serving thesame market, whereby the owner of one station provides operational assistanceto the other station, subject to ultimate editorial and other controls beingexercised by the latter station’s owner. By operating or entering into a localservices agreement with a second television station in a market in which we owna station, we believe that we could achieve significant operationalefficiencies, broaden our audience reach and enhance our ability to capturemore advertising spending in a given market. While these types of arrangementshave been approved by the FCC pursuant to delegated authority as consistentwith current FCC rules and policies, there can be no assurances that theFCC will continue to permit agreements as a means of creating opportunities forarrangements with in-market television stations, that the FCC will not assertits authority over the FCC staff in this area (which may result inmodifications to current policy) or that the FCC’s treatment of these types ofarrangements we may enter into will be consistent with the treatment describedabove or on terms that will permit us to realize the benefits described above.Specifically, the FCC may change its current policies with regard to theregulatory treatment of and acceptability of certain terms and conditions ofsuch arrangements for a variety of reasons, such as in response to directionfrom legislators or public opinion, in a way that prevents such arrangements orrequires significant modifications to the financial or other material terms ofsuch arrangements. For example, the FCC recently initiated a proceeding to seekcomment on whether to attribute same-market television joint salesagreements.  We cannot predict whetherthe FCC will decide to attribute television joint sales agreements.  See “Business —FCC Regulation of TelevisionBroadcasting’’ and ‘‘Business—Attribution” under Item 1.  If the FCC, on its own initiative or inresponse to a third party complaint, were to challenge such arrangements anddetermine that such arrangements constitute attributable interests in violationof, or otherwise violate, the FCC’s rules or policies, we may be unable toimplement this business strategy or be required to revise or terminate existingarrangements, and we could be subject to sanctions, fines and/or otherpenalties. Any such change in FCC policies concerning arrangements involvingjoint sales agreements, local services agreements, guarantees or similaragreements could limit our ability to establish or maintain arrangements withother in-market television stations and implement our acquisition strategy.

 

**CurrentFCC ownership rules or revised FCC ownership rules, whether revisedthrough FCC action, judicial review or federal legislation, may limit ouracquisition strategy.**

 

FCC ownershiprules currently impose significant limitations on the ability of broadcastlicensees to have attributable interests in multiple media properties. One ofthese local market ownership restrictions, known as the television duopolyrule, provides that a single entity may hold an attributable interest in twotelevision stations in the same DMA provided that (1) there are at least eightindependently owned and operating full-power television stations in the marketfollowing the combination and (2) one of the stations is not ranked among thetop four stations in the market at the time of the combination. The FCC’scurrent rules also permit a waiver of the duopoly rule but only ifone of the two television stations is a failed or failing station, if theproposed transaction would result in the construction of an unbuilt televisionstation or if compelling public interest factors are present, provided that awaiver applicant demonstrates that no reasonable out-of-market buyer wasavailable. Under the existing television duopoly rule, absent a waiver, wewould not be able to acquire a second station in our existing Big-Threeaffiliated stations’ markets because our stations and the most likely targetstations would be amongst the top-four rated stations in the market. Ourability to obtain a waiver of the existing duopoly rule also is severely restrictedbecause neither our stations nor our most likely target stations would qualifyas failed, failing or unbuilt stations. As a result, we would have todemonstrate the presence of compelling public interest factors in order toobtain a waiver. We are unable to predict whether the FCC would grant such awaiver. If we were to acquire a second station in a market pursuant to a waiverof the duopoly rule, we could not sell the duopoly to a third party unless thatthird party also: (i) obtained a waiver at the time of the proposed sale;or (ii) acquired one of the stations directly and established an operatingarrangement —through a local services agreement or otherwise—with another partywho then would acquire the second station.

 

On June 2, 2003, theFCC voted to substantially amend many of its ownership rules. The televisionduopoly rule was relaxed to permit ownership of up to three stations incertain large markets and two stations in many mid-sized markets, provided thatno more than one of the co-owned stations can be among the top four ratedstations in the market. In the markets in which we operate our Big-Threeaffiliated stations, absent a waiver, we would not be able to take advantage ofthis new duopoly rule because our station and the most likely targetstations would be amongst the top-four rated stations in the market. The FCCfurther declared that it would grant waivers of the top-four restriction undercertain circumstances, such as in markets where it can be established thatownership consolidation in small to mid-sized television markets with 11 orfewer television stations could lead to significant public interest benefits.We are unable to predict whether the FCC would grant us a waiver pursuant tothis standard. The FCC further determined that a non-conforming combinationpermitted by a waiver of the duopoly rule could not be transferred jointlyeither as a separate asset or through the transfer of control of the licensee,except by obtaining a waiver of the rule upon each transfer or by sale tocertain eligible small business entities. Therefore, as is currently the caseunder the present duopoly rule, if we were to acquire a second station in amarket pursuant to a waiver, our ability to sell or transfer that duopoly wouldbe restricted because any potential acquirer would need to obtain a waiver fromthe FCC in order to own the duopoly or establish its eligibility as a smallbusiness entity or would need to acquire one of the stations directly andestablish an operating arrangement with another party who then would acquirethe second station.

 

The FCC’s modified mediaownership rules have not gone into effect because on September 3,2003, the U.S. Court of Appeals for the Third Circuit stayed the effectivenessof the new rules.  On June 24, 2004,the Third Circuit issued a decision finding virtually all of the mediaownership rules without support and remanding the proceeding back to theFCC for further consideration.  The stayof the modified media ownership rules remains in effect pending the FCC’sreview on remand, except with respect to certain limited aspects of the FCC’s media ownership order, includingthe FCC’s revised definition of local radio market.  The modified media ownership rules alsoare subject to pending petitions for reconsideration filed with the FCC. We areunable to predict the eventual outcome of the reconsideration petitions or theoutcome of the FCC’s review on remand. We are unable to predict the potentialeffect any changes would have on our acquisition strategy.

 

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

 

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

 

•                   incuradditional debt and issue preferred stock;

•                   makecertain distributions, investments and other restricted payments;

•                   createcertain liens;

•                   enterinto transactions with affiliates;

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

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

•                   limitthe ability of our subsidiaries to issue preferred stock;

•                   sellor acquire assets; and

•                   enterinto new lines of business.

 

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

 

If we fail to comply withthe restrictions in the Indenture, a default may occur. A default would allowthe trustee under the Indenture or the holders of the Notes to accelerate therelated debt.  A default followed by anacceleration of the Notes would also allow the trustee under the Indenture toforeclose on collateral securing such debt.

 

Under the Indenture, theMalara Broadcast Group companies to which the Company provides servicespursuant to the local services agreements are subject to the terms of theIndenture applicable to Restricted Subsidiaries that are not Guarantors, assuch terms are defined in the Indenture. Failure of the Malara Broadcast Group companies to which the Companyprovides services to comply with the terms of the Indenture applicable toRestricted Subsidiaries that are not Guarantors would result in a default underthe Indenture, which in turn would create a default under Malara BroadcastGroup’s Senior Credit Facility.

 

**Each of Malara Broadcast Group and Four Seasons BroadcastCompany may make decisions regarding the operation of its station that couldreduce the amount of cash we might receive under our local services agreementswith each of Malara Broadcast Group and Four Seasons Broadcast Company.**

 

Eachof Malara Broadcast Group and Four Seasons Broadcast Company are 100% owned byan independent third party.  MalaraBroadcast Group owns and operates WPTA and KDLH, and Four Seasons BroadcastCompany owns and operates WAOE. As of March 8, 2005, we entered into variouslocal service agreements with Malara Broadcast Group pursuant to which weprovide services to Malara Broadcast Group’s stations. In return for theservices we provide, we receive substantially all of the available cash, afterpayment of debt service costs and other expenses, generated by Malara BroadcastGroup’s stations. The Company also guarantees all of the obligations incurredunder Malara Broadcast Group’s Senior Credit Facility with respect to the termloan B and revolving loan, which were incurred primarily in connection withMalara Broadcast Group’s acquisition of its stations. As of September 1, 2005,we entered into various local service agreements with Four Seasons BroadcastCompany pursuant to which we provide services to Four Seasons Broadcast Company’sstation. The Company receives a fixed payment for services provided to FourSeasons Broadcast Company plus a commission from advertising revenues generatedby the station.

 

Wedo not own Malara Broadcast Group or Malara Broadcast Group’s televisionstations or Four Seasons Broadcast Company or Four Seasons Broadcast Company’sstation. However, we are deemed to be the primary beneficial interest holdersin Malara Broadcast Group under U.S. GAAP and therefore consolidate theirresults as part of our consolidated results. In order for our arrangements withsuch companies to comply with FCC regulations, each of such companies mustmaintain complete control over its own stations, including ultimate controlover all operations of the stations, such as programming, finances, andpersonnel.  As a result, each suchcompany’s equity holder and officers can make decisions with which we disagreeand which could reduce the cash flow generated by these stations and, as aconsequence, the amounts we receive under our local service agreements witheach of Malara Broadcast Group and Four Seasons Broadcast Company. Forinstance, we may disagree with the programming decisions of Malara BroadcastGroup or Four Seasons Broadcast Company, which programming may prove unpopularand/or may generate less advertising revenue.

 

**A default by Malara Broadcast Group under its Senior CreditFacility (i) gives the lenders thereunder holding the Tranche B Term Loan orthe Revolving Loan the right to enforce the Granite Guaranty, and (ii)  triggers a default on the Indenture if thelenders thereunder accelerate the related debt.**

 

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Upon the occurrence andduring the continuation of an event of default under Malara Broadcast Group’sSenior Credit Facility, the lenders thereunder holding the Tranche B Term Loanor the Revolving Loan could enforce the Granite Guaranty relating to such loansnotwithstanding the existence of any dispute between Malara Broadcast Group andany such lender with respect to the existence of such event.  The obligations of Granite Broadcasting Corporationunder the Granite Guaranty are independent of the obligations of MalaraBroadcast Group under its Senior Credit Facility and the obligations of anyother guarantor of obligations of Malara Broadcast Group and a separate actionor actions may be brought and prosecuted against Granite BroadcastingCorporation whether or not any action is brought against Malara Broadcast Groupor any of such other guarantors and whether or not Malara Broadcast Group isjoined in any such action or actions.

 

A default under MalaraBroadcast Group’s Senior Credit Facility would also trigger a default under theIndenture if the lenders under Malara Broadcast Group’s Senior Credit Facilityaccelerate the debt.  If there is adefault under the Indenture, the trustee under the Indenture or the holders ofthe Notes can accelerate the debt under the Indenture.

 

**A defaultby Malara Broadcast Group under its Senior Credit Facility prevents payments tothe Company under the local services agreements and would permit the lenders underthe Senior Credit Facility to foreclose and sell the stations owned by MalaraBroadcast Group, which causes the automatic termination of the local servicesagreements.**

 

Upon the occurrence andduring the continuation of an event of default under Malara Broadcast Group’sSenior Credit Facility, the payments to the Company under the local servicesagreements would cease, but the Company would continue to be obligated toprovide the services set forth in the local services agreements while suchagreements are in effect.  Should thelenders under the Senior Credit Facility foreclose and sell the stations ownedby Malara Broadcast Group in connection with an event of default, the localservices agreements would automatically terminate, and the Company would nolonger receive any cash from these stations.

 

**If MalaraBroadcast Group were to enter bankruptcy, a bankruptcy court could reject thelocal services agreements between the Company and Malara Broadcast Group.**

 

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

 

**Ouroperating results are primarily dependent on advertising revenues and, as aresult, we may be more vulnerable to economic downturns than businesses inother industries.**

 

Our operating results areprimarily dependent on advertising revenues. The success of our operationsdepends in part upon factors beyond our control, such as:

 

•                    nationaland local economic conditions;

 

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

 

•                    therelative popularity of the programming on our stations;

 

•                    thedemographic characteristics of our markets; and

 

•                    theactivities of our competitors.

 

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

 

**Because ahigh percentage of our operating expenses are fixed, a relatively smalldecrease in advertising revenue could have a significant negative impact on ourresults of operations.**

 

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

 

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**We aredependent to a significant degree on automotive advertising.**

 

Approximately 20% of ourtotal revenues for the year ended December 31, 2005 and 2004 consisted ofautomotive advertising. A significant decrease in these revenues in the futurecould materially and adversely affect our results of operations and cash flows,which could affect our ability to fund operations and service our debtobligations.

 

**We have ahistory of net losses and a substantial accumulated deficit.**

 

We have had net losses of$99,382,000 for the year ended December 31, 2005; $83,292,000 for the yearended December 31, 2004 and $46,948,000 for the year endedDecember 31, 2003, primarily as a result of amortization of intangibleassets and debt service obligations. In addition, as of December 31, 2005,we had an accumulated stockholders’ deficit of $430,792,000.  We may not be able to achieve or maintainprofitability. The future utilization of a portion of our net operating lossesfor federal income tax purposes is subject to an annual limitation.

 

**Ourstrategy of seeking growth through acquisitions of television stations couldpose various risks and increase our leverage.**

 

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

 

**If we areunable to compete effectively, our revenue could decline.**

 

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

 

**Ourrevenue and profitability are affected by political campaigns and the Olympics.**

 

In the past, we havegenerated substantial advertising revenue from political campaign advertising,and to a lesser extent, from broadcasting the Olympics. Political advertising increases ineven-numbered years, such as 2006, due to the increase in the number ofcandidates running for political office. Revenue from Olympic advertising occurs exclusively in even-numberedyears, such as 2006, with the alternating Winter and Summer Games occurringevery two years.  In 2004,political election revenue contributed approximately 6.5% of total netrevenues.

 

**Therevenue generated by stations we operate or provide services to could declinesubstantially if they fail to maintain or renew their network affiliationagreements on favorable terms, or at all.**

 

The non-renewal ortermination of a network affiliation agreement could have a material adverseeffect on us. See ‘‘Business—Network affiliation’’ under Item 1. Each of thenetworks generally provides the affiliated stations we operate or provideservices to****with 22 hours of prime timeprogramming per week in the case of the Big-Three stations and 13 hours ofprime time programming per week in the case of the WB stations. On January 24, 2006, the WB Network announcedthat it will no longer provide programming to current WB affiliateseffective in September 2006. Eachof these agreements is subject to periodic renewal. In addition, some of thenetwork affiliation agreements are subject to earlier termination by thenetworks under specified circumstances including as a result of a change ofcontrol of the affiliated stations we operate or provide services to, whichwould generally result upon the acquisition of 50% of our voting power, withrespect to the stations we own, and 50% of Malara Broadcast Group’s votingpower, with respect to the stations to which we provide services. W. DonCornwell through his ownership of all of the outstanding shares of our votingcommon stock, possess 100% of our voting power. Some of the networks with whichour stations are affiliated have required us and other broadcast groups, uponrenewal of affiliation agreements, to reduce or eliminate network affiliationcompensation and, in specific cases, to make cash payments to the network, andto accept other material modifications of existing affiliation agreements.Consequently the affiliation agreements may not all remain in place and eachnetwork may not continue to provide programming or compensation to affiliateson the same basis as it currently provides programming or compensation. If thisoccurs, we and/or Malara Broadcast Group would need to find alternative sourcesof programming, which may be less attractive and more expensive.  We have no reason to believe that the networkaffiliation agreements with the Big Three Networks will not be renewed whenthey expire.

 

**While we are engaged in dialogue with potential buyers of ourtwo stations affiliated with the WB Network, we must prepare to operate thestations as independents following the WB Network’s September 2006 cessation ofoperations, requiring that we find alternative sources of programming, whichmay be less attractive and more expensive.**

 

25

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OnJanuary 24, 2006, the WB Network announced that it will no longer provide programming to currentWB affiliates effective in September 2006. We own two stations affiliated with the WB Network, both of which aresubject to sales to affiliates of AM Media Holdings, LLC under purchase andsale agreements.  Each station’s buyer advisedus that as a result the WB Network’s announcement, such buyer will not be ableto proceed with the transaction as contemplated.  On February 14, 2006, we entered intoamendments to such purchase and sale agreements, pursuant to which we have theright to market each station to other potential buyers and each party has aright to terminate the purchase and sale agreement, at any time, by providingwritten notice to the other party with no liability or obligation to such otherparty.  While there may be furtherdiscussions between the Company and the buyers of the stations about thetransactions, we are actively engaging in dialogue with other potential buyersbecause we do not presently have agreements in principle with the buyers withrespect to the stations.  The WB Networkcurrently provides 13 hours ofprime time programming per week to our two stations affiliated with the WBNetwork.  Though we are engaged indialogue with potential buyers of our two stations affiliated with the WBNetwork, we must prepare to operate the stations as independents following theWB Network’s September 2006 cessation of operations.  We will need to find alternative sources ofprogramming, which may be less attractive and more expensive.

 

**Our industryis subject to significant syndicated and other programming costs, and increasedprogramming costs could adversely affect our operating results.**

 

Our industry is subjectto significant syndicated and other programming costs. We may be exposed in thefuture to increased programming costs which may adversely affect our operatingresults. We often acquire program rights two or three years in advance, makingit difficult for us to accurately predict how a program will perform. In someinstances, we may have to replace programs before their costs have been fullyamortized, resulting in write-offs that increase station operating costs.

 

**Anyextraordinary, newsworthy event, including hostilities or terrorist attacks,may affect our revenues and results of operations.**

 

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

 

**We aredependent on key personnel.**

 

W. Don Cornwell, ourChief Executive Officer and Chairman of our Board of Directors has anemployment agreement with us. The agreement provides for a two-year employmentterm, which is automatically renewed for subsequent two-year terms unlessadvance notice of nonrenewal is given (the current term under such agreement,which was automatically renewed in September 2005, expiresSeptember 19, 2007). The agreement provides that Mr. Cornwell willnot engage in any business activities during the term of such agreement outsidethe scope of his employment with us unless approved by a majority of ourindependent directors. The loss of the services of certain key operating and executivepersonnel currently employed by us could have an adverse impact on us. Therecan be no assurance that the services of such personnel will continue to bemade available to us. We do not maintain key-man life insurance on any of ouremployees.

 

**Theindustry-wide mandatory conversion to digital television requires us to makesignificant capital expenditures for which we might not see a return on ourinvestment.**

 

The FCC required allcommercial television stations in the United States to start broadcasting indigital format by May 1, 2002 unless the FCC granted an extension.Stations may broadcast both analog and digital signals until February 17, 2009,when they must abandon the analog format. In November 2001, the FCC released anorder in which it authorized television stations to seek special temporaryauthorizations to construct the minimum DTV facilities required to serve theirrespective community of license.  In itssecond DTV periodic review order, the FCC established July 2005 andJuly 2006 deadlines by which stations must maximize or replicate theiranalog service areas, or risk losing interference protection to theirunreplicated service areas.  We may nothave sufficient resources to make required capital expenditures to broadcastwith full power digital transmission. See ‘‘Business—FCC Regulation of Television Broadcasting’’ and ‘‘Business—DigitalTelevision’’ under Item 1.  In addition,there are efforts in Congress and the FCC to establish a firm DTV transitiondeadline.  We cannot predict the outcomeof these efforts or their impact on the Company.

 

It is expensive toconvert from the current analog format to digital format. We have completed theupgrades to our television stations to enable them to broadcast with digitaltechnology either with full-power or reduced-power transmissions, as authorizedby the FCC. See ‘‘Business—FCC Regulation of Television Broadcasting’’ and ‘‘Business—DigitalTelevision’’ under Item 1.

 

The transition to digitaltelevision, or DTV, eventually will require consumers to purchase newtelevisions that are capable of receiving and displaying DTV signals, oradapters to receive DTV signals and convert them to analog signals for displayon their existing receivers. Currently, very few households have either a digitaltelevision or an adapter. Although the FCC has adopted some rules intendedto facilitate consumers’ transition to digital television—e.g., thoseconcerning ‘‘plug and play’’ compatibility and DTV tuners—it is possible thatmany households will never make the switch to digital television. See ‘‘Business—FCCRegulation of Television Broadcasting’’ and ‘‘Business—Digital Television’’under Item 1. Such households would not be able to view our stations’ signalsover-the-air if and when the FCC requires us to cease broadcasting analogsignals. If this happens our investment in upgrading our stations to broadcastdigitally will have been largely wasted with respect to such households and ouraudience share could be diminished. In addition, digital technology couldexpose us to additional competition since digital technology allowsbroadcasting of multiple channels within the additional allocated spectrum,compared to only one channel today using analog technology. We do not know nowwhat effect this will have on the competitive landscape in our industry.

 

26

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**If directbroadcast satellite companies do not carry the stations that we own and operateor provide services to, we could lose revenue and audience share.**

 

The Satellite HomeViewer Improvement Act of 1999 and the Satellite Home Viewer Extension andReauthorization Act of 2004 allow direct broadcast satellite televisioncompanies to transmit local broadcast television signals to subscribers inlocal markets provided that they offer to carry all local stations in thatmarket. However, satellite providers have limited satellite capacity to deliverlocal station signals in local markets. As of March 2006, satellite carriers DirecTV and EchoStar bothcarried the signals of our stations KBWB, WDWB, WKBW, KSEE and KBJR. Satellite providers, such as DirecTVand EchoStar, may choose not to carry local stations in any of our othermarkets. In those markets in which the satellite providers do not carry localstation signals, subscribers to those satellite services will be unable to viewour stations without making further arrangements, such as installing antennasand switches. Furthermore, when direct broadcast satellite companies do carrylocal television stations in a market, they are permitted to charge subscribersextra for such service; some subscribers may choose not to pay extra to receivelocal television stations. In the event subscribers to satellite services donot receive the stations that we own and operate or provide services to, wecould lose audience share, which would adversely affect our revenue andearnings. In certain limited circumstances where satellite subscribers cannotreceive an adequate over-the-air signal from one of our stations or when wegrant a waiver of our rights, satellite carriers may provide the signals ofdistant or significantly viewed stations with the same network affiliations asour stations. The availability of another station with the same networkaffiliation as ours in our markets could negatively affect our audience share.Such negative effects could increase if the subscribership of these satelliteproviders continues to grow.

 

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

 

In 2005, the FCC imposedsubstantial fines on television broadcasters for the broadcast of indecentmaterial in violation of the Communications Act and its rules. In 2004, the FCCalso revised its indecency review analysis to more strictly prohibit the use ofcertain language on television stations. On March 15, 2006, the FCC releasedseveral orders in which it imposed fines on television stations for thebroadcast of indecent content.  In one ofthese orders, the FCC assessed against KDLH a monetary forfeiture in the amountof $32,500 for its broadcast of the CBS program “Without a Trace.” Because theprogramming broadcast by stations owned by us and Malara Broadcast Group is inlarge-part comprised of programming provided by the networks with which thestations are affiliated, we and Malara Broadcast Group do not have full controlover what is broadcast on our stations, and we and Malara Broadcast Group maybe subject to the imposition of fines if the FCC finds such programming to beindecent. In addition, Congress currently is considering legislation that willsubstantially increase the maximum amount the FCC can fine broadcasters for thebroadcast of indecent programming and may consider permitting the FCC toinstitute license revocation proceedings against any station which repeatedlyviolates the indecency regulations.

 

**Thereare inherent limitations in all control systems, and misstatements due to erroror fraud may occur and not be detected, which may adversely impact our businessand operating results.**

 

Effectiveinternal control over financial reporting is necessary for us to providereasonable assurance with respect to our financial reports and to effectivelyprevent fraud. If we cannot provide reasonable assurance with respect to ourfinancial reports and effectively prevent fraud, our business and operatingresults could be harmed. Internal control over financial reporting may notprevent or detect misstatements because of its inherent limitations, includingthe possibility of human error, the circumvention or overriding of controls, orfraud. Therefore, even effective internal controls can provide only reasonableassurance with respect to the preparation and fair presentation of financialstatements. In addition, projections of any evaluation of effectiveness of internalcontrol over financial reporting to future periods are subject to the risk thatthe control may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. If wefail to maintain the adequacy of our internal controls, including any failureto implement required new or improved controls, or if we experiencedifficulties in their implementation, our business and operating results couldbe harmed and we could fail to meet our reporting obligations.

 

**Item 1B.  UnresolvedStaff Comments**

 

None.

 

27

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

 

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

 

The types of propertiesrequired to support each of the stations include offices, studios, transmittersites and antenna sites.  A station’sstudios are generally housed with its offices in downtown or businessdistricts.  The transmitter sites andantenna sites are generally located so as to provide maximum marketcoverage.  The following table containscertain information describing the general character of the properties as of December31, 2005:

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

 

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

 

28

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

 

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

 

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

 

(5)                                  OnSeptember 8, 2005, we entered into a separate definitive agreements to sellKBWB-TV, UHF Channel 20, the WB affiliate serving San Francisco, California andWDWB-TV, UHF Channel 20, the WB affiliate serving Detroit, Michigan toaffiliates of AM Media Holdings, LLC. However, the unexpected decision by theWB Network to no longer provide programming to current WB affiliates effectivein September 2006 has made sales of those stations on an acceptable basis muchless certain at the current time.

 

**Item 3.  Legal Proceedings**

 

In May 2004, anapplication was filed with the FCC seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between Malara and theCompany.  The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application inDecember 2004.  InJanuary 2005, the petitioning broadcasters filed an application for reviewseeking Commission-level review of the Bureau’s decision.  Malara filed an opposition to the applicationfor review, and the petitioning broadcasters filed a response to thatopposition.  The FCC has not yet ruled onthe application for review.  Although webelieve that the application for review is without merit and anticipate thatthe FCC will affirm the grant of the assignment application for KDLH, it is notpossible to predict how the FCC will rule on the application forreview.  It also is not possible topredict any remedial action or possible sanction that may be imposed by the FCCin the event that it grants the application for review.  An FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, L.L.C., or a sale byMalara of its ownership of KDLH.

 

In addition, we are fromtime to time involved in various claims and lawsuits that are incidental to itsbusiness.  Except as discussed above, weare not aware of any pending or threatened litigation, arbitration oradministrative proceedings involving claims or amounts that, individually or inthe aggregate, we believe are likely to materially harm our business, financialcondition, future results of operations or cash flows.  Any litigation, however, involves risk andpotentially significant litigation costs, and therefore we cannot give anyassurance that any litigation which may arise in the future will not materiallyharm our business, financial condition or future results of operations.

 

**Item 4.  Submissionof Matters to a Vote of Security Holders**

 

On May 3, 2005, theholder of all of our Voting Common Stock adopted resolutions W. Don Cornwell,Stuart J. Beck, James L. Greenwald, Edward Dugger III, Thomas R. Settle,Charles J. Hamilton, Jr., Robert E. Selwyn, Jr., Jon E. Barfield,Milton Frederick Brown and Veronica Pollard as directors.

 

On October 24, 2005, theholder of all of our Voting Common Stock adopted resolutions to fix the Company’snumber of directors at twelve from ten. Effective October 24, 2005, Eugene I. Davis and Kirk W. Aubry wereelected to the Board of Directors of Granite by the holders of a majority ofthe shares of Granite’s 12-3/4% Cumulative Exchangeable Preferred Stock (the “***Preferred Stock***”) bywritten consent pursuant to the terms and conditions of the Certificate ofDesignations of the Powers, Preferences and Relative, Participating, Optionaland Other Special Rights of the Preferred Stock.

 

29

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**PART II**

 

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

 

Our Common Stock(Nonvoting) is traded on the Over-the-Counter Bulletin Board (OTCBB) under thestock symbol GBTVK.  As of March 15,2006, the approximate number of record holders of Common Stock (Nonvoting) was 261.

 

The following table setsforth the closing market price ranges per share of Common Stock (Nonvoting)during 2005 and 2004, as reported beginning August 5, 2004 the Over-The-CounterBulletin Board and until August 5, 2004 the NASDAQ Small Cap market. Thequotations represent prices on such markets between dealers in securities, donot include retail markup, markdown or commission, and do not necessarilyrepresent actual transactions.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| 2005           |       |     |       |    |       |
| First Quarter  |       | $        | .45        |    | $          | .30 |   |
| Second Quarter |       | .32      |       | .15     |       |
| Third Quarter  |       | .45      |       | .19     |       |
| Fourth Quarter |       | .40      |       | .19     |       |
|           |       |     |       |    |       |
| 2004           |       |     |       |    |       |
| First Quarter  |       | $        | 1.97       |    | $          | 1.52 |   |
| Second Quarter |       | 1.90     |       | .70     |       |
| Third Quarter  |       | .72      |       | .13     |       |
| Fourth Quarter |       | .50      |       | .23     |       |
|                |            |          |            |         |            |  |  |  |  |

 

As of March 15, 2006the closing price per share for our Common Stock (Nonvoting), as reported bythe Over-The-Counter Bulletin Board was $0.11 per share.

 

There is no establishedpublic trading market for our Class A Voting Common Stock, par value $.01per share, our Voting Common Stock.  TheVoting Common Stock and the Common Stock (Nonvoting) are referred to hereincollectively as the Common Stock.  As ofMarch 15, 2006, the number of record holders of Voting Common Stock wasone.  Granite is a Controlled Company asdefined by Nasdaq Marketplace Rule 4350(c)(5).

 

We have never declared orpaid a cash dividend on our Common Stock and do not anticipate paying adividend on our Common Stock in the foreseeable future.  The payment of cash dividends on any of ourequity securities is subject to certain limitations under the Indenturegoverning our 9 3/4 % Senior Secured Notes and under the Certificate ofDesignations of our 12 3/4 % Cumulative Exchangeable Preferred Stock.  We are also prohibited from paying dividendson any Common Stock until all accrued but unpaid dividends on our Series AConvertible Preferred Stock, par value $.01 per share, are paid in full.  All outstanding shares of Series APreferred Stock were converted into Common Stock (Nonvoting) inAugust 1995.  Accrued dividends onthe Series A Preferred Stock, which totaled $262,844 at December 31,2005, are payable on the date on which such dividends may be paid under ourexisting debt instruments.

 

**EquityCompensation Plan Information**

 
| **Plan category**                                      | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 6,204,441                                                                                                                                            |       | $                                                                                                                | 5.86       |                                                                                        | 3,322,759  |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                               |       | —                                                                                                           |       | —                                                                                      |       |
| Total                                                       |       | 6,204,441                                                                                                                                            |       | $                                                                                                                | 5.86       |                                                                                        | 3,322,759  |   |

 

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

 

**Item 6.  Selected Financial Data**

 

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

 

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

 

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| ** **                                                                                                               | ** ** | **Years Ended December 31,**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                               | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Statement of Operations Data:                                                                                            |       |                                             |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                                                             |       | $                                                | 86, 160    |   | $ | 80,500 |   | $ | 73,333 |   | $ | 101,437 |   | $ | 79,839 |   |
| Station operating expenses                                                                                               |       | 60,295                                           |       | 56,101 |   | 53,272 |   | 62,937 |   | 73,318 |   |
| Depreciation                                                                                                             |       | 5,060                                            |       | 5,154 |   | 4,966 |   | 4,714 |   | 5,034 |   |
| Amortization of intangible assets                                                                                        |       | 2,896                                            |       | 2,426 |   | 2,426 |   | 11,864 |   | 6,982 |   |
| Corporate expense                                                                                                        |       | 10,550                                           |       | 13,532 |   | 11,715 |   | 9,536 |   | 9,687 |   |
| Performance award expense                                                                                                |       | 1,279                                            |       | 3,415 |   | 52 |   | — |   | — |   |
| Corporate separation agreement expense                                                                                   |       | —                                           |       | 1,406 |   | — |   | — |   | — |   |
| Non-cash compensation expense                                                                                            |       | 412                                              |       | 697 |   | 896 |   | 1,508 |   | 1,473 |   |
| Operating income (loss)                                                                                                  |       | 5,668                                            |       | (2,231 | ) | 6 |   | 10,878 |   | (16,655 | ) |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                                                    |       | 42,023                                           |       | 38,328 |   | 30,024 |   | 33,812 |   | 17,483 |   |
| Non-cash interest expense                                                                                                |       | 3,965                                            |       | 3,868 |   | 4,704 |   | 12,818 |   | 7,655 |   |
| Non-cash preferred stock dividend                                                                                        |       | 25,548                                           |       | 25,548 |   | 12,774 |   | — |   | — |   |
| Gain on sale of assets                                                                                                   |       | —                                           |       | — |   | — |   | (192,406 | ) | — |   |
| Loss on extinguishment of debt (a)                                                                                       |       | —                                           |       | — |   | 3,215 |   | 15,097 |   | 2,012 |   |
| Other expenses                                                                                                           |       | 160                                              |       | 1,028 |   | 575 |   | 849 |   | 1,036 |   |
| (Loss) income  from continuing operations before income taxes and cumulative effect of a  change in accounting principle |       | (66,028                                          | )          | (71,003 | ) | (51,286 | ) | 140,708 |   | (44,841 | ) |
| (Benefit) provision for income taxes                                                                                     |       | (697                                             | )          | (11,714 | ) | (17,032 | ) | 53,162 |   | (27,550 | ) |
| (Loss) income  from continuing operations before cumulative effect of a change in accounting  principle                  |       | (65,331                                          | )          | (59,289 | ) | (34,254 | ) | 87,546 |   | (17,291 | ) |
| Cumulative  effect of a change in accounting principle, net of tax benefit                                               |       | —                                           |       | — |   | — |   | 150,479 |   | — |   |
| (Loss) income  from continuing operations                                                                                |       | (65,331                                          | )          | (59,289 | ) | (34,254 | ) | (62,933 | )  | (17,291 | ) |
| Discontinued operations: (b) (c)                                                                                         |       |                                             |       |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations, net of taxes                                                                         |       | (34,051                                          | )          | (24,003 | ) | (12,693 | ) | (18,635 | ) | (59,456 | ) |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                                                 |       | $                                                | (99,382    | ) | $ | (83,292 | ) | $ | (46,947 | ) | $ | (81,568 | ) | $ | (76,747 | ) |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Net loss  attributable to common shareholders                                                                            |       | $                                                | (99,382    | ) | $ | (83,292 | ) | $ | (59,899 | ) | $ | (80,745 | ) | $ | (109,311 | ) |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Per common share:                                                                                                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Basic (loss)  income from continuing operations before cumulative effect of a change in  accounting principle            |       | $                                                | (3.34      | ) | $ | (3.06 | ) | $ | (2.48 | ) | $ | 4.71 |   | $ | (2.69 | ) |
| Basic (loss)  income from continuing operations                                                                          |       | (3.34                                            | )          |   | (3.06 | ) | (2.48 | ) | (3.31 | ) | (2.69 | ) |
| Basic loss from discontinued operations                                                                                  |       | (1.74                                            | )          | (1.24 | ) | (0.67 | ) | (1.00 | ) | (3.20 | ) |
| Basic net loss                                                                                                           |       | $                                                | (5.08      | ) | $ | (4.30 | ) | $ | (3.15 | ) | $ | (4.31 | ) | $ | (5.89 | ) |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding                                                                              |       | 19,559                                           |       | 19,366 |   | 18,991 |   | 18,749 |   | 18,569 |   |
|                                                                                                                     |       |                                             |       |   |   |   |   |   |   |   |   |
| Per common share:                                                                                                        |       |                                             |       |   |   |   |   |   |   |   |   |
| Diluted (loss) income  from continuing operations before cumulative effect of a change in accounting  principle          |       | $                                                | (3.34      | ) | $ | (3.06 | ) | $ | (2.48 | ) | $ | 4.63 |   | $ | (2.69 | ) |
| Diluted (loss)  income from continuing operations                                                                        |       | (3.34                                            | )          | (3.06 | ) | (2.48 | ) | (3.25 | )  | (2.69 | ) |
| Diluted loss  from discontinued operations                                                                               |       | (1.74                                            | )          | (1.24 | ) | (0.67 | ) | (0.98 | ) | (3.20 | ) |
| Diluted net loss                                                                                                         |       | $                                                | (5.08      | ) | $ | (4.30 | ) | $ | (3.15 | ) | $ | (4.23 | ) | $ | (5.89 | ) |
| Weighted average  common shares outstanding – assuming dilution                                                     |       | 19,559                                           |       | 19,366 |   | 18,991 |   | 19,098 |   | 18,569 |   |

 

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

 

(b)                                 Asof December 31, 2005 and 2004, we completed our annual impairment test inaccordance with Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“Statement 142”). AtDecember 31, 2005 and 2004 we recorded an impairment charge of approximately$7,700,000 and $15,491,000, respectively, related to our WB affiliated stationsand film impairments of approximately $4,300,000 and $3,800,000, respectively,which all have been included in discontinued operations. In addition, as ofDecember 31, 2005, we wrote down the carrying value of our network affiliationsat KBWB-TV and WDWB-TV totaling $23,381,000 as a result of the networksannouncement to no longer provide programming to current WB affiliates effectivein September 2006, which has been included in discontinued operations.

 

(c)                                  Inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* the operating results of KBWB-TV, San Francisco,California and WDWB-TV, Detroit, Michigan are not included in our consolidatedresults from continuing operations for the periods presented due to thecriteria for a qualifying plan of sale was achieved as of September 8, 2005 andtherefore, their operations have been recorded as discontinued operations forall periods presented.

 
| ** **                          | ** ** | **As of December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Selected Balance Sheet Data:        |       |                        |       |   |   |   |   |   |   |   |   |
| Total assets (b) (c)                |       | $                           | 405,837    |   | $ | 429,929 |   | $ | 504,097 |   | $ | 472,184 |   | $ | 731,097 |   |
| Total debt                          |       | 428,871                     |       | 400,791 |   | 400,087 |   | 312,791 |   | 401,206 |   |
| Total long-term liabilities (b)     |       | 323,754                     |       | 298,392 |   | 236,810 |   | 28,173 |   | 45,387 |   |
| Redeemable preferred stock (a)      |       | —                      |       | — |   | — |   | 198,125 |   | 272,109 |   |
| Stockholders’ (deficit) equity |       | (430,792                    | )          | (332,090 | ) | (249,432 | ) | (190,295 | ) | (98,144 | ) |
|                                     |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

(c)                                  Inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,* the assets and liabilities of KBWB-TV, SanFrancisco, California and WDWB-TV, Detroit, Michigan have been classified as “heldfor sale” on the accompanying balance sheets. The criteria for a qualifyingplan of sale was achieved on September 8, 2005 and are included in the totalassets for all periods presented.

 

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

 

Management’sdiscussion and analysis of our financial condition and results of operationprovides a narrative on our financial performance and condition that should beread in conjunction with our consolidated financial statements and theaccompanying notes that appear under Item 8 in this Form 10-K.  It includes the following sections:

 

•                  ExecutiveSummary

•                  RecentDevelopments

•                  CriticalAccounting Policies and Estimates

•                  Results ofOperations

•                  Liquidity andCapital Resources

•                  New AccountingPronouncements

 

**Executive Summary**

 

We own and operate eightnetwork affiliated television stations in geographically diverse marketsreaching over 6% of the nation’s television households and have shared services agreements andadvertising representation agreements (which we generally refer to as localservice agreements) to provide advertising, sales, promotion and administrativeservices, and selected programming to two additional stations owned by MalaraBroadcast Group and one additional station owned by Four Seasons BroadcastCompany.  As of December 31, 2005,four of our stations are affiliated with NBC, one of our stations is affiliatedwith ABC and one of our stations is affiliated with CBS, our Big ThreeAffiliates, and two of our stations are affiliated with the Warner BrosTelevision Network, our WB Affiliates. The NBC affiliates are KSEE-TV, Fresno-Visalia, California, WEEK-TV,Peoria-Bloomington, Illinois, KBJR-TV, Duluth, Minnesota - Superior, Wisconsinand WISE-TV, Fort Wayne, Indiana.  TheABC affiliate is WKBW-TV, Buffalo, New York. The CBS affiliate is WTVH-TV,Syracuse, New York.  The WB affiliatesare KBWB-TV, San Francisco, California and WDWB-TV, Detroit, Michigan. The two Malara Broadcast Group-owned stationsto which we provide services and selected programming are WPTA-TV, theABC affiliate serving Fort Wayne, Indiana andKDLH-TV, the CBS affiliate serving Duluth, Minnesota - Superior,Wisconsin.  The Four Seasons BroadcastCompany-owned station to which we provide services is WAOE-TV, the UPNaffiliate serving Peoria-Bloomington, Illinois. Our consolidatedfinancial statements and accompanying notes that appear under Item 8 of thisForm 10-K, unless otherwise indicated, reflect our financial condition andresults of operations based on the stations owned by us on December 31,2005.

 

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

 

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

 

Set forth below are theprincipal types of television revenues from continuing operations received bythe television stations we own and/or operate for the periods indicated and thepercentage contribution of each to the gross television revenues of ourtelevision stations.

 

**GROSSREVENUES, BY CATEGORY,CONSOLIDATED CONTINUING OPERATIONS**

(dollars inthousands)

 
| ** **           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** ** | **Amount**                        | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                 |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Local/Regional       |       | $                                 | 53,963     |   | 53.6 | % | $ | 45,160 |   | 47.7 | % | $ | 44,887 |   | 51.7 | % |
| National             |       | 36,268                            |       | 36.0 | % | 34,357 |   | 36.3 | % | 33,231 |   | 38.3 | % |
| Network Compensation |       | 2,620                             |       | 2.6 | % | 3,059 |   | 3.2 | % | 3,205 |   | 3.7 | % |
| Political            |       | 3,215                             |       | 3.2 | % | 8,379 |   | 8.9 | % | 1,818 |   | 2.1 | % |
| Other                |       | 4,674                             |       | 4.6 | % | 3,720 |   | 3.9 | % | 3,730 |   | 4.3 | % |
| Gross Revenue        |       | 100,740                           |       | 100 | % | 94,675 |   | 100 | % | 86,871 |   | 100 | % |
| Agency Commissions   |       | 14,580                            |       |   |   | 14,175 |   |   |   | 13,538 |   |   |   |
| Net Revenue          |       | $                                 | 86,160     |   |   |   | $ | 80,500 |   |   |   | $ | 73,333 |   |   |   |

 

Automotive advertisingconstitutes our single largest source of gross revenues, accounting forapproximately 20% of our total gross revenues in 2005.  Gross revenues from restaurants, paidprogramming and retail stores accounted for approximately 25% of our totalgross revenues in 2005.  Each othercategory of advertising revenue represents less than 5% of our total grossrevenues.

 

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Webelieve that inflation has not had a material impact on our results ofoperations for each of the three years in the period ended December 31,2005.  However, there can be no assurancethat future inflation would not have an adverse impact on our operating resultsand financial condition.

 

***2005 Highlights***

 

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

 

**•**                  In addition, a subsidiary of Malara BroadcastGroup on March 8, 2005 acquired CBS affiliate KDLH-TV, Duluth,Minnesota-Superior, Wisconsin (“KDLH-TV”) from New Vision Television andcertain of its subsidiaries for approximately $9.5 million, pursuant to theterms and conditions of an asset purchase agreement dated April 23, 2004. Wecurrently own and operate KBJR-TV, the NBC affiliate serving Duluth-Superior.

 

**•**                  On March 8, 2005, we entered into a strategicarrangement with Malara Broadcast Group, under which we provide advertisingsales, promotion and administrative services, and selected programming toMalara Broadcast Group-owned stations WPTA-TV and KDLH-TV in return for certainfees that are paid by Malara Broadcast Group to us. We do not own MalaraBroadcast Group or its television stations. In order for both us and MalaraBroadcast Group to continue to comply with FCC regulations, Malara BroadcastGroup must maintain complete responsibility for and control over programming,finances, personnel and operations of its television stations.  However, as a result of our guarantee of theobligations incurred under Malara Broadcast Group’s Senior Credit Facility andthe revolving loan, arrangements under the local service agreements and put orcall option agreements, under United States generally accepted accountingprinciples (“U.S. GAAP”), specifically, Financial Accounting Standards Board (“FASB”)Interpretation No. 46, *Consolidation ofVariable Interest Entities* (“Interpretation 46”), we are required toconsolidate Malara Broadcast Group’s financial position, results of operationsand statement of cash flows in our consolidated results. In addition, inaccordance with the provisions of Interpretation 46, the Company did notaccount for the sale of the assets of WPTA-TV and no gain therefrom wasrecognized in the consolidated statements of operations and we did not applythe provisions of purchase accounting to Malara Broadcast Group’s acquisitionof WPTA-TV.

 

**•**                  Malara Broadcast Group financed itsacquisition of WPTA-TV and KDLH-TV with the proceeds of borrowings pursuant toa Malara Broadcast Group credit agreement (the “Malara Broadcast Group SeniorCredit Facility”).  The Malara BroadcastGroup Senior Credit Facility provides for two term loans totaling $48.5 millionand a revolving loan of $5 million.  The$23.5 million Malara Broadcast Group Tranche A Term Loan, which was secured bya letter of credit, was repaid in full on February 10, 2006, as discussedbelow.  The $25 million Malara BroadcastGroup Tranche B Term Loan and the $5 million revolving loan are secured by theassets of WPTA-TV and KDLH-TV, and guaranteed on an unsecured basis by us.

 

**•**                  On September 1, 2005, we entered into astrategic arrangement with Four Seasons Broadcast Company, under which we provideadvertising sales, promotion and administrative services to Four SeasonsBroadcast Company-owned station WAOE (TV) in return for certain fees that willbe paid by Four Seasons Broadcast Company to us.

 

**•**                  On September 8, 2005, we entered into adefinitive agreement (the “KBWB Purchase and Sale Agreement”) to sellsubstantially all of the assets of KBWB-TV, the WB affiliate serving the SanFrancisco, California television market, to AM Broadcasting KBWB, Inc. (the “KBWBBuyer”).  On September 8, 2005, weentered into a definitive agreement (the “WDWB Purchase and Sale Agreement” andtogether with the KBWB Purchase and Sale Agreement, the “Purchase and Sale Agreements”)to sell substantially all of the assets of WDWB-TV, the WB affiliate servingthe Detroit Michigan television market, to AM broadcasting WDWB, Inc. (the “WDWBBuyer”).  The Purchase and SaleAgreements contained covenants by us not to compete in the San Francisco,California and Detroit, Michigan markets for a period of five years. Theaggregate consideration to be received by us for the sale of KBWB-TV was$72,500,000, before closing adjustments, which was payable $71,250,000 in cashand $1,250,000 in equity in AM Media Holdings, LLC. The aggregate considerationto be received by us for the sale of WDWB-TV was $87,500,000, before closingadjustments, which was payable $86,250,000 in cash and $1,250,000 in equity inAM Media Holdings, LLC. The consideration for each covenant not to compete inthe San Francisco and Detroit markets was $10 million, respectively. We havereclassified the operations of these stations as discontinued operations andthe assets and liabilities as held for sale in our consolidated balance sheetsand statements of operations in accordance with the provisions of Statement ofFinancial Accounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*(See Note 4. *Discontinued Operations*in the Notes toour Consolidated Financial Statements.)

 

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**Recent Developments**

 

**•**                  On January 24, 2006, the WB Network announcedthat it will no longer provide programming to current WB affiliateseffective in September 2006.  The KBWB Buyer has advised us that as aresult thereof, the KBWB Buyer will not be able to proceed with the transactionas contemplated.  While there may befurther discussions between us and the KBWB Buyer about the transaction, we areactively engaging in dialogue with other potential buyers because we do notpresently have an agreement in principle with the KBWB Buyer with respect toKBWB-TV.  On February 14, 2006, weentered into an amendment (the “KBWB Amendment”) to the KBWB Purchase and SaleAgreement.  Pursuant to the KBWBAmendment (i) Section 6.2 of the KBWB Purchase and Sale Agreement, a no shopprovision, was deleted in its entirety and (ii) the KBWB Buyer and the Companyeach have the right to terminate the KBWB Purchase and Sale Agreement, at anytime, by providing written notice to the other party with no liability orobligation to such other party.

 

**•**                  On January 24, 2006, the WB Network announcedthat it will no longer provide programming to current WB affiliateseffective in September 2006.  The WDWB Buyer has advised us that as aresult of the WB Network announcement, the WDWB Buyer will not be able toproceed with the transaction as contemplated. While there may be further discussions between us and the WDWB Buyerabout the transaction, we are actively engaging in dialogue with otherpotential buyers because we do not presently have an agreement in principlewith the WDWB Buyer with respect to WDWB-TV. On February 14, 2006, we entered into an amendment (the “WDWB Amendment”)to the WDWB Purchase and Sale Agreement. Pursuant to the WDWB Amendment (i) Section 6.2 of the WDWB Purchase andSale Agreement, a no shop provision, was deleted in its entirety and (ii) theWDWB Buyer and the Company each have the right to terminate the WDWB Purchaseand Sale Agreement, at any time, by providing written notice to the other partywith no liability or obligation to such other party.

 

**•**                  On February 10, 2006, in accordance with theterms of the Malara Broadcast Group Senior Credit Facility, the letter ofcredit issued in March 2005 to support the $23.5 million Tranche A Term Loanwas drawn upon in satisfaction of Malara Broadcast Group’s obligations to suchlenders under the Malara Tranche A Term Loan following non-renewal of theletter of credit.  We paid the reimbursementobligation to the letter of credit issuer on February 10, 2006, using U.S.government securities which had been pledged in support of such obligation.

 

**•**                  Under a Reimbursement Agreement, dated as ofMarch 8, 2005 (the “Reimbursement Agreement”), among us, Malara Broadcast Groupand certain of Malara Broadcast Group’s subsidiaries (the “Malara Borrowers”),the Malara Borrowers agreed to repay us any amounts drawn on the letter ofcredit plus interest at a rate of 8% per annum. We reduced to $16.6 million the amount due from the Malara Borrowers toGranite under the Reimbursement Agreement.

 

**•**                  On January 13, 2006, we and certain of oursubsidiaries entered into a definitive agreement with Television Station GroupHoldings, LLC and certain of its subsidiaries to purchase substantially all ofthe assets of WBNG-TV, Channel 12, the CBS-affiliated television stationserving Binghamton and Elmira, New York, for $45 million in cash, subject toclosing adjustments.  (the “WBNG Purchaseand Sale Agreement”).  As of February 8,2006, the sellers have a right to terminate the WBNG Purchase and SaleAgreement because the sales of two stations affiliated with the WB Network werenot completed as of such date.  As ofMarch 30, 2006, the sellers have not exercised their right to terminate theWBNG Purchase and Sale Agreement.  OnMarch 8, 2006, the application seeking consent to assign the WBNG-TV license toour subsidiary was granted by the Federal Communications Commission (“FCC”).

 

**•**                  On March 13, 2006, we retained the services ofHoulihan Lokey Howard & Zukin as our financial advisors to assist us with theevaluation of strategic options and to advise us on available financing andcapital restructuring alternatives.

 

**Critical Accounting Policies and Estimates**

 

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

 

*Revenuerecognition*

 

Our primary source ofrevenue is the sale of television time to advertisers.  Revenue is recorded when the advertisementsare aired.  Other sources of revenue arecompensation from the networks, studio rental and commercial productionactivities.  These revenues are recordedwhen the programs are aired and the services are performed. Revenue from bartertransactions is recognized when advertisements are broadcast and merchandise orservices received are charged to expense when received or used.  Barter revenue totaled $2,112,000, $1,777,000and $1,614,000 for the years ended December 31, 2005, 2004 and 2003,respectively.  Barter expense totaled $1,633,000,$1,296,000 and $1,442,000 for the years ended December 31, 2005, 2004 and2003, respectively.

 

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*FilmContract Rights*

 

Film contract rights arerecorded as assets at gross value when the license period begins and the filmsare available for broadcasting.  Filmcontract rights are amortized on an accelerated basis over the estimated usageof the films, and are classified as current or non-current on that basis.  Our accounting for long-lived film contractassets requires judgment as to the likelihood that such assets will generatesufficient revenue to cover the associated expense.  We review our film contract rights forimpairment by projecting the amount of revenue the program will generate overthe remaining life of the contract by applying average historical rates andsell-out percentages for a specific time period and comparing it to the program’sexpense.  If circumstances were tochange, such as the projected future revenue of a program is less than itsfuture expense and/or the expected broadcast period is shortened or cancelleddue to poor ratings, we would be required to write-off the exposed value of theprogram rights ratably or potentially immediately. We have written down thevalue of certain film contract rights at our WB stations by $ 4,346,000,$3,800,000 and $3,000,000 during the years ended December 31, 2005, 2004and 2003, respectively, and is included on our statement of operations in “lossfrom discontinued operations” in each respective year.  Film contract rights payable are classifiedas current or non-current in accordance with the payment terms of the variouslicense agreements.  Film contract rightsare reflected in the consolidated balance sheet at the lower of unamortizedcost or estimated net realizable value. As of December 31, 2005, theamounts of current film contract rights and non-current film contract rightswere $2,836,000 and $77,000, respectively.

 

*Goodwilland Intangible Assets*

 

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

 

In accordance withStatement 142, goodwill and other intangible assets deemed to have indefinitelives are no longer being amortized, but instead are subject to annualimpairment tests. We perform annual impairment tests using a discounted cashflow model.  We then compare theestimated fair market value to the book value to determine if an impairmentexists.  Our discounted cash flow modelis based on our judgment of future market conditions within the designatedmarketing area of each broadcast license as well as discount rates that wouldbe used by market participants in an arms-length transaction.  Our goodwill and other indefinite-livesintangible assets could be impaired if future events result in a conclusionthat market conditions have declined or discount rates have increased.  Any resulting impairment loss could have amaterial adverse impact on our financial condition and results of operations.We adopted the new rule on accounting for goodwill and other intangibleassets beginning on January 1, 2002. We recorded a charge to reduce thecarrying value of its goodwill and other indefinite-lived assets by $95,000,000and $114,000,000, respectively during the first quarter of 2002. The annualimpairment testing required by Statement 142 was completed as ofDecember 31, 2005. The impairment analysis resulted in a write down of thecarrying value of our goodwill by $7,669,000. In addition, as a result of theannouncement made by the Warner Bros. Network (the “WB”), that effective inSeptember 2006 the WB will no longer provide programming to current WBaffiliates, we wrote down the carrying value of our network affiliations byapproximately $23,381,000 in the aggregate at our two WB stations, KBWB-TV andWDWB-TV. During 2004, our annual impairment testing resulted in a write down ofthe carrying value of our goodwill by $15,491,000, as a result of decreases inprojected future cash flows from operations at certain stations.  During the second quarter of 2004, weadjusted our goodwill and related deferred tax liability balances byapproximately $14,926,000 to appropriately reflect the tax basis of certainassets acquired in prior years’ acquisitions. As of December 31, 2005, wehad $170,000,000 in goodwill and other intangible assets net of accumulatedamortization. In addition, assets held for sale at December 31, 2005 include$100,400,000 of goodwill and other intangible assets net of accumulatedamortization. The recorded impairment charges and write downs of otherindefinite-lived assets during 2005 and 2004 have been included as part of our discontinuedoperations.

 

We determine the value ofour FCC licenses using discounted cash flow valuation method assuming ahypothetical independent station whose only identifiable asset is the FCClicense. We believe that our FCC licenses have an indefinite life based on thehistorical basis to renew such licenses. The annual impairment testing for FCClicenses was completed as of December 31, 2005 and 2004 and did not resultin any additional write down of the carrying value of our licenses.

 

*Long-LivedAssets*

 

We review our long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset is not recoverable.  At such time as an impairment in value of along-lived asset is identified the impairment will be measured in accordancewith Statement of Financial Accounting Standard No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” as the amount by which thecarrying amount of a long-lived asset exceeds its fair value.  To determine fair value we employ an expectedpresent value technique, which utilizes multiple cash flow scenarios thatreflect the range of possible outcomes and an appropriate discount rate.  If circumstances were to change, such as adecreased cash flow scenarios, we would be required to record impairmentcharges of the exposed value of the long-lived assets which were not previouslyrecorded.

 

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*Allowancefor Doubtful Accounts*

 

We must make estimates ofthe uncollectibility of our accounts receivable.  We specifically review historical write-offactivity by market, large customer concentrations, customer credit worthiness,and changes in our customer payment terms when evaluating the adequacy of theallowance for doubtful accounts.  Ourexperience has been that the level of customer defaults has been predictableand that the allowance for doubtful accounts has been adequate to cover suchdefaults.  If circumstances change, suchas higher than expected defaults or an unexpected material adverse change in anagency’s ability to meet its financial obligation to us, our estimates of therecoverability of amounts due our company could be reduced by a materialamount. As of December 31, 2005 and 2004, our allowance for doubtfulaccounts totaled approximately $632,000 and $896,000, respectively.

 

*Consolidation of VariableInterest Entities*

 

Ourfinancial statements include the accounts of independently-owned MalaraBroadcast Group since it has been determined that we are the primarybeneficiary of a variable interest entity (“VIE”) in accordance with FASBInterpretation 46, as revised in December 2003, Interpretation 46(R). UnderU.S. GAAP a company must consolidate an entity when it has a “controllingfinancial interest” in such entity resulting from the company’s ownership of amajority of the entity’s voting rights. Interpretation 46(R) expands thedefinition of controlling financial interest to include factors other thanequity ownership and voting rights.

 

Inapplying Interpretation 46(R), we base our decision to consolidate an entity onquantitative and qualitative factors that indicate whether or not we areresponsible for a majority of the entity’s economic risks and receive amajority of the entity’s economic rewards, or “primary beneficiary.” Ourevaluation of whether or not we are deemed to be the primary beneficiary is anongoing process and may alter as facts and circumstances change.

 

MalaraBroadcast Group is included in our consolidated financial statements because webelieve we are the primary beneficiary of Malara Broadcast Group as a result oflocal service agreements we have with each of the Malara stations, ourguarantee of the obligations incurred under the Malara Broadcast Group SeniorCredit Facility and the put/call option agreements between us and Malara BroadcastGroup. However, we do not own Malara Broadcast Group or its televisionstations.

 

**Resultsof Operations**

** **

***Overview***

 

Net revenue fromcontinuing operations for our television group increased 7.0% due primarily toincreases in non-political local and non-political national revenues.Non-political local revenue increased to $53,963,000 from $45,160,000 in 2004or 19.5%. Non-political national revenue increased to $36,268,000 from $34,357,000in 2004 or 5.6%. The increases in both non-political local and nationalrevenues were primarily due to the inclusion of two additional stations in2005, WISE-TV and KDLH-TV in our consolidated results commencing in March 2005which were not in our consolidated results during 2004. Political revenuedecreased in a non-presidential election year to $3,215,000 from $8,379,000 in2004 or 61.6%.  We continue to focus onour strong news brands and targeted sales initiatives as our foundation forlocal performance and growth.  Overall,automotive, our largest revenue category decreased approximately 3%.  We experienced growth in several other majorcategories, such as home remodeling, medical, insurance and competitive media whichwere offset by decreases in categories such as entertainment (movies andamusement parks), utilities and pharmaceuticals.

 

Our operating expenses arecomprised of two components; (1) direct operating expenses consisting primarilyof programming, news and engineering costs; and (2) selling, general andadministrative expenses consisting primarily of sales, promotion andadministrative costs. Operating expenses increased as a result of risinghealthcare costs, increased compensation and related benefits expenses,increased promotional and marketing expenses resulting primarily from theinclusion of WISE-TV and KDLH-TV in our consolidated results commencing inMarch 2005. During 2006, we expect continued increases in healthcare costs andpromotional and marketing expenses, which will be offset by decreased filmamortization expense.

 

Net revenue from discontinuedoperations for our television group decreased 5.4% due primarily to decreasesin non-political local and non-political national revenues. Non-political localrevenue decreased to $19,643,000 from $20,915,000 in 2004 or 6.1%.Non-political national revenue decreased to $15,995,000 from $17,983,000 in2004 or 11.1%. Overall, automotive, our largest revenue category decreased 29%.  We experienced growth in several other majorcategories, such as retail stores, home remodeling and restaurants which were offsetby decreases in categories such as entertainment (movies and amusement parks)and instructional schools.

 

 

***Yearsended December 31, 2005 and 2004***

 

*ContinuingOperations*

 

Set forth below aresignificant factors that contributed to our operating results from continuingoperations for the years ended December 31, 2005 and 2004, respectively.

 

37

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**GROSSREVENUES, BY CATEGORY,**

**CONSOLIDATEDCONTINUING OPERATIONS**

(dollars inthousands)

 
| ** **           | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------|------------|------------|------------|----------|------------|
| ** **           | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|                 |       |       |       |     |       |   |   |   |   |
| Local/Regional       |       | $          | 53,963     |     | 53.6       | % | $ | 45,160 |   | 47.7 | % |
| National             |       | 36,268     |       | 36.0     | %          | 34,357 |   | 36.3 | % |
| Network Compensation |       | 2,620      |       | 2.6      | %          | 3,059 |   | 3.2 | % |
| Political            |       | 3,215      |       | 3.2      | %          | 8,379 |   | 8.9 | % |
| Other                |       | 4,674      |       | 4.6      | %          | 3,720 |   | 3.9 | % |
| Gross Revenue        |       | 100,740    |       | 100      | %          | 94,675 |   | 100.0 | % |
| Agency Commissions   |       | 14,580     |       |     |       | 14,175 |   |   |   |
| Net Revenue          |       | $          | 86,160     |     |       |   | $ | 80,500 |   |   |   |

 

The following discussion is related to the results ofour continuing operations, except for discussions regarding our statements ofcash flows which include the results of our discontinued operations.

 

Net revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

 

Net revenue increased $5,660,000 or 7.0% to $86,160,000for the year ended December 31, 2005, from $80,500,000 for the year ended December31, 2004.  The increase was due tohealthy increases in non-political local revenues of $8,803,000 or 19.5% andnon-political national revenues of $1,911,000 or 5.6% offset by decreases inpolitical advertising revenue during a non-election year of $5,164,000 or 61.6%and network compensation revenue of $439,000 or 14.4%. The increases in bothnon-political local and non-political national revenues were primarily due tothe inclusion of WISE-TV and KDLH-TV in our consolidated results during the yearended December 31, 2005 which were not in our consolidated results during thesame period last year. Malara Broadcast Group’s net revenues totaled $12,590,000or 14.6% of the total net revenues during the year ended December 31, 2005.

 

Direct operating expenses, consisting primarily ofprogramming, news and engineering increased $1,885,000 or 5.7% to $34,827,000for the year ended December 31, 2005 from $32,942,000 for the same period in2004. The increase was primarily due to increases in amortization of film contractrights, salaries and group health insurance as a result of the inclusion ofWISE-TV and KDLH-TV in our consolidated results of during the year endedDecember 31, 2005.  Selling, general andadministrative expenses increased $2,310,000 or 10% to $25,469,000 for the yearended December 31, 2005 from $23,159,000 for the same period in 2004. Theincrease was primarily due to increases in salaries, commissions, promotionaland professional fees as a result of the inclusion of WISE-TV and KDLH-TV inour consolidated results of during the year ended December 31, 2005. MalaraBroadcast Group’s direct operating expenses and selling, general andadministrative expenses totaled $2,525,000 of the total station expenses, afterelimination of expenses relating to various local service agreements totalingapproximately $12,807,000 between us and Malara Broadcast Group.

 

*OtherConsolidated Expenses*

 

Amortization expenseincreased $470,000 or 19.4% during the year ended December 31, 2005 as comparedto the same period in 2004. This increase was primarily due to the incrementalamortization expense of two additional television stations, KDLH-TV andWISE-TV, which were acquired in March 2005. Depreciation expense decreased$95,000 or 1.8% during the year ended December 31, 2005 as compared to the sameperiod in 2004.  The decrease wasprimarily due to the effect of the change in estimated useful lives assigned tocertain fixed assets as of January 1, 2005 in addition to fixed assets writtenoff in the third and fourth quarters of 2004 and first two quarters of 2005,thereby resulting in lower depreciation expense during 2005. This decrease wasoffset, in part, by increased depreciation expense due to the incrementaldepreciation expense of two additional television stations, KDLH-TV andWISE-TV, which were acquired in March 2005.

 

Corporate expense totaled $10,550,000;a decrease of $2,982,000 or 22.0% compared to $13,532,000 for the same periodin 2004.The decrease was primarily due to planned reduction in compensation andother non-personnel related expenses, offset in part by increases inprofessional fees related to the sale of WPTA-TV. The performance award expensefor the year ended December 31, 2005 totaled $1,279,000; a decrease of $2,136,000compared to $3,415,000 for the same period in 2004. The decrease was primarilydue to the separation of a company executive for which the unvested portion ofthe executive’s performance award expense was accelerated during the thirdquarter of 2004 pursuant to a Separation Agreement dated September 21, 2004.Corporate separation agreement expense decreased $1,406,000 compared to thesame period in 2004 due primarily to the separation of a company executiveduring the third quarter of 2004 pursuant to a Separation Agreement dated September21, 2004. Non-cash compensation expense decreased $285,000 or 40.9% primarilydue to the forfeitures of stock awards granted to certain personnel in prioryears as well as the effect of prior years awards fully vesting during 2004.

 

38

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Interest expense totaled$43,734,000; an increase of $4,244,000 or 10.7% compared to $39,490,000 for theyear ended December 31, 2004.  Theincrease was primarily due to the interest expense on Malara Broadcast Group’sSenior Credit Facility which totaled approximately $4,236,000. Interest incometotaled $1,711,000; an increase of $549,000, or 47.2% compared to $1,162,000for the year ended December 31, 2004. The increase was primarily due tointerest earned on the company’s cash, offset by the decreased average cashbalance invested during the year ended December 31, 2005 as compared to thesame period in 2004. Non-cash interest expense totaled $3,965,000; an increaseof $97,000 or 2.5% compared to $3,868,000 for the year ended December 31, 2004.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $25,548,000 during the twelve months ended December 31, 2005 and2004 as required by Statement of Financial Accounting Standards No.150.

 

We recorded a current and deferredtax benefit of $697,000, compared to a current and deferred tax benefit of$11,714,000 for the year ended December 31, 2004.  The decline in the tax benefit is primarilydue to an increase in the valuation allowance against net operating loss carryforwards which may not be utilized in future periods.

 

*DiscontinuedOperations*

 

Set forth beloware significant factors that contributed to our operating results fromdiscontinued operations for the yeas ended December 31, 2005 and 2004,respectively.

 

**GROSSREVENUES, BY CATEGORY,**

**CONSOLIDATEDDISCONTINUED OPERATIONS**

(dollars inthousands)

 
| ** **         | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------|------------|------------|------------|----------|------------|
| ** **         | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |       |       |     |       |   |   |   |   |
| Local/Regional     |       | $          | 19,643     |     | 53.2       | % | $ | 20,915 |   | 52.8 | % |
| National           |       | 15,995     |       | 43.3     | %          | 17,983 |   | 45.4 | % |
| Political          |       | 332        |       | 1.0      | %          | 399 |   | 1.0 | % |
| Other              |       | 938        |       | 2.5      | %          | 313 |   | 0.8 | % |
| Gross Revenue      |       | 36,908     |       | 100      | %          | 39,610 |   | 100 | % |
| Agency Commissions |       | 5,451      |       |     |       | 6,345 |   |   |   |
| Net Revenue        |       | $          | 31,457     |     |       |   | $ | 33,265 |   |   |   |

 

Net revenue fromour discontinued operations decreased $1,808,000 or 5.4% to $31,457,000 from $33,265,000due primarily to decreases in non-political national revenues of $1,988,000 andnon-political local revenues of $1,272,000. The non-political national revenue decreases were primarily due todeclines in the automotive, entertainment/movie, pharmaceuticals andtelecommunications categories.  Thenon-political local revenue decreases were primarily due to declines in theautomotive and instructional schools categories.

 

Direct operating expenses from our discontinuedoperations, consisting primarily of programming and engineering expenses,decreased $2,800,000 or 13.4% to $18,164,000 for the year ended December 31,2005 from $20,964,000 for the same period in 2004. The decrease was primarilydue to lower amortization of film contract rights due to the effects ofwrite-downs taken in 2004, and the replacement of expensive, unprofitableprograms with less expensive, profitable programming. There were approximately$4,346,000 and $3,800,000 of film asset write-downs during the years endedDecember 31, 2005 and 2004, respectively. Selling, general and administrativeexpenses from our discontinued operations increased $560,000 or 4.3% to $13,722,000for the year ended December 31, 2005 from $13,162,000 for the same period in2004. The increase was primarily due to higher general and administrativeexpenses.

 

In accordance withStatement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets (“Statement 142”), we completed our annual impairment test asof December 31, 2005 and 2004. The impairment analysis resulted in usrecording an impairment charge to the carrying value of goodwill ofapproximately $7,669,000 and $15,491,000, in 2005 and 2004, respectively. Inaddition, as a result of the announcement made by the WB, that effective inSeptember 2006 the WB will no longer provide programming to current WBaffiliates, we wrote down our remaining carrying value of our networkaffiliations by approximately $23,381,000 in the aggregate at our two WBstations, KBWB-TV and WDWB-TV.  Therecorded impairment charges and write downs of other intangible assets during2005 and 2004 have been included as part of our discontinued operations.

 

39

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

 

*ContinuingOperations*

 

Set forth below are significant factors thatcontributed to our operating results from continuing operations for the yearsended December 31, 2004 and 2003, respectively.

 

**GROSSREVENUES, BY CATEGORY,**

**CONSOLIDATEDCONTINUING OPERATIONS**

(dollars inthousands)

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

 

The following discussion is related to the results ofour continuing operations, except for discussions regarding our statements ofcash flows which include the results of our discontinued operations.

 

Net revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

 

Net revenue increased $7,167,000 or 9.8% to $80,500,000for the year ended December 31, 2004, from $73,333,000 for the same period in2003. The increase was primarily due to increases in political advertising and non-politicalnational revenues of $6,561,000 and $1,126,000, respectively. The non-politicalnational revenue increase was due to growth in the paid programming, foodstores and department stores categories. Non-political local revenues wereessentially flat. Excluding political, net revenue increased 2.2%.

 

Direct operating expenses, consisting primarily ofprogramming, news and engineering increased $356,000 or 1.1% to $32,942,000 forthe year ended December 31, 2004 from $32,586,000 for the same period in 2003.The increase was primarily due to increases in compensation, group healthinsurance and power costs associated with the launching of digital broadcastingin all of our markets during 2004. Selling, general and administrative expensesincreased $2,473,000 or 12% to $23,159,000 for the year ended December 31, 2004from $20,686,000 for the same period in 2003. The increase was primarily due toincreases in compensation, group health insurance, increased sales andpromotion expenses and restructuring charges at our Buffalo, New York station.

 

*OtherConsolidated Expenses*

 

Amortization expense remainedflat during the year ended December 31, 2004 compared to the same period in2003. Depreciation expense increased $188,000 or 3.8% during the year ended December 31,2004 compared to the same period in 2003. The increase was primarily due to increased capital expenditures in 2003for the conversion to digital broadcasting.

 

Corporate expense totaled$13,532,000 an increase of $1,817,000 or 15.5% compared to same period a yearearlier.  The primary increase was due toincreased professional fees relating to the implementation, documentation andtesting for Sarbanes-Oxley Section 404 compliance.  Increased healthcare costs and timing ofyear-end accruals also contributed to our increased corporate expense. Theperformance award expense for the twelve months ended December 31, 2004totaled $3,415,000 as compared to $52,000 in the same period a year earlier.This was primarily due to the expensing of the unvested portion of aperformance award earned in 2003 by an executive who departed the Company inSeptember 2004.  The corporateseparation agreement expense for the twelve months ended December 31, 2004totaled $1,406,000 and relates primarily to severance and other benefits payableto an executive who departed our Company in September 2004 pursuant to theterms of a separation agreement. Non-cash compensation expense decreased $199,000 or 22.2% primarily dueto the forfeitures of stock awards granted certain personnel in prior years whoare no longer employed by us as of December 31, 2004.

 

Interest expense totaled$39,490,000; an increase of $8,185,000 or 26.1% compared to $31,305,000 for theyear ended December 31, 2003.  Theincrease was primarily due to our 9 3/4 % Senior Secured Notes beingoutstanding for a full year.  Interestincome totaled $1,162,000; a decrease of $119,000, or 9.3% compared to the yearended December 31, 2003.  Thedecrease was primarily due to the recognition of interest income on an interestrate hedge related to the 8 7/8% Senior Subordinated Notes in 2003.  Non-cash interest expense totaled $3,868,000;a decrease of $836,000 or 17.7% primarily due to reduced amortization ofdeferred financing fees.

 

40

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

 

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

 

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

 

*DiscontinuedOperations*

 

Set forth beloware significant factors that contributed to our operating results fromdiscontinued operations for the yeas ended December 31, 2004 and 2003,respectively.

 

**GROSSREVENUES, BY CATEGORY,**

**CONSOLIDATEDDISCONTINUED OPERATIONS**

(dollars inthousands)

 
| ** **         | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------|------------|------------|------------|----------|------------|
| ** **         | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Update             |       |       |       |     |       |   |   |   |   |
| Local/Regional     |       | $          | 20,915     |     | 52.8       | % | $ | 21,239 |   | 49.2 | % |
| National           |       | 17,983     |       | 45.4     | %          | 21,555 |   | 50.0 | % |
| Political          |       | 399        |       | 1.0      | %          | 64 |   | 0.1 | % |
| Other              |       | 313        |       | 0.8      | %          | 317 |   | 0.7 | % |
| Gross Revenue      |       | 39,610     |       | 100      | %          | 43,175 |   | 100 | % |
| Agency Commissions |       | 6,345      |       |     |       | 7,964 |   |   |   |
| Net Revenue        |       | $          | 33,265     |     |       |   | $ | 35,211 |   |   |   |

 

Net revenue from ourdiscontinued operations decreased $1,946,000 or 5.5% to $33,265,000 for theyear ended December 31, 2004 from $35,211,000 for the same period in 2003. Thedecrease was primarily due to decreases in non-political national revenues of$3,572,000 and non-political local revenues of $324,000.  The non-political national revenue decreaseswere primarily due to declines in the automotive, paid programming and entertainment/moviecategories.  The non-political localrevenue decreases were primarily due to declines in the fast food, departmentstores, and amusement parks categories.

 

Direct operating expenses from our discontinuedoperations, consisting primarily of programming and engineering expenses,decreased $4,370,000 or 17.2% to $20,964,000 for the year ended December 31,2004 from $25,334,000 for the same period in 2003. The decrease was primarilydue to lower amortization of film contract rights due to the effects ofwrite-downs taken in 2004 and 2003, and the replacement of expensive,unprofitable programs with less expensive, profitable programming. There wereapproximately $3,800,000 and $3,000,000 of film asset write-downs during the yearended December 31, 2004 and 2003, respectively. Selling, general andadministrative expenses from our discontinued operations decreased $265,000 or 2%to $13,162,000 for the year ended December 31, 2004 from $13,427,000 for thesame period in 2003. The decrease was primarily due to decreased general andadministrative expenses.

 

In accordance withStatement 142, we completed our annual impairment test as of December 31,2004 and recorded an impairment charge on the carrying value of goodwill ofapproximately $15,491,000. We performed our annual impairment test as ofDecember 31, 2003 and concluded that no impairment and/or write-down ofgoodwill and other indefinite lived assets were required. The recordedimpairment charges and write downs of other indefinite-lived assets during 2005and 2004 have been included as part of our discontinued operations.

 

***Restructuring and Severance Charges***

 

During 2004, werecognized a $2,027,000 restructuring charge relating to employee separationsat both our corporate office and our Buffalo, New York television station.  Of this total, approximately $1,406,000related to severance and other benefits, associated with the departure ofStuart J. Beck (see Note 4, Related Parties) and administrative support staffat the corporate office which is being paid over an eighteen month period fromdate of separation, September 21, 2004. The remaining $621,000 includesseverance and other benefits resulting from a reduction in the workforce at theBuffalo, New York television station. As of December 31, 2005, we completed theseparation payments related to the Buffalo, New York restructuring charges, andreduced its accrual by approximately $10,000 to adjust for payments of benefitsand amounts originally accrued.

 

During 2005, werecorded restructuring charges totaling $447,000 related to employeeseparations, which included severance, other benefits and stay-bonuses awardedto transitional employees at its Duluth, Minnesota and Fort Wayne, Indianatelevision stations. We anticipate minimal restructuring charges in futureperiods relating to stay-bonuses awarded to transitional employees at both of ourDuluth, Minnesota and Fort Wayne, Indiana television stations upon separation.

 

41

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At December 31,2005, the accruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the television stations is included in “selling, general andadministrative expenses” and the related expense for the corporate charges areincluded in “corporate separation agreement expenses” on the consolidatedStatement of Operations.  These costswere recognized in accordance with the provisions of Statement of FinancialAccounting Standards No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*.

 

*Acquisition Charges*

 

During 2005, theCompany accrued $627,000 related to employee separations, which includedseverance and other benefits as part of the Company’s purchase accounting.These accrued costs were a result of employees not retained by the Companysubsequent to its acquisition of its Fort Wayne, Indiana television station,which included operational through management employees.

 

At December 31,2005 the accruals for acquisition activities of the television station areincluded in “other accrued liabilities” on the consolidated Balance Sheets.These charges were recognized in accordance with the provisions of EmergingIssues Task Force Issue No. 95-3 *Recognition of Liabilitiesin Connection with a Purchase Business Combination*.

 

The following is areconciliation of the aggregate liability recorded for restructuring andacquisition charges as of December 31, 2005:

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Year Ended December 31, 2005**                                                              | ** ** |
| ** **         | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **December 31,  2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Television station |       | $                                                                                             | 250,000    |   | $ | 1,064,000 |   | $ | 1,233,000 |   | $ | 81,000 |   |
| Corporate          |       | 1,214,000                                                                                     |       | — |   | 1,022,000 |   | 192,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,464,000  |   | $ | 1,064,000 |   | $ | 2,255,000 |   | $ | 273,000 |   |

 

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

 

**Liquidityand Capital Resources**

 

As of December 31, 2005, wehad approximately $8,629,000 of cash and cash equivalents on hand, whichexcludes $24,997,500 in U.S.government securities which we pledged to support the reimbursement obligationsin the event of a draw on the letter of credit that served as collateral forthe Tranche A Term Loan under Malara Broadcast Group’s Senior CreditFacility.  On February 10, 2006, theletter of credit issued in March 2005 to support the $23.5 million Tranche A Term Loan was drawn upon in satisfactionof Malara Broadcast Group’s obligations to such lenders under the Malara TrancheA Term Loan following non-renewal of the letter of credit.  We paid our reimbursement obligation to theletter of credit issuer on February 10, 2006, using U.S. government securitieswhich had been pledged in support of such obligation.

 

On June 1, 2006, we must makean interest payment of $19,744,000 on our 9 3⁄4 Senior Secured Notes (the “Notes”).  We donot anticipate having sufficient cash on hand to make the June 1, 2006 interestpayment on our Notes.

 

On March 13, 2006, weretained the services of Houlihan Lokey Howard & Zukin as our financialadvisors to assist us in the evaluation of strategic options and to advise uson available financing and capital restructuring alternatives.

 

Absent changes to our capital structure and stationownership mix we will not have enough liquidity to make our interest payment onJune 1, 2006 on our Notes. In order to improve our existing liquidity positionand to further our business strategy, we entered into separate definitiveagreements to sell our two WB affiliates (as discussed previously) and are continuingto explore the sale of our two WB affiliates and the restructuring of ourcompany.  We are actively marketing andengaging in dialogue with other potential buyers, which has resulted ininterest to buy one or both of our WB stations and we continue to evaluate suchinterest. However, under our Indenture, our use of the net proceeds from thesale of assets is restricted.  Of the netproceeds received in an asset sale, $5 million may be used for working capitalpurposes and the remainder must be used to either:

 

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

 

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

 

42

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Assuming we are successful in selling KBWB-TV andWDWB-TV and / or restructuring our company, we believe that the availableproceeds together with the cash and cash equivalents on hand and internallygenerated funds from operations may be sufficient to satisfy our cashrequirements for our existing operations and debt service for the next twelvemonths.  There can be no assurance thatwe will be successful in selling assets and restructuring our company and alack of liquidity would have a material adverse effect on our business strategyand therefore affect our ability to continue as a going concern and make ourJune 1, 2006 interest payment on our Notes. The 2005 financial statements donot include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationsof liabilities that might result from the outcome of this uncertainty.

 

We have established an investment policy for investingcash that is not immediately required for working capital purposes.  Our investment objectives are to preservecapital, maximize our return on investment and to ensure we have appropriateliquidity for our cash needs. The investments, when applicable, are consideredto be available-for-sale as defined under Statement of Financial AccountingStandards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. As of December 31, 2005,we had approximately $8,629,000 of cash and cash equivalents (which excludes$24,997,500 of restricted U.S. Government Securities cash equivalents). As ofDecember 31, 2005, we had no marketable securities.

 

***Net Cash Used in Operating, Investing andFinancing Activities***

 

Net cash used in operating activities was $22,883,000during the year ended December 31, 2005 compared to $18,723,000 during thetwelve months ended December 31, 2004. The change in 2005 from 2004 was primarily due to the receipt of a$16,000,000 income tax refund during June 2004 and changes in net assets.

 

Net cash used in investing activities was $79,483,000during the twelve months ended December 31, 2005 compared to $10,307,000 duringthe twelve months ended December 31, 2004. The change in 2005 from 2004 was primarily due to the acquisition ofassets and the purchase of U.S. Government Securities during March 2005, offsetby a reduction in capital expenditures due to the completion of our conversionto digital technology.

 

Net cash provided by financing activities was $50,137,000during the twelve months ended December 31, 2005 compared to net cash used infinancing activities of $325,000 during the twelve months ended December 31,2004.  The change in 2005 from 2004 is primarilydue to the proceeds from the Malara Broadcast Group Senior Credit Facility,offset in part by increased payments of deferred financing fees.

 

***Our 93/4 % Senior Secured Notes***

 

On December 22, 2003, we completed a $405,000,000offering of our 9 3/4 % Senior Secured Notes (the “Notes”) due December 1,2010, at a discount, resulting in proceeds to us of $400,067,100.  Interest on the Notes is payable onDecember 1 and June 1 of each year, which commenced on June 1,2004.  We used the net proceeds from theoffering in part to (i) repay all outstanding borrowings, plus accruedinterest, under our senior credit agreement, (ii) redeem at par, plusaccrued interest, all of our 9 3/8 % and 10 3/8 % senior subordinated notes dueMay and December 2005, respectively, and (iii) to repurchase atpar, plus accrued interest, all of our 8 7/8 % senior subordinated notes dueMay 2008.  The remaining proceedswere invested in short-term securities as well as being used for generalworking capital purposes.

 

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

 

The Indenture, which governs our Notes, restricts ourability and the ability of our restricted subsidiaries to, among other things:(i) incur additional debt and issue preferred stock; (ii) makecertain distributions, investments and other restricted payments;(iii) create certain liens; (iv) enter into transactions withaffiliates; (v) enter into agreements that restrict our restrictedsubsidiaries from making payments to us; (vi) merge, consolidate or sellsubstantially all of our assets; (vii) sell or acquire assets; and(viii) enter into new lines of business.

 

Under the Indenture, the Malara Broadcast Groupcompanies to which we provides services pursuant to the local servicesagreements are subject to the terms of the Indenture applicable to RestrictedSubsidiaries that are not Guarantors, as such terms are defined in theIndenture.

 

At December 31,2005, we were in compliance with all covenants under our Notes.

 

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

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV in March 2005 with the proceeds of the MalaraBroadcast Group Senior Credit Facility, consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Tranche A Term Loan which was secured by a letter of credit,was paid on February 10, 2006. To secure the reimbursement obligations in the event of a draw on theletter of credit, pursuant to the terms and conditions of an Application andAgreement for Standby Letter of Credit, we had pledged $25 million of U.S.Government Securities.  The $25 millionMalara Broadcast Group Tranche B Term Loan and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on anunsecured basis by Granite Broadcasting Corporation pursuant to a guarantyagreement (the “Granite Guaranty”).

 

43

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

 

Interest rates associated with the Tranche A Term Loanwere based, at Malara Broadcast Group’s option, at either (i) the higherof the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as suchterms are defined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Tranche B TermLoan and Revolving Loan are based, at Malara Broadcast Group’s option, oneither (i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Tranche B Term Loan and Revolving Loan at a rate of 3% perannum. Additionally, Malara Broadcast Group is required to pay monthlycommitment fees on the unused portion of its revolving loan commitment at arate of 0.50% per annum.  Cash interestpayments are payable monthly.

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Tranche B Term Loan as follows: (i) $125,000payable at the end of each month from June 1, 2006 through March 31,2007, (ii) $158,333 payable at the end of each month from April 1,2007, through March 31, 2008, and (iii) $216,667 payable at the end ofeach month from April 1, 2008, through February 1, 2010.

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Revolving Loan equal to the product of (i) theRepayment Percentage (which is 25% unless there is an Event of Default or theConsolidated Loan to Stick Value is less than 70%, in which case the RepaymentPercentage is 100%) and (ii) the Consolidated Excess Free Cash Flow forthe month preceding the month in which such installment is due, as such termsare defined in the Malara Broadcast Group Senior Credit Facility.  All such payments shall be applied first torepay the outstanding Revolving Loan to the full extent thereof (without acorresponding reduction in the Revolving Loan Commitment Amount) provided that,if the Repayment Percentage for such monthly installment is 100%, the excess75% of such monthly installment shall be applied first to repay the outstandingRevolving Loan to the full extent thereof and second to repay the outstanding TrancheB Term Loan to the full extent thereof. For the year ended December 31, 2005,the total principal payments made on the Revolving Loan approximated$1,021,000.

 

At December 31, 2005, MalaraBroadcast Group was in compliance with all covenants under the Malara BroadcastGroup Senior Credit Facility.

 

Under a ReimbursementAgreement dated as of March 8, 2005 (the “***Reimbursement Agreement***”)among us, Malara Broadcast Group and certain of Malara Broadcast Group’s subsidiaries( “***Malara Borrowers***”), the MalaraBorrowers agreed to repay us any amounts drawn on the letter of credit plusinterest at a rate of 8% per annum.  Wereduced to **$**16.6 million the amount due from theMalara Borrowers to us under the Reimbursement Agreement.

 

***Our12 3/4 % Cumulative Exchangeable Preferred Stock***

 

Under the terms of the Certificate of Designations forour 12 3/4 % Cumulative Exchangeable Preferred Stock (the “Preferred Stock”),we were required to make the semi-annual dividends on such shares in cashbeginning October 1, 2002.  The cashpayment of dividends had been restricted by the terms of our previous seniorcredit agreement and indentures and is prohibited under the Indenture, whichgoverns our Notes.  Consequently we havenot paid the semi-annual dividend due to the holders since October 1,2002.  During the year ended December 31,2005, a dividend payment of $25,548,000 accrued on our Preferred Stock. As ofDecember 31, 2005, we have recorded an aggregate of $95,804,000 in accrueddividends on our Preferred Stock. Since three or more semi-annual dividendpayments have not been paid, the holders of the Preferred Stock have the rightto elect the lesser of two directors or that number of directors constituting25% of the members of the Board of Directors. Effective October 24, 2005, theholders of the majority of the Preferred Stock exercised their right to electtwo directors to the Board of Directors of the Company. We are restricted frompaying cash dividends under the Indenture, which governs our Notes, and do notanticipate paying cash dividends on our Preferred Stock in the foreseeablefuture.

 

***FilmPayments***

 

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

 

Film payments from our continuing operations totaled $6.1million for year ended December 31, 2005 as compared to $5.3 million for theyear ended December 31, 2004. The increase in film payments from our continuingoperations is related to the two additional television stations, WISE-TV, whichwe acquired in March 2005 and KDLH-TV, which was acquired by Malara BroadcastGroup in March 2005. Based on completed negotiations and current marketconditions for the purchase of programming, we expect annual film payments tocontinue to decline based on a same station basis.

 

Film payments from ourdiscontinued operations totaled $11.7 million for year ended December 31, 2005as compared to $18.8 million for the year ended December 31, 2004.

 

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***NoOff-Balance Sheet Arrangements***

 

At December 31,2005, 2004, and 2003, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or variable interest entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. All of our arrangements withMalara Broadcast Group are on-balance sheet arrangements.

 

***Capitaland Commercial Commitments***

 

The following table and discussion reflect oursignificant contractual obligations and other commercial commitments related tocontinuing operations as of December 31, 2005:

 
| ** **                                                                        | ** ** | **Payment Due by Period** | ** **    |
|-----------------------------------------------------------------------------------|------------|---------------------------|---------------|
| **Capital Commitment**                                                       | ** ** | **Total**                 | ** **    | **2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| 9 3/4% Senior Secured Notes due 2010                                              |       | $                         | 405,000,000   |   | $ | — |   | $ | — |   | $ | 405,000,000 |   | $ | — |   |
| Interest on Senior Secured Notes                                                  |       | 194,147,000               |          | 39,488,000 |   | 78,975,000 |   | 75,684,000 |   | — |   |
| Malara Broadcast  Group Senior Credit Facility (b) (e)                            |       | 29,720,000                |          | 2,579,000 |   | 6,772,000 |   | 20,369,000 |   | — |   |
| Interest on Senior Credit Facility (c) (e)                                        |       | 12,012,000                |          | 3,490,000 |   | 5,782,000 |   | 2,740,000 |   | — |   |
| Program contract commitments - current                                            |       | 3,847,000                 |          | 3,658,000 |   | 189,000 |   | — |   | — |   |
| Program contract commitments - future (d)                                         |       | 17,212,000                |          | 1,501,000 |   | 8,621,000 |   | 6,282,000 |   | 808,000 |   |
| Operating leases                                                                  |       | 2,831,000                 |          | 602,000 |   | 1,044,000 |   | 961,000 |   | 224,000 |   |
| 12 3/4%  Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000               |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring and severance                                                       |       | 192,000                   |          | 192,000 |   | — |   | — |   | — |   |
| Total capital  and commercial commitments                                         |       | $                         | 1,042,631,000 |   | $ | 51,510,000 |   | $ | 101,383,000 |   | $ | 888,706,000 |   | $ | 1,032,000 |   |

 

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(a)          Asof December 31, 2005, the Cumulative Exchangeable Preferred Stock, includingaccrued dividends totaled $294,996,000. The table above includes the balance asof December 31, 2005 and the expected accrued dividends throughApril 2009, the date of redemption. Payment of cash dividends arerestricted by the terms of the Indenture, which governs our existing SeniorSecured Notes.

(b)         Theamounts are our estimates of required cash payments under the Malara BroadcastGroup Senior Credit Facility. The Malara Broadcast Group Senior Credit Facilityconsists of a revolver and one term loan. The required amortization under therevolver calculated based upon Malara’s station performance; therefore, actualrequired amortization may vary from our estimates above. The term loan has afixed amortization schedule, and such amounts are included above.

(c)          Theamounts are our estimates of required interest payments under the Malara BroadcastGroup Senior Credit Facility. The actual interest payments may vary based uponthe actual required amortization payments of the Senior Credit Facility (see(b) above).

(d)          Programcontract commitments — future reflect a license agreement for program materialthat is not yet available for its first broadcast and is therefore not recordedas an asset or liability on our consolidated balance sheet in accordance withthe provisions of Statement of Financial Accounting Standards No. 63, *Financial Reporting for Broadcasters*.

(e)           Amountsreflect capital commitments subsequent to February10, 2006, whereby the letter of credit issued in March 2005 to support the$23.5 million Tranche A Term Loan of the Malara Broadcast Group’s Senior CreditFacility was drawn upon in satisfaction following non-renewal of theletter of credit. The Company paid its reimbursement obligation to the letterof credit issuer on February 10, 2006, using U.S. government securities whichhad been pledged in support of such obligation. Amounts may vary fromcommitments listed within our footnotes to our consolidated financial resultsherein.

 

The following table and discussion reflect oursignificant contractual obligations and other commercial commitments related todiscontinued operations as of December 31, 2005:

 
| ** **                                      | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| **Capital Commitment**                     | ** ** | **Total**                                | ** ** | **2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |
| Program contract commitments – current     |       | $                                        | 32,292,000 |   | $ | 19,510,000 |   | $ | 9,853,000 |   | $ | 2,929,000 |   | $ | — |   |
| Program contract  commitments – future (a) |       | 22,721,000                               |       | 1,504,000 |   | 7,125,000 |   | 8,784,000 |   | 5,308,000 |   |
| WB Affiliation                                  |       | 3,154,000                                |       | 3,154,000 |   | — |   | — |   | — |   |
| Operating leases                                |       | 10,030,000                               |       | 1,390,000 |   | 2,263,000 |   | 1,958,000 |   | 4,419,000 |   |
|                                            |       |                                     |       |   |   |   |   |   |   |   |   |
| Total capital  and commercial commitments       |       | $                                        | 68,197,000 |   | $ | 25,558,000 |   | $ | 19,241,000 |   | $ | 13,671,000 |   | $ | 9,727,000 |   |
|                                                 |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)           Programcontract commitments — future reflect a license agreement for program materialthat is not yet available for its first broadcast and is therefore not recordedas an asset or liability on our consolidated balance sheet in accordance withthe provisions of Statement of Financial Accounting Standards No. 63, *Financial Reporting for Broadcasters*.

 

**RecentAccounting Pronouncements**

 

In May 2005, FASB issuedStatement of Financial Accounting Standards No. 154, *AccountingChanges and Error Corrections – a replacement of APB No. 20 and FASB StatementNo. 3,*or Statement 154. Statement 154 changes the requirements ofaccounting for and reporting a change in accounting principle and applies toall voluntary changes in accounting principle and changes required by anaccounting pronouncement, in the event that the accounting pronouncement doesnot include specific transition provisions. Statement 154 requires retrospectiveapplication of changes in accounting principle to prior periods’ financialstatements unless it is impracticable. Statement 154 also requires that achange in the method of depreciation, amortization or depletion of long-lived,non-financial assets be accounted for as a change in accounting estimateaffected by a change in accounting principle. The guidance contained in APBOpinion No. 20, *Accounting Changes* for reportingthe correction of an error was carried forward in Statement 154 without change.Statement 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. We do not expect theadoption of Statement 154 to have a material impact on its financial positionor results of operations.

 

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

 

Statement 123(R) iseffective for interim and annual reporting periods beginning on or afterJanuary 1, 2006. All public companies must use either the modified prospectiveor modified retrospective transition method. Statement 123(R) permits publiccompanies to adopt its requirements using one of the two methods:

 

1.                                                     A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of Statement123(R) for all shared based payments granted after the effective date and (b)based on the requirements of Statement 123 for all awards granted to employeesprior to the effective date of Statement 123(R) that remain unvested on theeffective date.

 

2.                                                     A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) prior interimperiods of the year of adoption.

 

We plan to adoptStatement 123(R) using the modified-prospective approach.

 

As permitted by Statement123, through December 31, 2005, we account for share-based payments toemployees using APB Opinion 25’s intrinsic value method and, as such, generallyrecognized no compensation cost for employee stock options. Accordingly, theadoption of Statement 123(R)’s fair value method will have an impact on itsresults of operations, although it will have no impact on our overall financialposition or cash flows. The impact of the adoption of Statement 123(R) willdepend on the levels of share-based payments granted in the future and the rateof cancellation of unvested grants. However, had we adopted Statement 123(R) inprior periods, the impact of that standard would have approximated the impactof Statement 123 as described in the disclosure of pro forma net loss and lossper share in Note 2 to the financial statements. We currently believes thatstock-based compensation expenses for the calendar year ended December 31, 2006related to share-based payments granted prior to January 1, 2006 and unvestedas of that date will range from $120,000 to $140,000.

 

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

 

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

 

Interest rates associatedwith Malara Broadcast Group’s March 8, 2005, Tranche ATerm Loan werebased, at Malara Broadcast Group’s option, at either (i) the higher of thePrime Rate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with MalaraBroadcast Group’s March 8, 2005, Tranche B Term Loan and Revolving Loanare based, at Malara Broadcast Group’s option, at either (i) the Base Rateplus 4.625% per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% perannum.  In addition, Deferred Interest(as defined in the Malara Broadcast Group Senior Credit Facility) accrues withrespect to, and is added to the principal amount of, the Tranche B Term Loanand Revolving Loan at a rate of 3% per annum. As of March 8, 2005, the six-month Adjusted Eurodollar Rate was3.21%.  Malara Broadcast Group has notentered into any agreements to hedge the risk of potential interest rateincreases.  Based on borrowings outstandingas of December 31, 2005, a 2% increase in the Adjusted Eurodollar Rate wouldincrease interest expense on an annual basis by approximately $1,070,000.

 

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

 

Index toConsolidated Financial Statements

 
| ** **                                                                                                        | **Page** |
|-------------------------------------------------------------------------------------------------------------------|----------|
| Report of  Independent Registered Public Accounting Firm                                                          | 49       |
| Consolidated  Statements of Operations for the years ended December 31, 2005, 2004 and  2003                 | 50       |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                | 51       |
| Consolidated  Statements of Stockholders’ Deficit for the years ended December 31,  2005, 2004 and 2003 | 52       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, 2004 and  2003                 | 53       |
| Notes to the  Consolidated Financial Statements                                                                   | 54       |
| Schedule II  — Valuation and Qualifying Accounts                                                        | 75       |

 

48

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**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of Directors and StockholdersGranite Broadcasting Corporation

 

We have audited theaccompanying consolidated balance sheets of Granite Broadcasting Corporation (the“Company”) as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, stockholders’ deficit and cash flows for each of thethree years in the period ended December 31, 2005.  Our audits also included the financialstatement schedule listed in the Index at Item 15(a).  These financial statements and theschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and the schedule based on our audits.

 

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

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Granite BroadcastingCorporation at December 31, 2005 and 2004, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended December 31, 2005, in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

As discussed in Note 1 tothe consolidated financial statements, Granite Broadcasting Corporation’srecurring losses from operations and net capital deficiency raise substantialdoubt about its ability to continue as a going concern.  Management’s plans to address these liquiditymatters are also described in Note 1. The 2005 financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

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

 

 

New York, New York

March 23, 2006

 

49

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                  | ** ** | **For the Years Ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                                                  | ** ** | **2005**                                  | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                                                                                                |       | $                                         | 86,159,543  |   | $ | 80,499,512 |   | $ | 73,333,409 |   |
| Station  operating expenses:                                                                                                |       |                                      |        |   |   |   |   |
| Direct operating expense (exclusive of  depreciation and amortization expenses shown separately below)                      |       | 34,883,041                                |        | 32,941,728 |   | 32,586,129 |   |
| Selling, general and administrative  expenses (exclusive of depreciation and amortization expenses shown  separately below) |       | 25,411,802                                |        | 23,159,012 |   | 20,686,338 |   |
| Depreciation                                                                                                                |       | 5,059,406                                 |        | 5,154,326 |   | 4,966,167 |   |
| Amortization  of intangible assets                                                                                          |       | 2,895,768                                 |        | 2,425,909 |   | 2,425,911 |   |
| Corporate  expense                                                                                                          |       | 10,550,430                                |        | 13,532,344 |   | 11,715,412 |   |
| Performance  award expense                                                                                                  |       | 1,279,188                                 |        | 3,414,698 |   | 52,247 |   |
| Corporate  separation agreement expense                                                                                     |       | —                                    |        | 1,406,442 |   | — |   |
| Non-cash  compensation expense (1)                                                                                          |       | 411,862                                   |        | 696,522 |   | 895,539 |   |
|                                                                                                                        |       |                                      |        |   |   |   |   |
| Operating income (loss)                                                                                                     |       | 5,668,046                                 |        | (2,231,469 | ) | 5,666 |   |
|                                                                                                                        |       |                                      |        |   |   |   |   |
| Other  expenses (income):                                                                                                   |       |                                      |        |   |   |   |   |
| Interest expense                                                                                                            |       | 43,734,355                                |        | 39,489,942 |   | 31,305,297 |   |
| Interest income                                                                                                             |       | (1,710,937                                | )           | (1,162,476 | ) | (1,281,251 | ) |
| Non-cash interest expense                                                                                                   |       | 3,965,229                                 |        | 3,867,838 |   | 4,703,841 |   |
| Non-cash preferred stock dividend                                                                                           |       | 25,547,844                                |        | 25,547,844 |   | 12,773,922 |   |
| Loss on extinguishment of debt                                                                                              |       | —                                    |        | — |   | 3,214,524 |   |
| Other                                                                                                                       |       | 159,447                                   |        | 1,028,753 |   | 575,654 |   |
| Loss from continuing operations before  income taxes                                                                        |       | (66,027,892                               | )           | (71,003,370 | ) | (51,286,321 | ) |
| (Benefit)  provision for income taxes:                                                                                      |       |                                      |        |   |   |   |   |
| Current                                                                                                                     |       | 170,802                                   |        | 216,400 |   | (16,110,412 | ) |
| Deferred                                                                                                                    |       | (867,506                                  | )           | (11,930,701 | ) | (921,277 | ) |
| Total benefit for income taxes                                                                                              |       | (696,704                                  | )           | (11,714,301 | ) | (17,031,689 | ) |
| Loss from  continuing operations                                                                                            |       | (65,331,188                               | )           | (59,289,069 | ) | (34,254,632 | ) |
| Discontinued  operations:                                                                                                   |       |                                      |        |   |   |   |   |
| Loss from discontinued operations, net of  taxes                                                                            |       | (34,050,626                               | )           | (24,002,606 | ) | (12,693,240 | ) |
| Net loss                                                                                                                    |       |                                      | (99,381,814 | ) |   | (83,291,675 | ) |   | (46,947,872 | ) |
|   Dividends  and accretion on redeemable preferred stock                                                               |       | —                                    |        | — |   | (12,951,558 | ) |
| Net loss  attributable to common shareholders                                                                               |       | $                                         | (99,381,814 | ) | $ | (83,291,675 | ) | $ | (59,899,430 | ) |
|                                                                                                                        |       |                                      |        |   |   |   |   |
| Basic and  diluted net loss per share from continuing operations                                                            |       | $                                         | (3.34       | ) | $ | (3.06 | ) | $ | (2.48 | ) |
| Basic and  diluted net loss per share from discontinued operations                                                          |       | (1.74                                     | )           | (1.24 | ) | (0.67 | ) |
| Basic and  diluted net loss per share                                                                                       |       | $                                         | (5.08       | ) | $ | (4.30 | ) | $ | (3.15 | ) |
|                                                                                                                        |       |                                      |        |   |   |   |   |
| Weighted  average common shares outstanding                                                                                 |       | 19,558,756                                |        | 19,365,950 |   | 18,990,919 |   |

 

----

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

 
| ** **                     | ** ** | **For the Years Ended December 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Station  operating expenses    |       | $                                         | 78,605     |   | $ | 112,520 |   | $ | 139,269 |   |
| Corporate  expense             |       | 333,257                                   |       | 584,002 |   | 756,270 |   |
| Non-cash  compensation expense |       | $                                         | 411,862    |   | $ | 696,522 |   | $ | 895,539 |   |

 

See accompanying notes.

 

50

----

 

**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2005**              | ** **  | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | ** **            | ** **  | ** ** | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                                      |       |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Current  assets:                                                                                                                                                                                                                                                                                                                                                                            |       |                  |        |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                   |       | $                     | 8,629,044   |   | $ | 60,858,710 |   |
| Restricted cash equivalents                                                                                                                                                                                                                                                                                                                                                                 |       | 24,997,500            |        | — |   |
| Marketable securities, at fair value                                                                                                                                                                                                                                                                                                                                                        |       | —                |        | 5,603,500 |   |
| Accounts receivable, less allowance for  doubtful accounts ($632,156 in 2005 and $896,465 in 2004)                                                                                                                                                                                                                                                                                          |       | 22,388,546            |        | 20,551,203 |   |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                                        |       | 2,835,827             |        | 3,776,749 |   |
| Other current assets                                                                                                                                                                                                                                                                                                                                                                        |       | 6,361,111             |        | 3,176,834 |   |
| Assets held for sale                                                                                                                                                                                                                                                                                                                                                                        |       | 116,183,354           |        | 158,142,996 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                        |       | 181,395,382           |        | 252,109,992 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                                                |       | 41,691,267            |        | 37,229,555 |   |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                                       |       | 76,562                |        | 157,842 |   |
| Other non  current assets                                                                                                                                                                                                                                                                                                                                                                   |       | 734,975               |        | 8,384,731 |   |
| Deferred financing fees, less accumulated  amortization ($4,334,405 in 2005 and $1,989,038  in 2004)                                                                                                                                                                                                                                                                                        |       | 11,757,197            |        | 11,760,080 |   |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                    |       | 60,320,347            |        | 28,937,539 |   |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                                    |       | 44,686,292            |        | 37,979,394 |   |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                                  |       | 65,174,688            |        | 53,370,047 |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                |       | $                     | 405,836,710 |   | $ | 429,929,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Liabilities  and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                 |       |                  |        |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                                       |       |                  |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                            |       | $                     | 1,352,131   |   | $ | 1,063,782 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                                            |       | 3,290,625             |        | 3,290,625 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                                   |       | 7,188,091             |        | 6,277,190 |   |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                                                |       | 3,658,253             |        | 5,013,574 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                           |       | 25,844,000            |        | — |   |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                                                   |       | 6,026,247             |        | 1,133,678 |   |
| Liabilities held for sale                                                                                                                                                                                                                                                                                                                                                                   |       | 36,930,893            |        | 46,056,768 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                   |       | 84,290,240            |        | 62,835,617 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Long-term  debt                                                                                                                                                                                                                                                                                                                                                                             |       | 428,871,456           |        | 400,791,298 |   |
| Film  contract rights payable                                                                                                                                                                                                                                                                                                                                                               |       | 188,727               |        | 370,890 |   |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                                     |       | 21,560,807            |        | 19,347,007 |   |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                                 |       | 199,191,138           |        | 198,835,862 |   |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                                            |       | 95,804,417            |        | 70,256,573 |   |
| Other non  current liabilities                                                                                                                                                                                                                                                                                                                                                              |       | 7,008,694             |        | 9,582,081 |   |
|                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |        |   |   |
| Stockholders’  deficit:                                                                                                                                                                                                                                                                                                                                                                |       |                  |        |   |   |
| Common stock: 41,000,000 shares authorized  consisting of 1,000,000 shares of Class A Common Stock, $.01 par value,  and 40,000,000 shares of Common Stock (Nonvoting), $.01 par value; 98,250  shares of Class A Common Stock and 19,480,142 shares of Common Stock  (Nonvoting) (19,283,924 shares at December 31, 2004) issued and  outstanding at December 31, 2005 |       | 195,783               |        | 193,820 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                 |       | 393,701               |        | 361,088 |   |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                                       |       | —                |        | (12,914 | ) |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                        |       | (430,792,098          | )           | (331,410,284 | ) |
| Less:  Unearned compensation                                                                                                                                                                                                                                                                                                                                                                |       | (480                  | )           | (346,183 | ) |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                                     |       | (875,675              | )           | (875,675 | ) |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                                            |       | (431,078,769          | )           | (332,090,148 | ) |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                           |       | $                     | 405,836,710 |   | $ | 429,929,180 |   |

 

See accompanying notes.

 

51

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’DEFICIT**

**For the Years Ended December 31, 2003,2004 and 2005**

 
| ** **                                                                      | ** ** | **Class A  Common Stock** | ** ** | **Common Stock  (Nonvoting)** | ** ** | **Additional  Paid-in Capital** | ** ** | **Other   Comprehensive  Income** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** ** | **Treasury  Stock** | ** **   | **Total  Stockholders’  Deficit** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|--------------|----------------------------------------|------------|
|                                                                            |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       |                |         |                                   |       |
| Balance as of  December 31, 2002                                           |       | $                              | 1,785      |                          | $          | 185,815                         |       | $                                 | —     |                     | $          | —                     |       | $                   | (188,779,415 | )                                      | $          | (851,334 | ) | $ | (851,924 | ) | $ | (190,295,073 | ) |
| Dividends on  redeemable preferred stock                                        |       |                           |       |                          |       | (382,600                        | )          |                              |       | (12,391,322              | )          |                       |       |                |         | (12,773,922                            | )          |
| Accretion of  offering costs related to Cumulative Exchangeable Preferred Stock |       |                           |       |                          |       | (177,636                        | )          |                              |       |                     |       |                       |       |                |         | (177,636                               | )          |
| Grant of stock  award under stock plans                                         |       |                           |       |                          |       | 402,900                         |       |                              |       |                     |       | (402,900                   | )          |                |         | —                                 |       |
| Exercise of stock  options                                                      |       |                           |       | 175                           |       | 26,075                          |       |                              |       |                     |       |                       |       |                |         | 26,250                                 |       |
| Issuance of  Common Stock (Nonvoting)                                           |       |                           |       | 2,351                         |       | (2,351                          | )          |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Repurchase of  Common Stock (Nonvoting)                                         |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       | (23,751             | )            | (23,751                                | )          |
| Stock expense  related to stock plans                                           |       |                           |       |                          |       | 133,612                         |       |                              |       |                     |       | 431,133                    |       |                |         | 564,745                                |       |
| Discount on loans  to officers                                                  |       |                           |       |                          |       |                            |       |                              |       |                     |       | 195,453                    |       |                |         | 195,453                                |       |
| Net loss                                                                        |       |                           |       |                          |       |                            |       |                              |       | (46,947,872              | )          |                       |       |                |         | (46,947,872                            | )          |
| Balance at  December 31, 2003                                              |       | 1,785                          |       | 188,341                       |       | —                          |       | —                            |       | (248,118,609             | )          | (627,648                   | )          | (875,675            | )            | (249,431,806                           | )          |
| Conversion of  Class A to Class B                                     |       | (803                           | )          | 803                           |       |                            |       |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Grant of stock  award under stock plans                                         |       |                           |       |                          |       | 180,885                         |       |                              |       |                     |       | (180,885                   | )          |                |         | —                                 |       |
| Issuance of  Common Stock (Nonvoting)                                           |       |                           |       | 3,694                         |       | (3,694                          | )          |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense  related to stock plans                                           |       |                           |       |                          |       | 183,897                         |       |                              |       |                     |       | 252,020                    |       |                |         | 435,917                                |       |
| Discount on loans  to officers                                                  |       |                           |       |                          |       |                            |       |                              |       |                     |       | 210,330                    |       |                |         | 210,330                                |       |
| Net loss                                                                        |       |                           |       |                          |       |                            |       |                              |       | (83,291,675              | )          |                       |       |                |         | (83,291,675                            | )          |
| Unrealized loss  on investment                                                  |       |                           |       |                          |       |                            |       | (12,914                           | )          |                     |       |                       |       |                |         | (12,914                                | )          |
| Comprehensive  loss                                                             |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       |                |         | (83,304,589                            | )          |
| Balance at  December 31, 2004                                              |       | 982                            |       | 192,838                       |       | 361,088                         |       | (12,914                           | )          | (331,410,284             | )          | (346,183                   | )          | (875,675            | )            | (332,090,148                           | )          |
| Issuance of  Common Stock (Nonvoting)                                           |       |                           |       | 1,963                         |       | (1,963                          | )          |                              |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense  related to stock plans                                           |       |                           |       |                          |       | 41,838                          |       |                              |       |                     |       | 149,211                    |       |                |         | 191,049                                |       |
| Forfeiture of  stock award under stock plans                                    |       |                           |       |                          |       | (7,262                          | )          |                              |       |                     |       | 7,262                      |       |                |         | —                                 |       |
| Discount on loans  to officers                                                  |       |                           |       |                          |       |                            |       |                              |       |                     |       | 189,230                    |       |                |         | 189,230                                |       |
| Net loss                                                                        |       |                           |       |                          |       |                            |       |                              |       | (99,381,814              | )          |                       |       |                |         | (99,381,814                            | )          |
| Realized gain on  investment                                                    |       |                           |       |                          |       |                            |       | 12,914                            |       |                     |       |                       |       |                |         | 12,914                                 |       |
| Comprehensive  loss                                                             |       |                           |       |                          |       |                            |       |                              |       |                     |       |                       |       |                |         | (99,368,900                            | )          |
| Balance at  December 31, 2005                                              |       | $                              | 982        |                          | $          | 194,801                         |       | $                                 | 393,701    |                     | $          | —                     |       | $                   | (430,792,098 | )                                      | $          | (480 | ) | $ | (875,675 | ) | $ | (431,078,769 | ) |

 

See accompanying notes.

 

52

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **For the Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                                  | ** **  | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                       |       |                                      |        |   |   |   |   |
| Net loss                                                                     |       | $                                         | (99,381,814 | ) | $ | (83,291,675 | ) | $ | (46,947,872 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                      |        |   |   |   |   |
| Amortization of intangible assets                                            |       | 6,938,315                                 |        | 7,892,924 |   | 9,976,310 |   |
| Impairment of Intangibles                                                    |       | 31,049,507                                |        | 15,491,327 |   | — |   |
| Depreciation                                                                 |       | 5,989,768                                 |        | 6,429,964 |   | 6,285,077 |   |
| Future affiliation payment obligation write  downs                           |       | (2,765,890                                | )           | — |   | — |   |
| Performance award expense                                                    |       | 1,279,188                                 |        | 3,414,698 |   | 52,247 |   |
| Non-cash compensation expense                                                |       | 411,862                                   |        | 696,522 |   | 895,539 |   |
| Non-cash interest expense                                                    |       | 4,332,336                                 |        | 4,198,603 |   | 4,969,421 |   |
| Non-cash preferred stock dividend                                            |       | 25,547,844                                |        | 25,547,844 |   | 12,773,922 |   |
| Film amortization and impairment                                             |       | 18,305,737                                |        | 21,672,744 |   | 25,921,688 |   |
| Deferred tax benefit                                                         |       | (696,704                                  | )           | (11,930,701 | ) | (921,277 | ) |
| Loss on extinguishments of debt                                              |       | —                                    |        | — |   | 3,214,524 |   |
| Change in  assets and liabilities net of effects from acquisitions:          |       |                                      |        |   |   |   |   |
| Decrease in accounts receivable                                              |       | 583,079                                   |        | 913,762 |   | 1,746,672 |   |
| Increase (decrease) in accrued liabilities                                   |       | 447,491                                   |        | 2,641,030 |   | (2,073,818 | ) |
| (Decrease) increase in accounts payable                                      |       | (68,988                                   | )           | (1,044,437 | ) | 95,998 |   |
| WB affiliation payment                                                       |       | (1,261,714                                | )           | (2,523,428 | ) | (2,096,753 | ) |
| Decrease (increase) in income tax  receivable                                |       | —                                    |        | 16,326,799 |   | (10,991,953 | ) |
| Increase in film contract rights and other  assets                           |       | (7,313,133                                | )           | (17,616,749 | ) | (23,488,240 | ) |
| Decrease in film contract rights payable  and other liabilities              |       | (6,280,138                                | )           | (7,542,427 | ) | (186,005 | ) |
| Net cash used in operating activities                                        |       | (22,883,254                               | )           | (18,723,200 | ) | (20,774,520 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Cash flows  from investing activities:                                       |       |                                      |        |   |   |   |   |
| Sales (purchases) of marketable securities  and other investments            |       | 5,598,815                                 |        | (5,496,847 | ) | — |   |
| Payment for acquisition of assets                                            |       | (56,306,366                               | )           | — |   | — |   |
| Purchase of U.S. Government Securities                                       |       | (24,997,500                               | )           | — |   | — |   |
| Capital expenditures                                                         |       | (3,778,174                                | )           | (4,810,645 | ) | (12,652,554 | ) |
| Net cash used in investing activities                                        |       | (79,483,225                               | )           | (10,307,492 | ) | (12,652,554 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| Cash flows  from financing activities:                                       |       |                                      |        |   |   |   |   |
| Proceeds from senior credit facility                                         |       | 53,500,000                                |        | — |   | — |   |
| Proceed from senior secured notes                                            |       | —                                    |        | — |   | 400,067,100 |   |
| Repayment of bank debt                                                       |       | —                                    |        | — |   | (316,677,910 | ) |
| Payment of deferred financing fees                                           |       | (2,342,484                                | )           | (324,593 | ) | (14,070,217 | ) |
| Payment of senior credit facility                                            |       | (1,020,703                                | )           | — |   | — |   |
| Repurchase of common stock                                                   |       | —                                    |        | — |   | (23,751 | ) |
| Exercise of stock options                                                    |       | —                                    |        | — |   | 26,250 |   |
| Net cash provided by (used in) financing  activities                         |       | 50,136,813                                |        | (324,593 | ) | 69,321,472 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Net  (decrease) increase in cash and cash equivalents                        |       | (52,229,666                               | )           | (29,355,285 | ) | 35,894,398 |   |
| Cash and  cash equivalents, beginning of year                                |       | 60,858,710                                |        | 90,213,995 |   | 54,319,597 |   |
| Cash and  cash equivalents, end of year                                      |       | $                                         | 8,629,044   |   | $ | 60,858,710 |   | $ | 90,213,995 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Supplemental  information:                                                   |       |                                      |        |   |   |   |   |
| Cash paid for interest                                                       |       | $                                         | 42,970,878  |   | $ | 37,184,063 |   | $ | 33,473,446 |   |
| Cash paid for income taxes                                                   |       | 177,266                                   |        | 177,070 |   | 832,765 |   |
| Non-cash capital expenditures                                                |       | 309,110                                   |        | 186,266 |   | 142,335 |   |
| Cumulative exchangeable preferred stock  dividend                            |       | —                                    |        | — |   | 12,773,922 |   |

 

See accompanying notes.

 

53

----

 

**GRANITE BROADCASTING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1 — Operations of the Company**

 

The businessoperations of Granite Broadcasting Corporation and its wholly ownedsubsidiaries (the “Company”) consist of eight network affiliated televisionstations in the United States, consisting of four NBC-affiliated televisionstations, one ABC-affiliated station, one CBS-affiliated television station andtwo WB Network stations. The Company’s stations are located in New York,California, Michigan, Indiana, Illinois and Minnesota. Through various localservice agreements (as fully discussed below), the Company provides advertisingsales, promotion, administrative services and selected programming to twotelevision stations owned by Malara Broadcast Group, Inc (“Malara BroadcastGroup”) and onetelevision station owned by Four Seasons Broadcast Company.

 

As more fullydiscussed in Note 3, the Company completed the sale of its Fort Wayne, IndianaABC affiliate, WPTA-TV, to Malara Broadcast Group and acquired the Fort Wayne,Indiana NBC affiliate, WISE-TV from New Vision Group, LLC inMarch 2005.  Malara Broadcast Groupalso acquired KDLH-TV, the CBS affiliate serving Duluth, Minnesota from NewVision Group, LLC. The Company entered into a strategic arrangement with MalaraBroadcast Group, under which the Company provides advertising sales, promotionand administrative services, and selected programming to WPTA-TV and KDLH-TVunder local services agreements. Although the Company does not own MalaraBroadcast Group or its television stations, the Company is deemed to be theprimary beneficiary of Malara Broadcast Group as defined under FinancialAccounting Standards Board Interpretation No. 46, *Consolidationof Variable Interest Entities* (“Interpretation 46”). As a result,Interpretation 46 requires the Company to consolidate Malara Broadcast Group’sfinancial position, results of operations and cash flows.

 

In September2005, the Companyentered into a strategic arrangement with Four Seasons Broadcast Company, underwhich the Company provides advertising sales, promotion and administrativeservices, and selected programming to WAOE-TV under local services agreements.The Company does not own FourSeasons Broadcast Company or its television stations, and pursuant toInterpretation 46, the Company is not deemed to be the primary beneficiary of Four Seasons Broadcast Company andtherefore, has not consolidated their results with the Company’s as of December31, 2005.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of a SeniorCredit Facility (the “Malara Broadcast Group Senior Credit Facility”)consisting of two terms loans totaling $48.5 million and a revolving loan of $5million. The $23.5 million Malara Broadcast Group Term Tranche A Loan which wassecured by a letter of credit was repaid February 10, 2006, as discussed below.To secure the reimbursement obligations in the event of a draw on the letter ofcredit, pursuant to the terms and conditions of an Application and Agreementfor Standby Letter of Credit, the Company had pledged $25 million of U.S.Government Securities. On February 10, 2006, the letter of credit issued inMarch 2005 to support the $23.5million Tranche A Term Loan was drawn upon in satisfaction of Malara BroadcastGroup’s obligations to such lenders under the Malara Tranche A Term Loanfollowing non-renewal of the letter of credit.  The Company paid its reimbursement obligationto the letter of credit issuer on February 10, 2006, using U.S. governmentsecurities which had been pledged in support of such obligation.The $25 million Malara Broadcast Group Tranche B Term Loan and the $5 millionrevolving loan are secured by the assets of WPTA-TV and KDLH-TV, and guaranteedon an unsecured basis by the Company.

 

OnSeptember 8, 2005, the Company entered into a definitive agreement (the “KBWBPurchase and Sale Agreement”) to sell substantially all of the assets ofKBWB-TV, the WB affiliate serving the San Francisco, California televisionmarket, to AM Broadcasting KBWB, Inc. (the “KBWB Buyer”).  In addition, on September 8, 2005, theCompany entered into a definitive agreement (the “WDWB Purchase and SaleAgreement” and together with the KBWB Purchase and Sale Agreement, the “Purchaseand Sale Agreements”) to sell substantially all of the assets of WDWB-TV, theWB affiliate serving the Detroit, Michigan television market, to AMbroadcasting WDWB, Inc. (the “WDWB Buyer”). The Purchase and Sale Agreements contain covenants by the Company not tocompete in the San Francisco, California and Detroit, Michigan markets for aperiod of five years. The aggregate consideration to be received by the Companyfor the sale of the assets of KBWB-TV was $72,500,000, before closing adjustments,which was payable $71,250,000 in cash and $1,250,000 in equity in AM MediaHoldings, LLC.  The aggregateconsideration to be received by the Company for the sale of the assets ofWDWB-TV was $87,500,000, before closing adjustments which was payable $86,250,000in cash and $1,250,000 in equity in AM Media Holdings, LLC. The considerationfor each covenant not to compete in the San Francisco and Detroit markets is$10 million, respectively.

 

OnJanuary 24, 2006, the WB Network announced that it will no longerprovide programming to current WB affiliates effective in September 2006.  The KBWB Buyer has advised the Company thatas a result thereof, the KBWB Buyer will not be able to proceed with thetransaction as contemplated.  While theremay be further discussions between the Company and the KBWB Buyer about thetransaction, the Company is actively engaging in dialogue with other potentialbuyers because the Company does not presently have an agreement in principlewith the KBWB Buyer with respect to KBWB-TV and anticipates that it willcomplete a sale of KBWB-TV within the next twelve months but there can be noassurances that the Company will be successful in identifying anotherbuyer.  On February 14, 2006, the Companyentered into an amendment (the “KBWB Amendment”) to the KBWB Purchase and SaleAgreement.  Pursuant to the KBWBAmendment (i) a no shop provision was deleted in its entirety and (ii) the KBWBBuyer and the Company each have the right to terminate the KBWB Purchase andSale Agreement, at any time, by providing written notice to the other partywith no liability or obligation to such other party.

 

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On January 24, 2006, the WBNetwork announced that it will no longer provide programming to currentWB affiliates effective inSeptember 2006. The WDWB Buyer has advised the Company that as a result of theWB Network announcement, the WDWB Buyer will not be able to proceed with thetransaction as contemplated.  While theremay be further discussions between the Company and the WDWB Buyer about thetransaction, the Company is actively engaging in dialogue with other potentialbuyers because the Company does not presently have an agreement in principlewith the WDWB Buyer with respect to WDWB-TV and anticipates that it willcomplete a sale of WDWB-TV within the next twelve months but there can be noassurances that the Company will be successful in identifying anotherbuyer.  On February 14, 2006, the Companyentered into an amendment (the “WDWB Amendment”) to the WDWB Purchase and SaleAgreement. Pursuant to the WDWB Amendment (i) a no shop provision was deletedin its entirety and (ii) the WDWB Buyer and the Company each have the right toterminate the WDWB Purchase and Sale Agreement, at any time, by providingwritten notice to the other party with no liability or obligation to such otherparty.

 

Over the last three years,the Company has experienced annual operating losses and at December 31, 2005had unrestricted cash and accumulated deficit of $8,629,000 and $430,792,000,respectively. On June 1, 2006, the Company must make an interest payment of$19,744,000 on its 9 3/4 % Senior Secured Notes (the “Notes”).  The Company does not anticipate having sufficient cash on hand to makethe June 1, 2006 interest payment on its Notes.

 

On March 13, 2006, theCompany retained the services of Houlihan Lokey Howard & Zukin as itsfinancial advisors to assist the Company in the evaluation of strategic optionsand to advise us on available financing and capital restructuring alternatives.

 

Absent changesto its capital structure and station ownership mix, the Company will not haveenough liquidity to make the June 1, 2006 interest payment on its Notes. Inorder to improve the Company’s existing liquidity position and to further theCompany’s business strategy, the Company had entered into separate definitiveagreements to sell its two WB affiliates (as discussed above) and is continuingto explore the sale of the two WB affiliates and the restructuring of the Company.  However, under its Indenture, the Company’suse of the net proceeds from the sale of assets is restricted. Of the netproceeds received in an asset sale, $5 million may be used for working capitalpurposes and the remainder must be used either:

 

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

 

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

 

Assuming theCompany is successful in selling the KBWB-TV and WDWB-TV, selling additionalassets and / or restructuring the Company, management believes that theavailable proceeds together with the cash and cash equivalents on hand andinternally generated funds from operations may be sufficient to satisfy ourcash requirements for our existing operations and debt service for the nexttwelve months. However, a lack of liquidity would have a material adverseeffect on the Company’s business strategy and therefore affect its ability tocontinue as a going concern and make our June 1, 2006 interest payment on ourNotes. The 2005 financial statements do not include any adjustments to reflectthe possible future effects on the recoverability and classification of assetsor the amounts and classification of liabilities that might result from theoutcome of this uncertainty.

 

On January 13, 2006, theCompany and certain of its subsidiaries entered into a definitive agreementwith Television Station Group Holdings, LLC and certain of its subsidiaries topurchase substantially all of the assets of WBNG-TV, Channel 12, theCBS-affiliated television station serving Binghamton and Elmira, New York, for$45 million in cash, subject to closing adjustments.  (the “WBNG Purchase and Sale Agreement”).  As of February 8, 2006, the sellers have aright to terminate the WBNG Purchase and Sale Agreement because the sales of theCompany’s two stations affiliated with the WB Network were not completed as ofsuch date.  As of March 30, 2006, thesellers have not exercised their right to terminate the WBNG Purchase and SaleAgreement. On March 8, 2006, the application seeking consent to assign theWBNG-TV license to the Company’s subsidiary was granted by the FederalCommunications Commission (“FCC”).

 

**Note 2 - Summary of Significant Accounting Policies**

 

*Financial statement presentation*

 

Theconsolidated financial statements include the accounts of Granite BroadcastingCorporation, its wholly owned subsidiaries and the accounts ofindependently-owned Malara Broadcast Group where it is deemed that the Companyis the primary beneficiary of a variable interest entity in accordance withInterpretation 46. All intercompany account balances and transactions have beeneliminated in consolidation. Certain prior year amounts have been reclassifiedto conform to the current year presentation. In addition, the Company reduced goodwill during the year ended 2004 by$14,926,000 to appropriately reflect the tax basis of certain assets acquiredin prior years’ acquisitions which have been reflected in the December 31,2004 Balance Sheet disclosed herein and had no effect on the Company’sStatement of Operations or Cash Flows.

 

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Malara Broadcast Group is included in these consolidated financialstatements because the Company is deemed to be the primary beneficiary ofMalara Broadcast Group as defined by Interpretation 46 as a result of (i) theCompany’s guarantee of the obligations incurred under Malara Broadcast Group’sSenior Secured Credit Facility, (ii) local service agreements the Company haswith Malara Broadcast Group and (iii) put or call option agreements the Companyhas with Malara Broadcast Group to acquire all of the assets and assume theliabilities of each Malara Broadcast Group television station, subject toapproval by the Federal Communications Commission (“FCC”) (see Note 3 forfurther details on the aforementioned).

 

*Discontinued Operations*

 

In accordance with the provisions of Statement of Financial AccountingStandards No. 144 (“Statement 144”), *Accounting for theImpairment or Disposal of Long-Lived Assets,* the operating resultsof KBWB-TV, San Francisco, California and WDWB-TV, Detroit, Michigan are notincluded in our consolidated results from continuing operations for the yearsended December 31, 2005, 2004 and 2003 since the asset sale agreements forKBWB-TV, San Francisco, California and WDWB-TV, Detroit, Michigan, each meetthe criteria for a qualifying plan of sale. The Company is committed to a planto sell these assets, the assets are available for immediate sale, and theCompany is actively seeking buyers and marketing these assets and believes thatthe sale of the assets is probable at prices that are reasonable in relation totheir current fair value.  The assets andliabilities being disposed of have been classified as “held for sale” on theaccompanying balance sheets and their operations have been recorded asdiscontinued operations. Discontinued operations have not been segregated inthe consolidated statement of cash flows and, therefore, amounts for certaincaptions will not agree with the accompanying consolidated balance sheets andstatements of operations. Their financial position and results of operationshave been reclassified accordingly for all periods presented. (See Note 4 *Discontinued Operations*, for further details.)

 

*Revenue recognition*

 

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

 

*Allowance for Doubtful Accounts*

 

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

 

*Intangibles*

 

Intangible assets at December 31 are summarized as follows:

 
| ** **                | ** ** | **2005**    | ** **  | **2004**    | ** ** |
|---------------------------|------------|-------------|-------------|-------------|------------|
| ** **                | ** ** | ** **  | ** **  | ** **  | ** ** |
| Goodwill                  |       | $           | 74,088,000  |        | $          | 42,706,000 |   |
| Network  affiliations     |       | 94,292,000  |        | 79,591,000  |       |
| Broadcast  licenses       |       | 53,514,000  |        | 46,807,000  |       |
|                      |       | 221,894,000 |        | 169,104,000 |       |
| Accumulated  amortization |       | (51,713,000 | )           | (48,817,000 | )          |
|                      |       |        |        |        |       |
| Net  intangible assets    |       | $           | 170,181,000 |        | $          | 120,287,000 |   |

 

As of December 31, 2005 and 2004, the Company’s intangible assetsand related accumulated amortization consisted of the following:

 
| ** **                                      | ** ** | **December 31, 2005** | ** **   | **December 31, 2004**    | ** ** |
|-------------------------------------------------|------------|----------------------------|--------------|-------------------------------|------------|
| ** **                                      | ** ** | **Gross  Carrying Value**  | ** **   | **Accumulated  Amortization** | ** ** | **Gross  Carrying Value** | ** ** | **Accumulated  Amortization** | ** ** |
|                                            |       |                       |         |                          |       |   |   |   |   |
| Intangible  assets subject to amortization:     |       |                       |         |                          |       |   |   |   |   |
| Network  affiliation agreements                 |       | $                          | 94,292,000   |                          | $          | (29,117,000 | ) | $ | 79,591,000 |   | $ | (26,221,000 | ) |
|                                            |       |                       |         |                          |       |   |   |   |   |
| Intangible  assets not subject to amortization: |       |                       |         |                          |       |   |   |   |   |
| Goodwill                                        |       | $                          | 74,088,000   |                          | $          | (13,768,000 | ) | $ | 42,706,000 |   | $ | (13,768,000 | ) |
| Broadcast  licenses                             |       | 53,514,000                 |         | (8,828,000                    | )          | 46,807,000 |   | (8,828,000 | ) |
|                                            |       | $                          | 127,602 ,000 |                          | $          | (22,596,000 | ) | $ | 89,513,000 |   | $ | (22,596,000 | ) |

 

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The Company amortizes its network affiliation agreements for which itdoes not make contractual payments using an estimated useful life of 25 yearsand amortizes its network affiliation agreements for which it makes contractualpayments over the life of the contract. The Company recorded amortization expense of $2,896,000, $2,426,000 and$2,426,000 during the years ended December 31, 2005, 2004 and 2003,respectively.  Based on the currentamount of intangible assets subject to amortization, the estimated amortizationexpense for each of the succeeding 5 years are as follows: 2006: $3,014,000;2007: $3,014,000; 2008: $3,014,000; 2009: $3,014,000; and 2010:  $3,014,000. As acquisitions and dispositions occur in the future, these amounts mayvary.

 

*Long-Lived Assets*

 

Long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset is notrecoverable.  At such time as animpairment in value of a long-lived asset is identified, except for goodwilland other intangible assets deemed to have indefinite lives, the impairmentwill be measured in accordance with Statement 144, as the amount by which thecarrying amount of a long-lived asset exceeds its fair value.  A present value technique, which utilizesmultiple cash flow scenarios that reflect the range of possible outcomes and anappropriate discount rate, is used to determine fair value.  There were no impairments of long-livedassets at December 31, 2005.

 

*Deferred financing fees*

 

On December 22, 2003, the Company completed an offering of theNotes. Proceeds from the Notes were used, in part, to (i) repay alloutstanding borrowings, plus accrued interest, under the Company’s thenoutstanding senior credit agreement, (ii) to redeem at par, plus accruedinterest, all of the 9 3/8% and 10 3/8% Senior Subordinated Notes due 2005 and(iii) to repurchase at par, plus accrued interest, all of the 8 7/8%Senior Subordinated Notes due 2008.  Theremaining proceeds were invested in short-term securities as well as being usedfor general working capital purposes. The unamortized deferred financing fees related to the Company’s seniorcredit agreement and the Company’s senior subordinated notes of $3,215,000 werewritten off in 2003.  The Company incurredfees of $ 13,749,000 in connection with the sale of the Notes.  These fees are being amortized over sevenyears. In connection with entering into the Malara Broadcast Group SeniorCredit Facility in 2005, the Company incurred fees of $ 2,342,000, which arebeing amortized over 5 years. As a result of the February 10, 2006 repayment ofTranche A Term Loan, approximately $709,000 of unamortized deferred financingfees will be written off in the first quarter of 2006.

 

*Property and equipment*

 

Property and equipment are recorded at cost anddepreciated on a straight-line basis over their estimated useful lives, byasset classifications, ranging from a period of 3 to 40 years. Prior to January1, 2005 property and equipment were being depreciated on a straight-line basisranging from 3 to 35 years. On January 1, 2005, the Company revised theestimated useful lives to reflect the revised expected useful life of suchassets to 3 to 40 years. This change decreased total depreciation expenseduring the year ended December 31, 2005 by approximately $700,000, or $0.03 perdiluted share.Maintenance and repairs are charged to operations as incurred.

 

*Film contract rights*

 

Film contract rights are recorded as assets at gross value when thelicense period begins and the films are available for broadcasting.  Film contract rights are amortized on anaccelerated basis over the estimated usage of the films, and are classified ascurrent or non-current on that basis. The Company’s accounting for long-lived film contract assets requiresjudgment as to the likelihood that such assets will generate sufficient revenueto cover the associated expense.  TheCompany reviews its film contract rights for impairment by projecting theamount of revenue the program will generate over the remaining life of thecontract by applying average historical rates and sell-out percentages for aspecific time period and comparing it to the program’s expense.  If the projected future revenue of a programis less than its future expense and/or the expected broadcast period isshortened or cancelled due to poor ratings, the Company would be required towrite-off the exposed value of the program rights ratably or potentiallyimmediately. The Company has written down the value of certain film contract rightsat its two WB stations by $ 4,346,000, $3,800,000 and $3,000,000 during theyears ended December 31, 2005, 2004 and 2003, respectively, and isincluded on the statement of operations in “loss from discontinued operations”in each respective year.  Film contractrights payable are classified as current or non-current in accordance with thepayment terms of the various license agreements.  Film contract rights are reflected in theconsolidated balance sheet at the lower of unamortized cost or estimated netrealizable value. As of December 31, 2005, the amounts of current filmcontract rights and non-current film contract rights were $2,836,000 and$77,000, respectively.

 

At December 31, 2005, the obligation for programming that had notbeen recorded because the program rights were not available for broadcastingaggregated $17,212,000.

 

*Barter transactions*

 

Revenue from barter transactions is recognized when advertisements arebroadcast and merchandise or services received are charged to expense whenreceived or used.  Barter revenue totaled$2,112,000, $1,777,000 and $1,614,000 for the years ended December 31,2005, 2004 and 2003 respectively.  Barterexpense totaled $1,633,000, $1,296,000 and $1,442,000 for the years endedDecember 31, 2005, 2004 and 2003 respectively.

 

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*Advertising*

 

The cost of advertising is expensed as incurred.  Advertising expense was $497,000, $421,000and $406,000 for the years ended December 31, 2005, 2004 and 2003,respectively.

 

*Use of estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses reported in the financial statements andaccompanying notes.  The significantestimates made by management include the allowance for doubtful accounts, therecoverability of film contract rights and the useful lives and carrying valueof tangible and intangible assets. Actual results could differ from thoseestimates.

 

*Cash Equivalents and Investments inMarketable Securities*

 

All highly liquid investments with a maturity of ninety days or lessfrom the date of purchase are considered cash equivalents. Marketablesecurities are classified as available-for-sale in accordance with theprovisions of Statement of Financial Accounting Standards No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.  These securities are carried at fair marketvalue based on current market quotes. Unrealized gains and losses are reportedin stockholders’ equity as a separate component of other comprehensive income /(loss) until realized.  Gains and losseson securities sold are based on the specific identification method. The Companydoes not hold these securities for speculative or trading purposes. Marketablesecurities, which include direct obligations of the U.S. Government, domesticcommercial paper and domestic certificates of deposits, have maturities of oneyear or less and have active markets to ensure portfolio liquidity. AtDecember 31, 2005, the Company did not have any marketable securities.

 

*Restricted Cash Equivalents*

 

At December31, 2005, the $23.5 million Tranche A Term Loan under the Malara BroadcastGroup Senior Credit Facility is secured by a letter of credit.  To securethe reimbursement obligations in the event of a draw on the letter of creditand pursuant to the terms and conditions of an Application and Agreement for StandbyLetter of Credit, the Company pledged $25 million of U.S. GovernmentSecurities, which are not available for working capital or any other purposesand held in escrow. As of December 31, 2005, the restricted U.S. GovernmentSecurities totaled $24,997,500.

 

On February 10, 2006, inaccordance with the terms of the Malara Broadcast Group’s Senior CreditFacility, the letter of credit issued in March 2005 (see Note 10.) to supportthe $23.5 million Tranche A Term Loan was drawn upon in satisfaction of MalaraBroadcast Group’s obligations to such lenders Loans under the Malara Tranche ATerm Loan following non-renewal of the letter of credit. The Company paidits reimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities that had been pledged in support of suchobligation.

* *

*Stock-Based Compensation*

 

The Company has adopted the disclosure provisions of SFAS No. 148,*Accounting for Stock-Based Compensation —Transition and Disclosure,*which requires disclosure in the summaryof accounting policies of the effects of an entity’s accounting policy withrespect to stock-based compensation on reported net income / (loss) andearnings per share in annual and interim financial statements.

 

The Company accounts for stock option grants under the recognition andmeasurement principles of Accounting Principles Board (“APB”) No 25, *Accounting for Stock Issued to Employees,*and relatedinterpretations and the Company complies with the disclosure provisions of SFASNo. 123, *Accounting for Stock-Based Compensation*asamended by SFAS No. 148. Under APB No. 25, because the exercise price ofthe Company’s stock options equals the market price (fair value) of theunderlying stock on the date of grant, no compensation expense is recorded.

 

The following table illustrates the effect on net loss and loss pershare as if the Company had applied the fair value recognition provisions ofSFAS No. 123, as amended by SFAS No. 148, to stock-based compensationfor the years ended December 31, as follows which may not berepresentative of the impact in future years:

 
| ** **                                                 | ** ** | **2005**   | ** **  | **2004**   | ** ** | **2003**    | ** ** |
|------------------------------------------------------------|------------|------------|-------------|------------|------------|-------------|------------|
| ** **                                                 | ** ** | ** ** | ** **  | ** ** | ** ** | ** **  | ** ** |
| Net loss  attributable to common shareholders, as reported |       | $          | (99,382,000 | )          | $          | (83,292,000 | )          | $ | (59,899,000 | ) |
| Add: Pro  forma compensation expense                       |       | 415,000    |        | 1,330,000  |       | 1,381,000   |       |
| Less: Option  compensation expense, as reported            |       | (38,000    | )           | (45,000    | )          | (48,000     | )          |
| Pro forma  net loss attributable to common shareholders    |       | $          | (99,759,000 | )          | $          | (84,577,000 | )          | $ | (61,232,000 | ) |
|                                                       |       |       |        |       |       |        |       |
| Basic and  diluted net loss per share, as reported         |       | $          | (5.08       | )          | $          | (4.30       | )          | $ | (3.15 | ) |
| Pro forma  compensation expense                            |       | (0.02      | )           | (0.07      | )          | (0.07       | )          |
| Pro forma  basic and diluted net loss per share            |       | $          | (5.10       | )          | $          | (4.37       | )          | $ | (3.22 | ) |

 

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The Company did not grantany stock options in 2005. The fair value for each option grant was estimatedat the date of grant using the Black Scholes option pricing model with thefollowing assumptions for the various grants made during 2005, 2004 and 2003:

 
| ** **               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**      | ** ** |
|--------------------------|------------|----------|------------|----------|------------|---------------|------------|
| Risk-free  interest rate |       | —   |       | 3.00%    |       | 2.93% - 3.19% |       |
| Dividend  yield          |       | 0        | %          | 0%       |       | 0%            |       |
| Expected  volatility     |       | —   |       | 90%      |       | 59% - 92%     |       |
| Expected  lives          |       | —   |       | 5        |       | 5             |       |

 

The Black Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  In addition,option valuation models require the input of highly subjective assumptionsincluding the expected stock price volatility. The Company’s employee stock options have characteristics significantlydifferent from those of traded options and changes in the subjective inputassumptions can materially affect the fair value estimate.

 

*Net loss per common share*

 

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

 
| ** **                                                               | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                               | ** ** | **2005**                          | ** **  | **2004** | ** ** | **2003** | ** ** |
|                                                                     |       |                              |        |   |   |   |   |
| Net loss                                                                 |       | $                                 | (99,382,000 | ) | $ | (83,292,000 | ) | $ | (46,948,000 | ) |
|                                                                     |       |                              |        |   |   |   |   |
| Cumulative  exchangeable preferred stock dividends                       |       | —                            |        | — |   | 12,774,000 |   |
| Accretion of  offering costs on cumulative exchangeable preferred stock  |       | —                            |        | — |   | 177,000 |   |
|                                                                     |       |                              |        |   |   |   |   |
| Net loss  attributable to common shareholders                            |       | $                                 | (99,382,000 | ) | $ | (83,292,000 | ) | $ | (59,899,000 | ) |
|                                                                     |       |                              |        |   |   |   |   |
| Weighted  average common shares outstanding for basic net loss per share |       | 19,559,000                        |        | 19,366,000 |   | 18,991,000 |   |
|                                                                     |       |                              |        |   |   |   |   |
| Basic and  diluted net loss per share                                    |       | $                                 | (5.08       | ) | $ | (4.30 | ) | $ | (3.15 | ) |

 

Stock options totaling 45,565 for the year ended December 31,2003, were excluded from the computation of diluted earnings per share due totheir anti-dilutive effect.

 

*Recent Accounting Pronouncements*

 

In May 2005, FASB issued Statement of Financial Accounting StandardsNo. 154, *Accounting Changes and Error Corrections – areplacement of APB No. 20 and FASB Statement No. 3,*or Statement154. Statement 154 changes the requirements of accounting for and reporting achange in accounting principle and applies to all voluntary changes inaccounting principle and changes required by an accounting pronouncement, inthe event that the accounting pronouncement does not include specifictransition provisions. Statement 154 requires retrospective application ofchanges in accounting principle to prior periods’ financial statements unlessit is impracticable. Statement 154 also requires that a change in the method ofdepreciation, amortization or depletion of long-lived, non-financial assets beaccounted for as a change in accounting estimate affected by a change inaccounting principle. The guidance contained in APB Opinion No. 20, *Accounting Changes* for reporting the correction of an errorwas carried forward in Statement 154 without change. Statement 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The Company does not expect the adoption of Statement154 to have a material impact on its financial position or results ofoperations.

 

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

 

Statement 123(R) is effective for interim and annual reporting periodsbeginning on or after January 1, 2006. All public companies must use either themodified prospective or modified retrospective transition method. Statement123(R) permits public companies to adopt its requirements using one of the twomethods:

 

1.               A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of Statement123(R) for all shared based payments granted after the effective date and (b)based on the requirements of Statement 123 for all awards granted to employeesprior to the effective date of Statement 123(R) that remain unvested on theeffective date.

 

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2.               A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) prior interimperiods of the year of adoption.

 

The Company plans to adopt Statement 123(R) using themodified-prospective approach.

 

As permitted by Statement 123, through December 31, 2005, the Companyaccounted for share-based payments to employees using APB Opinion 25’sintrinsic value method and, as such, generally recognized no compensation costfor employee stock options. Accordingly, the adoption of Statement 123(R)’sfair value method will have an impact on its results of operations, although itwill have no impact on its overall financial position or cash flows. The impactof the adoption of Statement 123(R) will depend on the levels of share-basedpayments granted in the future and the rate of cancellation of unvested grants.However, had the Company adopted Statement 123(R) in prior periods, the impactof that standard would have approximated the impact of Statement 123 asdescribed in the disclosure of pro forma net loss and loss per share in Note 2.The Company currently believes that stock-based compensation expenses for thecalendar year ended December 31, 2006 related to share-based payments grantedprior to January 1, 2006 and unvested as of that date will range from $120,000to $140,000.

 

**Note 3 – Acquisitions and Dispositions**

 

On March 7, 2005, the Company completed the sale of its FortWayne, Indiana ABC affiliate, WPTA-TV to a subsidiary of Malara Broadcast GroupInc. (“Malara Broadcast Group”) for approximately $45.4 million, pursuant tothe terms and conditions of an asset purchase agreement, dated April 23,2004.  In addition, on March 8,2005, the Company completed its purchase of WISE-TV, the NBC affiliate servingFort Wayne from New Vision Group, LLC, or New Vision Television, forapproximately $43.5 million, pursuant to the terms and conditions of a stockpurchase agreement, dated April 23, 2004.

 

Furthermore,another subsidiary of Malara Broadcast Group acquired CBS affiliate KDLH-TV,Duluth, Minnesota from New Vision Television on March 8, 2005 for approximately$9.5 million, pursuant to the terms and conditions of an asset purchaseagreement, dated April 23, 2004.

 

On March 8, 2005, the Company entered into a strategic arrangementwith Malara Broadcast Group, under which the Company provides advertisingsales, promotion and administrative services, and selected programming toWPTA-TV and KDLH-TV in return for certain fees that will be paid by MalaraBroadcast Group to the Company. The fees payable to the Company will be paidafter current debt service as well as certain other expenses Malara BroadcastGroup incurs directly are satisfied. During the year ended December 31, 2005,Malara Broadcast Group paid the Company approximately $2,639,000 under thestrategic arrangements between the companies.  As of December 31, 2005, the total amount due tothe Company from Malara Broadcast Group was approximately $14,514,000.

 

MalaraBroadcast Group financed its acquisition of WPTA-TV and KDLH-TV with theproceeds of the Malara Broadcast Group Senior Credit Facility (see Note 10,Debt).

 

The Companydoes not own Malara Broadcast Group or its television stations. However, as aresult of the Company’s guarantee of the obligations incurred under MalaraBroadcast Group’s Senior Credit Facility with respect to the Tranche B TermLoan and the revolving loan and due to its arrangements under the local serviceagreements and put or call option agreements, under Interpretation 46, theCompany is required to consolidate Malara Broadcast Group’s financial position,results of operations and cash flows. In addition, in accordance with theprovisions of Interpretation 46, the Company did not account for the sale ofthe assets of WPTA-TV and no gain there from was recognized in the consolidatedstatements of operations. Additionally, the Company did not apply theprovisions of purchase accounting to Malara Broadcast Group’s acquisition ofWPTA-TV.

 

In May 2004,an application was filed with the FCC, seeking consent to assign the license oftelevision station KDLH to a subsidiary of Malara Broadcast Group.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between MalaraBroadcast Group and the Company.  The FCC’sMedia Bureau (“Bureau”) denied the petition and granted the assignmentapplication in December 2004.  In January2005, the petitioning broadcasters filed an application for review seekingCommission-level review of the Bureau’s decision.  Malara Broadcast Group filed an opposition tothe application for review, and the petitioning broadcasters filed a responseto that opposition.

 

The FCC hasnot yet ruled on the application for review. Although the Company believes that the application for review is withoutmerit and anticipates that the FCC will affirm the grant of the assignmentapplication for KDLH, it is not possible to predict how the FCC will rule onthe application for review.  It also isnot possible to predict any remedial action or possible sanction that may beimposed by the FCC in the event that it grants the application for review.  An FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, LLC, or a sale byMalara Broadcast Group of its ownership of KDLH.

 

Each of theacquisitions listed below was consummated during the three months ended March31, 2005. The Company’s acquisition of WISE and Malara Broadcast Group’sacquisition of KDLH were accounted for under the purchase method of accounting.The consolidated financial statements continue to include the operating resultsof WPTA as well as the operating results of WISE and KDLH from the date ofconsummation of the acquisition. In accordance with the provisions ofInterpretation 46, the Company did not account for the sale of the assets ofWPTA.

 

60

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| **Station**   | ** ** | **Network  Affiliation** | ** ** | **Market**          | ** ** | **Date Acquired** | ** ** | **Acquiring Company**         | ** ** |
|---------------|------------|--------------------------|------------|---------------------|------------|-------------------|------------|-------------------------------|------------|
| WISE          |       | NBC                      |       | Fort Wayne, Indiana |       | March 8, 2005     |       | Granite Broadcast Corporation |       |
| WPTA (1), (2) |       | ABC                      |       | Fort Wayne, Indiana |       | March 7, 2005     |       | Malara Broadcast Group        |       |
| KDLH (1)      |       | CBS                      |       | Duluth, Minnesota   |       | March 8, 2005     |       | Malara Broadcast Group        |       |

 

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(1)         Operationsunder local service agreements, whereby, the Company provides advertising,sales, promotions, administrative services and selected programming services toMalara Broadcast Group television stations in return for certain fees that willbe paid to the Company by Malara Broadcast Group.

(2)         Inaccordance with Interpretation 46, the Company did not account for the sale ofthe assets of WPTA-TV and no gain there from was recognized in the consolidatedstatements of operations. In addition, the Company did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

*WISE*

 

On March 8,2005, the Company acquired the stock of WISE-TV from New Vision Group, LLC for$43.5 million in cash plus approximately $2,900,000 of transactions costs. Theacquisition was accounted for under the purchase method of accounting andaccordingly, the purchase price was allocated to liabilities acquired based ontheir estimated fair value on the acquisition date.

 

The followingtable summarizes the preliminary allocation of the purchase price of WISE-TV onMarch 8, 2005. The Company obtained a third-party valuation of certain acquiredintangible assets and the allocation below is the final valuation of theacquired intangible assets. In addition, net liabilities acquired are subjectto future adjustments and therefore the amount below is preliminary andestimated and subject to change.

 
| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase  Price                                        |       | $                 | 46,443,000 |   |
| Net  Liabilities Assumed                               |       | 1,093,000         |       |
| FCC License  (indefinite lived)                        |       | (5,248,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (14,088,000       | )          |
| Goodwill  (indefinite lived)                           |       | $                 | 28,200,000 |   |

 

*KDLH*

 

On March 8,2005, Malara Broadcast Group acquired substantially all of the assets ofKDLH-TV from New Vision Group, LLC for $9.5 million plus approximately $360,000of transactions costs. The acquisition was accounted for under the purchasemethod of accounting and accordingly, the purchase price was allocated toassets acquired based on their estimated fair value on the acquisition date.

 

The followingtable summarizes the preliminary allocation of the purchase price of KDLH-TVacquired on March 8, 2005. Malara Broadcast Group obtained a third-partyvaluation of certain acquired intangible assets and the allocation below is thefinal valuation of the acquired intangible assets. In addition, net assetsacquired are subject to future adjustments and therefore the amount below ispreliminary and estimated and subject to change.

 
| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase  Price                                        |       | $                 | 9,864,000  |   |
| Net Assets  Acquired                                   |       | (4,647,000        | )          |
| FCC License  (indefinite lived)                        |       | (1,459,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (612,000          | )          |
| Goodwill  (indefinite lived)                           |       | $                 | 3,146,000  |   |

 

The followingpro forma information from continuing operations for the years ended December31, 2005 and 2004 have been presented as if the Company’s acquisition ofWISE-TV and Malara Broadcast Group’s acquisition of KDLH-TV had occurred onJanuary 1, of each year:

 

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| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Pro Forma**                | ** ** | **Pro Forma** | ** ** |
| Net Revenues                                  |       | $                            | 88,011,000 |   | $ | 93,488,000 |   |
| Operating  Expenses                           |       | 82,143,000                   |       | 91,851,000 |   |
| Income from  Operations                       |       | 5,868,000                    |       | 1,637,000 |   |
| Other  Expenses                               |       | 72,621,000                   |       | 74,170,000 |   |
| Loss before  taxes                            |       | 66,753,000                   |       | 72,533,000 |   |
| Benefit for  income taxes                     |       | 697,000                      |       | 11,714,000 |   |
| Net loss  attributable to common shareholders |       | $                            | 66,056,000 |   | $ | 60,819,000 |   |
|                                          |       |                         |       |   |   |
| Basic and  diluted net loss per share         |       | $                            | 3.38       |   | $ | 3.14 |   |
|                                          |       |                         |       |   |   |
| Weighted  average common shares outstanding   |       | 19,559,000                   |       | 19,366,000 |   |

 

The pro formainformation is presented for illustrative purposes only and is not necessarilyindicative of results of operations in the future periods or results that wouldhave been achieved had the Company’s acquisition of WISE-TV and MalaraBroadcast Group’s acquisition of KDLH-TV occurred during the specified periods.

 

**Note 4 –Discontinued Operations**

 

In accordance with the provisions of Statement No. 144, the operatingresults of KBWB-TV, San Francisco, California and WDWB-TV, Detroit, Michiganare reported as discontinued operations in the accompanying consolidatedbalance sheets and statements of operations. The respective assets andliabilities being disposed of have been classified as “held for sale” on theaccompanying balance sheets presented and their operations have been recordedas discontinued operations. Discontinued operations have not been segregated inthe consolidated statement of cash flows and, therefore, amounts for certaincaptions will not agree with the accompanying consolidated balance sheets andstatements of operations.

 

**Agreementsto sell KBWB and WDWB**

 

On September 8, 2005, theCompany entered into the KBWB Purchase and Sale Agreement to sell substantiallyall of the assets of KBWB-TV, the WB affiliate serving the San Francisco,California television market, to the KBWB Buyer.  In addition, on September 8, 2005, theCompany entered into the WDWB Purchase and Sale Agreement and together with theKBWB Purchase and Sale Agreement, the “Purchase and Sale Agreements” to sellsubstantially all of the assets of WDWB-TV, the WB affiliate serving theDetroit Michigan television market, to the WDWB Buyer. The Purchase and SaleAgreements contain covenants by the Company not to compete in the SanFrancisco, California and Detroit, Michigan markets for a period of five years.The aggregate consideration to be received by the Company for the sale ofKBWB-TV was $72,500,000, before closing adjustments, which was payable$71,250,000 in cash and $1,250,000 in equity in AM Media Holdings, LLC. Theaggregate consideration to be received by the Company for the sale of WDWB-TV was$87,500,000, before closing adjustments, which was payable $86,250,000 in cashand $1,250,000 in equity in AM Media Holdings, LLC. The consideration for eachcovenant not to compete in the San Francisco and Detroit markets was $10million, respectively. As of December 31, 2005 the aggregate assets held forsale totaled $116,183,000 and the aggregate liabilities held for sale totaled$36,931,000. At December 31, 2004, the aggregate assets held for sale totaled$158,143,000 and the aggregate liabilities held for sale totaled $46,057,000.

 

Cash relatedto discontinued operations, which the Company will retain the rights to, isincluded in cash and cash equivalents in the accompanying consolidated balancesheets for all periods presented. Cash and cash equivalents totaled $520,000 asof December 31, 2005 and $649,000 as of December 31, 2004 is included in theCompany’s consolidated balance sheets. Accounts receivable related todiscontinued operations, which the Company will retain the rights to andcollect, is included in accounts receivable, net of allowance for doubtfulaccounts, in the accompanying consolidated balance sheets for all periodspresented. Such amounts totaled $5,464,000 (net of allowance of $222,000) as ofDecember 31, 2005 and $6,091,000 (net of allowance of $415,000) as of December31, 2004 and are included in the Company’s consolidated balance sheets. Netloss from discontinued operations was $34,051,000, $24,003,000 and $12,693,000for the years ended December 31, 2005, 2004 and 2003 respectively. Net revenuesfrom discontinued operations were $31,457,000, $33,266,000 and $35,211,000 forthe years ended December 31, 2005, 2004 and 2003, respectively. Net loss fromdiscontinued operations includes non-cash impairment write downs related to filmcontract rights, affiliation agreements and other intangible assets totaling$35,396,000, $19,291,000 and $2,950,000, in 2005, 2004 and 2003, respectively.

 

OnJanuary 24, 2006, the WB Network announced that it will no longerprovide programming to current WB affiliates effective in September 2006.  The KBWB Buyer has advised the Company thatas a result thereof, the KBWB Buyer will not be able to proceed with thetransaction as contemplated.  While theremay be further discussions between the Company and the KBWB Buyer about thetransaction, the Company is actively engaging in dialogue with other potentialbuyers because the Company does not presently have an agreement in principlewith the KBWB Buyer with respect to KBWB-TV and anticipates that it will completea sale of KBWB-TV within the next twelve months.  On February 14, 2006, the Company enteredinto the KBWB Amendment to the KBWB Purchase and Sale Agreement. Pursuant tothe KBWB Amendment (i) Section 6.2 of the KBWB Purchase and Sale Agreement, ano shop provision, was deleted in its entirety and (ii) the KBWB Buyer and theCompany each have the right to terminate the KBWB Purchase and Sale Agreement,at any time, by providing written notice to the other party with no liabilityor obligation to such other party.

 

62

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On January 24, 2006, the WBNetwork announced that it will no longer provide programming to currentWB affiliates effective inSeptember 2006.  The WDWB Buyer hasadvised the Company that as a result of the WB Network announcement, the WDWBBuyer will not be able to proceed with the transaction as contemplated.  While there may be further discussionsbetween the Company and the WDWB Buyer about the transaction, the Company isactively engaging in dialogue with other potential buyers because the Companydoes not presently have an agreement in principle with the WDWB Buyer withrespect to WDWB-TV TV and anticipates that it will complete a sale of WDWB-TVwithin the next twelve months. On February 14, 2006, the Company entered intothe WDWB Amendment to the WDWB Purchase and Sale Agreement. Pursuant to theWDWB Amendment (i) Section 6.2 of the WDWB Purchase and Sale Agreement, a noshop provision, was deleted in its entirety and (ii) the WDWB Buyer and theCompany each have the right to terminate the WDWB Purchase and Sale Agreement,at any time, by providing written notice to the other party with no liabilityor obligation to such other party.

 

Summarizedfinancial data for assets and liabilities held for sale are as follows:

 
| ** **                       | ** ** | **Balance Sheet Data** | ** **  |
|----------------------------------|------------|------------------------|-------------|
| ** **                       | ** ** | **December 31,**       | ** **  | **December 31,** | ** ** |
| ** **                       | ** ** | **2005**               | ** **  | **2004** | ** ** |
| Film  contract rights            |       | $                      | 6,967,000   |   | $ | 12,851,000 |   |
| Property and  equipment, net     |       | 7,883,000              |        | 8,510,000 |   |
| Intangible  and other assets     |       | 101,333,000            |        | 136,782,000 |   |
| Total assets  held for sale      |       | $                      | 116,183,000 |   | $ | 158,143,000 |   |
|                             |       |                   |        |   |   |
| Film  contract rights payable    |       | $                      | 32,292,000  |   | $ | 37,118,000 |   |
| Accrued and  other liabilities   |       | 4,639,000              |        | 8,939,000 |   |
| Total  liabilities held for sale |       | $                      | 36,931,000  |   | $ | 46,057,000 |   |

 

**Note 5 –Restructuring and Acquisition Charges**

 

*Restructuring Charges*

 

During 2004, the Company recorded a $2,027,000 restructuring chargerelating to employee separations at both its corporate office and its Buffalo,New York television station.  Of thistotal, approximately $1,406,000 related to severance and other benefits,associated with the departure of Stuart J. Beck (see Note 17, Related Parties)and administrative support staff at the corporate office which are being paidover an eighteen month period from date of separation, September 21, 2004.The remaining $621,000 includes severance and other benefits resulting from areduction in the workforce at the Buffalo, New York television station. As ofDecember 31, 2005, the Company completed the separation payments related to theBuffalo, New York restructuring charges, and reduced its accrual byapproximately $10,000 to adjust for payments of benefits and amounts originallyaccrued.

 

Duringthe year ended December 31, 2005, the Company recorded restructuring chargestotaling $447,000 related to employee separations, which included severance,other benefits and stay-bonuses awarded to transitional employees at itsDuluth, Minnesota and Fort Wayne, Indiana television stations. The Companyanticipates minimal restructuring charges in future periods relating tostay-bonuses awarded to transitional employees of both its Duluth, Minnesotaand Fort Wayne, Indiana television stations upon separation.

 

At December 31, 2005, the accruals forrestructuring activities were included in “other accrued liabilities” on theconsolidated balance sheets and the related expense for the charge at thetelevision stations are included in “selling, general and administrativeexpenses” and the related expense for the corporate charges are included in “corporateseparation agreement expenses” on the consolidated statement ofoperations.  These costs were recognizedin accordance with the provisions of Statement of Financial AccountingStandards No. 146, *Accounting for Costs Associatedwith Exit or Disposal Activities*.

 

*Acquisition Charges*

 

During the year ended December 31, 2005, theCompany accrued $627,000 related to employee separations, which includedseverance and other benefits as part of the Company’s purchase accounting.These accrued costs were a result of employees not retained by the Companysubsequent to its acquisition of its Fort Wayne, Indiana television station,which included operational through management employees.

 

At December 31, 2005, the accruals for acquisitionactivities of the television station were included in “other accruedliabilities” on the consolidated Balance Sheets. These charges were recognizedin accordance with the provisions of Emerging Issues Task Force Issue No. 95-3 *Recognition of Liabilities in Connection with a Purchase BusinessCombination*.

 

63

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The following is a reconciliation of theaggregate liability recorded for restructuring and acquisition charges as ofDecember 31, 2005:

 
| ** **          | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Year Ended December 31, 2005**                                                              | ** ** |
| ** **          | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **December 31,  2005** | ** ** |
|                |       |                                                                                          |       |   |   |   |   |   |   |
| Television  station |       | $                                                                                             | 250,000    |   | $ | 1,064,000 |   | $ | 1,233,000 |   | $ | 81,000 |   |
| Corporate           |       | 1,214,000                                                                                     |       | — |   | 1,022,000 |   | 192,000 |   |
|                |       |                                                                                          |       |   |   |   |   |   |   |
| Total               |       | $                                                                                             | 1,464,000  |   | $ | 1,064,000 |   | $ | 2,255,000 |   | $ | 273,000 |   |

 

**Note 6 – Property and Equipment**

 

The major classificationsof property and equipment are as follows:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land                                             |       | $                     | 1,576,000  |   | $ | 1,556,000 |   |
| Buildings  and improvements                      |       | 14,443,000            |       | 14,740,000 |   |
| Furniture  and fixtures                          |       | 5,406,000             |       | 5,580,000 |   |
| Technical  equipment and other                   |       | 50,573,000            |       | 45,731,000 |   |
|                                             |       | 71,998,000            |       | 67,607,000 |   |
|                                             |       |                  |       |   |   |
| Less: Accumulated  depreciation and amortization |       | 30,307,000            |       | 30,377,000 |   |
|                                             |       |                  |       |   |   |
| Net property  and equipment                      |       | $                     | 41,691,000 |   | $ | 37,230,000 |   |

 

**Note 7 – Other Accrued Liabilities**

 

Other accrued liabilities are summarized below:

 
| ** **                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Compensation  and benefits                             |       | $                     | 3,459,000  |   | $ | 2,917,000 |   |
| Severance  and other costs related to the sale of KNTV |       | 176,000               |       | 309,000 |   |
| Professional  fees                                     |       | 1,720,000             |       | 896,000 |   |
| Severance  and restructuring                           |       | 273,000               |       | 1,464,000 |   |
| Other                                                  |       | 1,560,000             |       | 691,000 |   |
|                                                   |       |                  |       |   |   |
| Total                                                  |       | $                     | 7,188,000  |   | $ | 6,277,000 |   |

 

**Note 8 – Other Current Liabilities**

 

Other current liabilitiesare summarized below:

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Barter  payable            |       | $                     | 639,000    |   | $ | 467,000 |   |
| Performance  award payable |       | 3,286,000             |       | — |   |
| Other                      |       | 2,101,000             |       | 667,000 |   |
|                       |       |                  |       |   |   |
| Total                      |       | $                     | 6,026,000  |   | $ | 1,134,000 |   |

 

**Note 9 – Other Current Assets**

 

Other current assets aresummarized below:

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Barter and  other receivables |       | $                     | 4,878,000  |   | $ | 1,999,000 |   |
| Other                         |       | 1,483,000             |       | 1,178,000 |   |
|                          |       |                  |       |   |   |
| Total                         |       | $                     | 6,361,000  |   | $ | 3,177,000 |   |

 

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**Note 10 – Debt**

 

Currentportion of long-term debt consists of the following:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                           |       |                  |       |   |   |
| Malara  Broadcast Group Senior Credit Facility |       | $                     | 25,844,000 |   | $ | — |   |
|                                                |            |                       |            |  |  |  |  |

 

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

 
| ** **                                                                                                                      | ** ** | **December 31, 2005** | ** **  | **December 31, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                      | ** ** | **Carrying Amount**        | ** **  | **Fair Value**             | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| ** **                                                                                                                      | ** ** | ** **                 | ** **  | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Malara Broadcast Group Senior Credit  Facility, less current portion                                                            |       | $                          | 27,375,000  |                       | $          | — |   | $ | — |   | $ | — |   |
| 9 3/4% Senior Secured Notes, due 2010, net  of discount of $3,504,002 at December 31, 2005 and $4,208,702 at December 31,  2004 |       | 401,496,000                |        | 372,600,000                |       | 400,791,000 |   | 390,825,000 |   |
|                                                                                                                            |       |                       |        |                       |       |   |   |   |   |
|                                                                                                                            |       | $                          | 428,871,000 |                       | $          | 372,600,000 |   | $ | 400,791,000 |   | $ | 390,825,000 |   |
|                                                                                                                                 |            |                            |             |                            |            |  |  |  |  |  |  |  |  |  |

 

The fair value of the Company’s Senior Secured Notes atDecember 31, 2005 and 2004 is estimated based on quoted market prices.

 

*Senior Secured Notes*

 

On December 22,2003, the Company completed a $405,000,000 offering of the Notes dueDecember 1, 2010, at a discount, resulting in proceeds of$400,067,100.  Interest on the Notes ispayable on December 1 and June 1 of each year, which commenced onJune 1, 2004.  The Company used thenet proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under its senior credit agreement,(ii) redeem at par, plus accrued interest, all of its 9 3/8 % and 10 3/8 %senior subordinated notes due May and December 2005, respectively,and (iii) to repurchase at par, plus accrued interest, all of its 8 7/8 %senior subordinated notes due May 2008. The remaining proceeds were invested in short-term securities as well asbeing used for general working capital purposes.

 

The Notes arethe Company’s senior secured obligations. The Notes are guaranteed by each ofthe Company’s domestic restricted subsidiaries. The Notes and the guaranteesare secured by substantially all of the Company’s assets.  The Company may redeem some or all of theNotes at any time on or after December 1, 2006. The Company may alsoredeem up to 35% of the aggregate principal amount of the Notes using theproceeds of one or more equity offerings on or before December 1, 2005.

 

The Indenture,which governs the Company’s Notes, restricts its ability and the ability of itsrestricted subsidiaries to, among other things: (i) incur additional debtand issue preferred stock; (ii) make certain distributions, investmentsand other restricted payments; (iii) create certain liens; (iv) enterinto transactions with affiliates; (v) enter into agreements that restrictits restricted subsidiaries from making payments to the Company;(vi) merge, consolidate or sell substantially all of its assets;(vii) sell or acquire assets; and (viii) enter into new lines ofbusiness.

 

Under theIndenture, the Malara Broadcast Group companies to which the Company providesservices pursuant to the local services agreements are subject to the terms ofthe Indenture applicable to Restricted Subsidiaries that are not Guarantors, assuch terms are defined in the Indenture.

 

At December 31, 2005, the Company was in compliance with all covenantsunder its Notes.

 

***Malara Broadcast Group’s Senior CreditFacility***

 

MalaraBroadcast Group financed its acquisition of WPTA-TV and KDLH-TV inMarch 2005 with the proceeds of the Malara Broadcast Group Senior CreditFacility, consisting of two terms loans totaling $48.5 million and a revolvingloan of $5 million. The $23.5 million Malara Broadcast Group Tranche A TermLoan which was secured by a letter of credit was repaid on February 10, 2006. Tosecure the reimbursement obligations in the event of a draw on the letter ofcredit, pursuant to the terms and conditions of an Application and Agreementfor Standby Letter of Credit, the Company had pledged $25 million of U.S.Government Securities. To the****extent thatprincipal payments were made on the Tranche A Term Loan, the letter of creditwas to be proportionately reduced and the Company shall be permitted toproportionately reduce the amount of the pledged U.S. GovernmentSecurities.  The $25 million MalaraBroadcast Group Term Loan B and the $5 million revolving loan are secured bythe assets of WPTA-TV and KDLH-TV, and guaranteed on an unsecured basis by theCompany pursuant to a guaranty agreement (the “Granite Guaranty”).

 

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

 

65

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Interest ratesassociated with the Tranche A Term Loan were based, at Malara Broadcast Group’soption, at either (i) the higher of the Prime Rate or the Federal FundsEffective Rate plus 0.50% (the “Base Rate”) or (ii) the Adjusted EurodollarRate plus 0.60% per annum, as such terms are defined in the Malara BroadcastGroup Senior Credit Facility.  Interestrates associated with the Tranche B Term Loan and Revolving Loan are based, atMalara Broadcast Group’s option, on either (i) the Base Rate plus 4.625%per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Tranche B Term Loan and Revolving Loanat a rate of 3% per annum. Additionally, Malara Broadcast Group is required topay monthly commitment fees on the unused portion of its revolving loancommitment at a rate of 0.50% per annum. Cash interest payments are payable monthly.

 

MalaraBroadcast Group is required to make monthly principal payments on the Tranche BTerm Loan as follows: (i) $125,000 payable at the end of each month fromJune 1, 2006 through March 31, 2007, (ii) $158,333 payable atthe end of each month from April 1, 2007, through March 31, 2008, and(iii) $216,667 payable at the end of each month from April 1, 2008,through February 1, 2010.

 

MalaraBroadcast Group is required to make monthly principal payments on the Tranche ATerm Loan and the Revolving Loan equal to the product of (i) the RepaymentPercentage (which is 25% unless there is an Event of Default or theConsolidated Loan to Stick Value is less than 70%, in which case the RepaymentPercentage is 100%) and (ii) the Consolidated Excess Free Cash Flow forthe month preceding the month in which such installment is due, as such termsare defined in the Malara Broadcast Group Senior Credit Facility.  All such payments shall be applied first torepay the outstanding Revolving Loan to the full extent thereof (without acorresponding reduction in the Revolving Loan Commitment Amount) and second torepay the outstanding Tranche A Term Loan to the full extent thereof; providedthat, if the Repayment Percentage for such monthly installment is 100%, theexcess 75% of such monthly installment shall be applied first to repay theoutstanding Revolving Loan to the full extent thereof and second to repay theoutstanding Tranche B Term Loan to the full extent thereof. For the year endedDecember 31, 2005, the total principal payments made on the Revolving Loanapproximated $1,021,000.

 

AtDecember 31, 2005, Malara Broadcast Group was in compliance with all covenantsunder the Malara Broadcast Group Senior Credit Facility.

 

Undera Reimbursement Agreement dated as of March 8, 2005 (the “***ReimbursementAgreement***”) among the Company, Malara Broadcast Group andcertain of Malara Broadcast Group’s subsidiaries (together with Malara, the “***Malara Borrowers***”), the MalaraBorrowers agreed to repay the Company any amounts drawn on the letter of creditplus interest at a rate of 8% per annum. The Company reduced to $16.6 million the amount due from the MalaraBorrowers to the Company under the Reimbursement Agreement.

 

*Senior Subordinated Notes*

 

OnDecember 22, 2003, the Company redeemed in full $100,717,000 aggregateprincipal amount of its 10-3/8% Senior Subordinate Notes due May 15, 2005 and$34,660,000 aggregate principal amount of its 9-3/8% Senior Subordinate Notesdue December 1, 2005 at par, plus accrued interest and repurchased all of theoutstanding 8-7/8% Senior Subordinated Notes due May 15, 2008 at par, plusaccrued interest.  In connection withthese transactions, the Company recognized a loss on the extinguishment of debtof $3,215,000 related to the write-off of unamortized deferred financing feesand 30-day holding period interest on the 9-3/8% Notes and 10-3/8% Notes fromDecember 22, 2003 to January 21, 2004, the date of redemption, atDecember 31, 2003.

 

The scheduledprincipal maturities on all debt for the five years subsequent toDecember 31, 2005, are as follows:

 
| 2006   |   | $           | 25,844,000  |   |
|--------|--------|-------------|-------------|--------|
| 2007   |   | 3,413,000   |        |
| 2008   |   | 4,982,000   |        |
| 2009   |   | 5,323,000   |        |
| 2010   |   | 418,657,000 |        |
|   |   | $           | 458,219,000 |   |

 

**Note 11 –Commitments**

 

Future minimumlease payments under long-term operating leases as of December 31, 2005are as follows:

 
| 2006                 |   | $       | 591,000   |   |
|----------------------|--------|---------|-----------|--------|
| 2007                 |   | 516,000 |      |
| 2008                 |   | 509,000 |      |
| 2009                 |   | 477,000 |      |
| 2010                 |   | 463,000 |      |
| 2011 and  thereafter |   | 293,000 |      |
|                 |   | $       | 2,849,000 |   |

 

Rent expense,including escalation charges, was approximately $585,000, $546,000 and $586,000for the years ended December 31, 2005, 2004 and 2003, respectively.

 

66

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Future payments under film contract rights agreements as ofDecember 31, 2005 are as follows:

 
| 2006                 |   | $         | 5,159,000  |   |
|----------------------|--------|-----------|------------|--------|
| 2007                 |   | 4,408,000 |       |
| 2008                 |   | 4,401,000 |       |
| 2009                 |   | 3,912,000 |       |
| 2010                 |   | 2,371,000 |       |
| 2011 and  thereafter |   | 808,000   |       |
|                 |   | $         | 21,059,000 |   |

 

**Note 12 –Condensed Consolidating Financial Information**

 

The GraniteBroadcasting Corporation column represents the registrant’s financialinformation. The Malara Broadcast Group column represents the consolidatedfinancial information of Malara Broadcast Group, an independently owned entityin which the Company is deemed to be the primary beneficiary (see Note 3) andis required to be consolidated as a variable interest entity in accordance withInterpretation 46.

 

**BALANCE SHEET**

**December 31, 2005**

 
| ** **                                        | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|---------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                        | ** ** | ** **                            | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                            |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current  assets:                                  |       |                                  |        |                        |       |             |       |                      |        |
| Cash and cash equivalents                         |       | $                                     | 6,803,511   |                        | $          | 1,825,533        |       | $                         | —      |   | $ | 8,629,044 |   |
| Accounts receivable, net                          |       | 19,373,183                            |        | 3,015,363                   |       | —           |       | 22,388,546                |        |
| Other current assets                              |       | 8,359,472                             |        | 837,466                     |       | —           |       | 9,196,938                 |        |
| Restricted cash equivalents                       |       | 24,997,500                            |        | —                      |       | —           |       | 24,997,500                |        |
| Assets held for sale                              |       | 116,183,354                           |        | —                      |       | —           |       | 116,183,354               |        |
| Due from consolidated entity                      |       | 14,773,036                            |        | 10,864                      |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total current assets                              |       | 190,490,056                           |        | 5,689,226                   |       | (14,783,900      | )          | 181,395,382               |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Property and  equipment, net                      |       | 32,348,927                            |        | 9,342,340                   |       | —           |       | 41,691,267                |        |
| Other non  current assets                         |       | 14,903,268                            |        | 1,312,134                   |       | (3,646,668       | )          | 12,568,734                |        |
| Intangibles,  net                                 |       | 153,171,696                           |        | 44,740,731                  |       | (27,731,100      | )          | 170,181,327               |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total assets                                      |       | $                                     | 390,913,947 |                        | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Liabilities  and stockholders’ deficit       |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current  liabilities:                             |       |                                  |        |                        |       |             |       |                      |        |
| Accounts payable and other accrued  liabilities   |       | $                                     | 11,222,811  |                        | $          | 608,036          |       | $                         | —      |   | $ | 11,830,847 |   |
| Current portion of long-term debt                 |       | —                                |        | 25,844,000                  |       | —           |       | 25,844,000                |        |
| Other current liabilities                         |       | 8,573,826                             |        | 1,110,674                   |       | —           |       | 9,684,500                 |        |
| Liabilities held for sale                         |       | 36,930,893                            |        | —                      |       | —           |       | 36,930,893                |        |
| Due to consolidated entity                        |       | 10,864                                |        | 14,773,036                  |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total current liabilities                         |       | 56,738,394                            |        | 42,335,746                  |       | (14,783,900      | )          | 84,290,240                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Long-term  debt, less current portion             |       | 401,495,998                           |        | 27,375,458                  |       | —           |       | 428,871,456               |        |
| Other non  current liabilities                    |       | 28,483,877                            |        | 3,921,019                   |       | (3,646,668       | )          | 28,758,228                |        |
| Redeemable  preferred stock                       |       | 199,191,138                           |        | —                      |       | —           |       | 199,191,138               |        |
| Accrued  dividends on redeemable preferred stock  |       | 95,804,417                            |        | —                      |       | —           |       | 95,804,417                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Stockholders’  deficit:                      |       |                                  |        |                        |       |             |       |                      |        |
| Common stock                                      |       | 195,783                               |        | —                      |       | —           |       | 195,783                   |        |
| Additional paid-in capital                        |       | 393,701                               |        | —                      |       | —           |       | 393,701                   |        |
| Accumulated deficit                               |       | (390,513,206                          | )           | (12,547,792                 | )          | (27,731,100      | )          | (430,792,098              | )           |
| Less: Unearned compensation                       |       | (480                                  | )           | —                      |       | —           |       | (480                      | )           |
| Treasury stock, at cost                           |       | (875,675                              | )           | —                      |       | —           |       | (875,675                  | )           |
| Total stockholders’ deficit                  |       | (390,799,877                          | )           | (12,547,792                 | )          | (27,731,100      | )          | (431,078,769              | )           |
| Total  liabilities and stockholders’ deficit |       | $                                     | 390,913,947 |                        | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |

 

67

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**STATEMENT OF OPERATIONS**

**For the year ended December 31, 2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Net revenues                                                                                                                |       | $                                      | 86,376,259  | (1)                         | $          | 12,590,124       |       | $                         | (12,806,840 | ) | $ | 86,159,543 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |        |
| Direct operating expenses (exclusive of  depreciation and amortization expenses shown separately below)                     |       | 33,499,698                             |        | 5,474,585                   | (2)        | (4,091,242       | )          | 34,883,041                |        |
| Selling, general and administrative  expenses (exclusive of depreciation and amortization expenses shown  separately below) |       | 24,269,965                             |        | 9,857,435                   | (3)        | (8,715,598       | )          | 25,411,802                |        |
| Corporate expense (exclusive of  depreciation expense shown separately below)                                               |       | 10,550,430                             |        | —                      |       |             |       | 10,550,430                |        |
| Depreciation  and amortization                                                                                              |       | 6,965,520                              |        | 989,654                     |       |             |       | 7,955,174                 |        |
| Performance  award expense                                                                                                  |       | 1,279,188                              |        | —                      |       |             |       | 1,279,188                 |        |
| Non-cash  compensation expense                                                                                              |       | 411,862                                |        | —                      |       |             |       | 411,862                   |        |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Operating income (loss)                                                                                                     |       | 9,399,596                              |        | (3,731,550                  | )          |             |       | 5,668,046                 |        |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Other  expenses (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |        |
| Interest expense                                                                                                            |       | 39,498,142                             |        | 4,236,213                   |       |             |       | 43,734,355                |        |
| Interest income                                                                                                             |       | (1,710,937                             | )           | —                      |       |             |       | (1,710,937                | )           |
| Non-cash interest expense                                                                                                   |       | 3,728,917                              |        | 236,312                     |       |             |       | 3,965,229                 |        |
| Non-cash preferred stock dividend                                                                                           |       | 25,547,844                             |        | —                      |       |             |       | 25,547,844                |        |
| Other                                                                                                                       |       | (4,184,270                             | )           | 4,343,717                   |       |             |       | 159,447                   |        |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Loss from continuing operations before  income taxes                                                                        |       | (53,480,100                            | )           | (12,547,792                 | )          |             |       | (66,027,892               | )           |
| Benefit for  income taxes                                                                                                   |       | (696,704                               | )           | —                      |       |             |       | (696,704                  | )           |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Loss from  continuing operations                                                                                            |       | (52,783,396                            | )           | (12,547,792                 | )          |             |       | (65,331,188               | )           |
| Discontinued  operations:                                                                                                   |       |                                   |        |                        |       |             |       |                      |        |
| Loss from discontinued operations, net of  taxes                                                                            |       | (34,050,626                            | )           | —                      |       |             |       | (34,050,626               | )           |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Net loss                                                                                                                    |       | $                                      | (86,834,022 | )                           | $          | (12,547,792      | )          |                      |        | $ | (99,381,814 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Basic and diluted net loss per share from  continuing operations                                                            |       | $                                      | (2.70       | )                           | N/A        |             |       |                      | $           | (3.34 | ) |
| Basic and diluted net loss per share from  discontinued operations                                                          |       | $                                      | (1.74       | )                           | N/A        |             |       |                      | $           | (1.74 | ) |
| Basic and  diluted net loss per share                                                                                       |       | $                                      | (4.44       | )                           | N/A        |             |       |                      | $           | (5.08 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |        |
| Weighted  average common shares outstanding                                                                                 |       | 19,558,756                             |        | N/A                         |       |             |       | 19,558,756                |        |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |             |  |  |  |  |

 

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(1)                                  Amountincludes approximately $12,807,000 of fees charged by the Company to MalaraBroadcast Group for services performed under local services agreements.

(2)                                  Amountincludes approximately $4,091,000 of programming expenses charged by theCompany to Malara Broadcast Group.

(3)                                  Amountincludes approximately $2,363,000 and $6,353,000 for advertising representationcommissions and shared service fees, respectively, charged by the Company toMalara Broadcast Group.

 

68

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**STATEMENT OF CASH FLOWS**

**For the year ended December 31, 2005**

 
| ** **                                                       | ** ** | **Granite****Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                               | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash flows (used in) provided by operating  activities**       |       | $                                        | (26,718,375 | )                            | $          | 3,866,837        |       | $                         | (31,716    | ) | $ | (22,883,254 | ) |
|                                                             |       |                                     |        |                         |       |             |       |                      |       |
| **Cash flows from investing activities:**                        |       |                                     |        |                         |       |             |       |                      |       |
| Sales (purchase) of marketable securities  and other investments |       | 5,598,815                                |        | —                       |       | —           |       | 5,598,815                 |       |
| Proceeds from sale of assets                                     |       | 45,417,485                               |        | —                       |       | (45,417,485      | )          | —                    |       |
| Payment for acquisition of assets                                |       | (46,442,584                              | )           | (55,312,983                  | )          | 45,449,201       |       | (56,306,366               | )          |
| Proceeds (payments) from option agreements                       |       | (3,646,668                               | )           | 3,646,668                    |       | —           |       | —                    |       |
| Purchase of U.S. Government Securities                           |       | (24,997,500                              | )           | —                       |       | —           |       | (24,997,500               | )          |
| Capital expenditures                                             |       | (2,401,971                               | )           | (1,376,203                   | )          | —           |       | (3,778,174                | )          |
| Net cash used in investing activities                            |       | (26,472,423                              | )           | (53,042,518                  | )          | 31,716           |       | (79,483,225               | )          |
|                                                             |       |                                     |        |                         |       |             |       |                      |       |
| **Cash flows from financing activities:**                        |       |                                     |        |                         |       |             |       |                      |       |
| Proceeds from senior credit facility                             |       | —                                   |        | 53,500,000                   |       |             |       | 53,500,000                |       |
| Payment of senior credit facility                                |       | —                                   |        | (1,020,703                   | )          |             |       | (1,020,703                | )          |
| Payment of deferred financing fees                               |       | (864,401                                 | )           | (1,478,083                   | )          |             |       | (2,342,484                | )          |
| Net cash (used in) provided by financing  activities             |       | (864,401                                 | )           | 51,001,214                   |       |             |       | 50,136,813                |       |
|                                                             |       |                                     |        |                         |       |             |       |                      |       |
| Net (decrease) increase in cash and cash  equivalents            |       | (54,055,199                              | )           | 1,825,533                    |       |             |       | (52,229,666               | )          |
| Cash and cash equivalents, beginning of  period                  |       | 60,858,710                               |        | —                       |       |             |       | 60,858,710                |       |
| Cash and cash equivalents, end of period                         |       | $                                        | 6,803,511   |                         | $          | 1,825,533        |       |                      |       | $ | 8,629,044 |   |
|                                                             |       |                                     |        |                         |       |             |       |                      |       |
| Supplemental information:                                        |       |                                     |        |                         |       |             |       |                      |       |
| Cash paid for interest                                           |       | $                                        | 39,487,500  |                         | $          | 3,483,378        |       |                      |       | $ | 42,970,878 |   |
| Cash paid for income taxes                                       |       | 177,266                                  |        | —                       |       |             |       | 177,266                   |       |
| Non-cash capital expenditures                                    |       | 309,110                                  |        | —                       |       |             |       | 309,110                   |       |
|                                                                  |            |                                          |             |                              |            |                  |            |                           |            |  |  |  |  |

 

***Other Historical ConsolidationInformation***

 

At December 31,2004, the Company’s consolidated Balance Sheets included in “other non-currentassets” and “deferred financing fees” of $130,000 and $32,500, respectively, asa result of the consolidation of Malara Broadcast Group.

 

For the yearsended December 31, 2004 and 2003, consolidation of variable interest entity inaccordance with Interpretation 46 was not applicable for the Company’sStatement of Operations and Statement of Cash Flows.

 

**Note 13 –Redeemable Preferred Stock**

 

*Series A Preferred Stock*

 

The Companyauthorized 100,000 shares of its Series A Convertible Preferred Stock (“SeriesA Stock”), par value $.01 per share, which were issued at an aggregate price of$1,210,000.  All outstanding shares ofthe Series A Stock were converted into shares of the Company’s Common Stock(Nonvoting), par value $.01 per share (the “Common Stock (Nonvoting)”) inAugust 1995.  Prior to conversion,dividends accrued on the Series A Stock at an annual rate of $.40 per share,which accumulated, without interest, if unpaid. Accrued but unpaid dividends on the Series A Stock totaled $263,000 atDecember 31, 2005 and 2004 and are recorded in other non-currentliabilities on the Company’s balance sheet. Accrued dividends are due and payable on the date on which suchdividends may be paid under the Company’s debt instruments.

 

*12 3/4 % Cumulative Exchangeable Preferred Stock*

 

InJanuary 1997, the Company authorized the issuance of 400,000 shares of its12 3/4 % Cumulative Exchangeable Preferred Stock (the “12 3/4 % Cumulative ExchangeablePreferred Stock”), par value $.01 per share. In connection with the Company’s acquisition of WDWB-TV, 150,000 sharesof the 12 3/4 % Cumulative Exchangeable Preferred Stock were issued inJanuary 1997 at a price of $1,000 per share.

 

69

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Holders of the12 3/4 % Cumulative Exchangeable Preferred Stock are entitled to receivedividends at an annual rate of 12 3/4 % per share payable semi-annually onApril 1 and October 1 of each year. The Company paid dividends on and prior to April 1, 2002 inadditional shares of 12 3/4 % Cumulative Exchangeable Preferred Stock.  On and after October 1, 2002, theCompany is required to pay such dividends in cash.  However, the payment of cash dividends on the12 3/4 % Cumulative Exchangeable Preferred Stock was restricted by the terms ofthe indentures governing the Company’s senior subordinated notes and wasprohibited under the terms of the then outstanding senior credit agreement.Since three or more semi-annual dividend payments have not been paid, theholders of the Preferred Stock have the right to elect the lesser of twodirectors or that number of directors constituting 25% of the members of theBoard of Directors.  Effective October24, 2005, the holders of the majority of the Preferred Stock exercised theirright to elect two directors to the Board of Directors of the Company. TheCompany is restricted by the terms of the Indenture, which governs the Company’ssenior secured notes, from paying cash dividends on the 12 3/4 % CumulativeExchangeable Preferred Stock.  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 $95,804,000 as ofDecember 31, 2005 are recorded in other non-current liabilities on theCompany’s consolidated balance sheet.

 

During the three months ended September 30, 2003, the Company adoptedStatement 150 and the 12 3/4  %Cumulative Exchangeable Preferred Stock was reclassified on the Company’sconsolidated balance sheet as a long-term liability and the accrual ofdividends for the six months ended December 31, 2003 was recorded as acharge to expense on the consolidated statement of operations.  Prior to the adoption of Statement 150,dividends on the 12 3/4 % Cumulative Exchangeable Preferred Stock was treatedas a reduction of shareholders’ equity. The impact of adopting Statement 150resulted in a reduction of income before income taxes by $25,548,000 for theyears ended December 31, 2005 and 2004, respectively and $12,774,000 forthe year ended December 31, 2003.

 

The 12 3/4 %Cumulative Exchangeable Preferred Stock is entitled to a preference of $1,000per share initially, plus accumulated and unpaid dividends in the event ofliquidation or winding up of the Company ($294,996,000 liquidation value atDecember 31, 2005).  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.  Based on quotedmarket prices, the fair value of the 12 3/4 % Cumulative Exchangeable PreferredStock at December 31, 2005 is $38,071,250.

 

Subject to certainconditions, each share of the 12 3/4 % Cumulative Exchangeable Preferred Stockis exchangeable, in whole or in part, at the option of the Company, for theCompany’s 12 3/4 % Exchange Debentures (the “12 3/4 % Exchange Debentures”) onany scheduled dividend payment date at the rate of $1,000 principal amount of12 3/4 % Exchange Debentures for each share of 12 3/4 % Cumulative ExchangeablePreferred Stock outstanding at the time of the exchange.

 

**Note 14 –Stockholders’ Deficit**

 

*Stock option plans*

 

InApril 1990 the Company adopted a stock option plan (the “Stock Option Plan”)for officers and certain key employees. The Stock Option Plan terminated onApril 1, 2000.  At December 31,2005 and 2004, options granted under the Stock Option Plan were outstanding forthe purchase of 3,304,200 and 4,094,700 shares of Common Stock (Nonvoting),respectively.

 

OnApril 27, 2000, the Company adopted a new stock option plan (the “2000Stock Option Plan”) for officers and certain key employees.  The number of shares of Common Stock(Nonvoting) subject to options available for grant is 4,000,000.  Options may be granted under the 2000 StockOption Plan at an exercise price (for tax-qualified incentive stock options) ofnot less than 100% of the fair market value of the Common Stock (Nonvoting) onthe date the option is granted, or 110% of such fair market value for optionrecipients who hold 10% or more of the Company’s voting stock.  The exercise price for non-qualified stockoptions may be less than, equal to or greater than the fair market value of theCommon Stock (Nonvoting) on the date the option is granted. AtDecember 31, 2005 and 2004, options granted under the 2000 Stock OptionPlan were outstanding for the purchase of 1,486,500 and 1,496,500 shares ofCommon Stock (Nonvoting), respectively.

 

OnMarch 1, 1994, the Company adopted a Director Stock Option Plan (the “DirectorOption Plan”) providing for the grant, from time to time, of nonqualified stockoptions to non-employee directors of the Company to purchase shares of CommonStock (Nonvoting).  On April 23,2002, the Director Option Plan was amended to increase the shares of CommonStock (Nonvoting) subject to options available for grant to 1,500,000.  As of December 31, 2005 and 2004,options granted under the Director Option Plan were outstanding for thepurchase of 660,250 and 689,650 shares of Common Stock (Nonvoting),respectively.  The options granted underthe Director Option Plan serve as compensation for attendance at regularlyscheduled meetings and for service on certain committees of the Board ofDirectors.

 

70

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The Company’sstock option information is as follows:

 
| ** **                                                      | ** ** | **2005**    | ** ** | **2004**                                | ** ** | **2003**    | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|-------------|------------|
| ** **                                                      | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  price** | ** ** |
| ** **                                                      | ** ** | ** **  | ** ** | ** **                              | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding  at beginning of year                               |       | 6,280,850   |       | $                                       | 6.34       |        | 6,791,135  |   | $ | 6.21 |   | 6,721,435 |   | $ | 6.33 |   |
| Granted                                                         |       | 0           |       | 0                                       |       | 20,000      |       | 1.76 |   | 160,000 |   | 2.10 |   |
| Exercised                                                       |       | 0           |       | 0                                       |       | 0           |       | 0 |   | (17,500 | ) | 1.50 |   |
| Forfeited                                                       |       | (829,900    | )          | 5.77                                    |       | (530,285    | )          | 4.51 |   | (72,800 | ) | 9.29 |   |
| Outstanding  at end of year                                     |       | 5,450,950   |       | 6.42                                    |       | 6,280,850   |       | 6.34 |   | 6,791,135 |   | 6.21 |   |
| Exercisable  at end of year                                     |       | 4,248,450   |       | 5.58                                    |       | 4,864,900   |       | 5.77 |   | 4,637,535 |   | 5.96 |   |
| Weighted-average fair value of options  granted during the year |       | $           | 0          |                                    |       |        | $          | 1.38 |   |   |   | $ | 1.36 |   |   |   |
|                                                                 |            |             |            |                                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                           | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **at 12/31/05**         | ** ** | **Weighted-Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Outstanding at  12/31/05** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|                          |       |                    |       |                                              |       |   |   |   |   |   |   |
| $ 1.47 -  $2.70          |       | 1,431,500               |       | 5.06 years                                        |       | $ | 2.10 |   | 1,339,000 |   | $ | 2.10 |   |
| $ 3.00 -  $5.50          |       | 5,000                   |       | 4.33 years                                        |       | 5.50 |   | 5,000 |   | 5.50 |   |
| $ 6.13 -  $6.88          |       | 1,514,000               |       | 2.51 years                                        |       | 6.45 |   | 1,514,000 |   | 6.45 |   |
| $ 7.00 -  $9.75          |       | 1,303,450               |       | 2.21 years                                        |       | 7.76 |   | 1,303,450 |   | 7.76 |   |
| $ 10.00 -  $12.44        |       | 1,197,000               |       | 2.17 years                                        |       | 10.11 |   | 87,000 |   | 11.47 |   |
|                               |            |                         |            |                                                   |            |  |  |  |  |  |  |  |  |

 

*Management Stock Plan*

 

InApril 1993, the Company adopted a Management Stock Plan providing for thegrant from time to time of awards denominated in shares of Common Stock(Nonvoting) (the “Bonus Shares”) to salaried executive employees of theCompany.  On October 19, 2004 the Companyincreased the reserve of shares from 2,000,000 to 2,500,000.  Shares generally vest over a five-yearperiod. As of December 31, 2005, the Company has allocated a total of2,035,425 Bonus Shares pursuant to the Management Stock Plan, 1,958,925 ofwhich had vested through December 31, 2005.  For the years ended December 31, 2005and 2004, 161,500 and 255,500 shares, respectively, were granted pursuant tothe Management Stock Plan.  Theweighted-average grant-date fair value of those shares is $0.24 and $0.79,respectively.

 

*Non-Employee Directors’ Stock Plan*

 

InApril 1997, the Company adopted a Non-Employee Directors’ Stock Plan (the “DirectorStock Plan”), providing an annual grant of shares of the Company’s Common Stock(Nonvoting) to each eligible non-employee director.  On December 2, 2002, the Company increasedthe reserve of shares of Common Stock (Nonvoting) for grant under the DirectorStock Plan from 400,000 shares to 600,000 shares, and increased thecompensation to be received by each eligible non-employee director onJanuary 1st of each calendar 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.  Shares granted vest immediately.  On December 31, 2004, the Company’s Board ofDirectors suspended Director Stock Plan until such time the Board of Directorsdetermines otherwise. Effective beginning January 1, 2005, each eligiblenon-employee director will receive an annual fee of $45,000 for directorservices payable semiannually in equal increments in cash. For the years endedDecember 31, 2004 and 2003, 229,125 and 107,780 shares, respectively, weregranted pursuant to the Director Stock Plan. No shares were granted in 2005.

 

*Employee Stock Purchase Plan*

 

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

 

InMarch 2001, the Company issued 753,491 stock purchase warrants to its thensenior lenders.  The warrants were issuedat an exercise price of $1.75 and are exercisable at any time prior toMarch 6, 2006.

 

71

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The totalnumber of common shares outstanding at December 31, 2005 assuming theexercise of all outstanding stock options and warrants is as follows:

 
| Class A Common Stock      |   | 98,000     |   |
|---------------------------|--------|------------|--------|
| Common Stock  (Nonvoting) |   | 19,480,000 |   |
| Stock  options            |   | 5,451,000  |   |
| Warrants                  |   | 753,000    |   |
|                      |   | 25,782,000 |   |

 

**Note 15 –Income Taxes**

 

The Companyrecords income taxes using a liability approach for financial accounting andreporting that results in the recognition and measurement of deferred taxassets based on the likelihood of realization of tax benefits in future years.

 

The (benefit)provision for income taxes for the years ended December 31 consists of thefollowing:

 
| ** **                            | ** ** | **2005** | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|---------------------------------------|------------|----------|------------|-------------|------------|-------------|------------|
| Current  taxes:                       |       |     |       |        |       |        |       |
| Federal                               |       | $        | —     |        | $          | —      |       | $ | (16,327,000 | ) |
| State                                 |       | 171,000  |       | 216,000     |       | 216,000     |       |
|                                  |       | 171,000  |       | 216,000     |       | (16,111,000 | )          |
| Deferred  taxes:                      |       |     |       |        |       |        |       |
| Federal                               |       | (865,000 | )          | (11,927,000 | )          | (1,303,000  | )          |
| State                                 |       | (3,000   | )          | (3,000      | )          | 382,000     |       |
|                                  |       | (868,000 | )          | (11,930,000 | )          | (921,000    | )          |
| (Benefit)  provision for income taxes |       | $        | (697,000   | )           | $          | (11,714,000 | )          | $ | (17,032,000 | ) |

 

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

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax  liability:          |       |                  |       |   |   |
| Depreciation  and amortization    |       | $                     | 23,125,000 |   | $ | 29,318,000 |   |
| Total  deferred tax liability     |       | 23,125,000            |       | 29,318,000 |   |
|                              |       |                  |       |   |   |
| Deferred tax  assets:             |       |                  |       |   |   |
| Net  operating loss carry forward |       | 33,130,000            |       | 25,190,000 |   |
| Other                             |       | 1,175,000             |       | 2,108,000 |   |
| Valuation  allowance              |       | (32,741,000           | )          | (17,327,000 | ) |
| Total  deferred tax assets        |       | 1,564,000             |       | 9,971,000 |   |
| Net deferred  tax liability       |       | $                     | 21,561,000 |   | $ | 19,347,000 |   |

 

The differencebetween the U.S. federal statutory tax rate and the Company’s effective taxrate for the years ended December 31 is as follows:

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| U.S.  statutory rate                            |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State and  local taxes                          |       | (0.3     | )          | (0.2     | )          | (0.6     | )          |
| (Increase) /  decrease in valuation allowance   |       | (13.3    | )          | (12.4    | )          | —   |       |
| Accrued  dividend on redeemable preferred stock |       | (13.7    | )          | (9.4     | )          | (7.0     | )          |
| Other                                           |       | (6.7     | )          | (0.7     | )          | (0.7     | )          |
| Effective  tax rate                             |       | 1.0      | %          | 12.3     | %          | 26.7     | %          |

 

At December 31, 2005, the Company had a netoperating loss carry forward for federal tax purposes of approximately$94,657,000 of which approximately $10,837,000 is subject to certainutilization limitations provided by the Internal Revenue Code. If not utilized,$10,837,000 of the net loss carry forwards will expire in 2006 through 2018,and the remaining $83,820,000 will expire in 2023 through 2025.

 

Statement ofFinancial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes”requires that a valuation allowance be established when it is “more likely thannot” that all or a portion of deferred tax assets will not be realized.  As a result, the Company recorded a valuationallowance of approximately $32,741,000 and $17,327,000 for the years endedDecember 31, 2005 and 2004, respectively. The increase in the valuation allowance during 2005 of $15,414,000primarily relates to the increase in the Company’s net operating loss carryforward.

 

72

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In connectionwith the acquisition of WISE-TV, the Company recorded net deferred taxliabilities of $7,834,000 in the purchase accounting for the transaction andreduced its valuation allowance by $4,750,000 as an offset to goodwill.

 

**Note 16 –Defined Contribution Plan**

 

The Companyhas a trusteed profit sharing and savings plan (the “Plan”) coveringsubstantially all of its employees. Contributions by the Company to the Plan are based on a percentage ofthe amount of employee contributions to the Plan and are made at the discretionof the Board of Directors.  Companycontributions, which are funded monthly, amounted to $518,000, $591,000 and$452,000 for the years ended December 31, 2005, 2004 and 2003respectively.

 

**Note 17 –Related Party**

 

Between 1995and 1998, the Company loaned W. Don Cornwell, the Company’s Chief ExecutiveOfficer, $2,911,000 in four separate transactions.  On January 1, 2001, the Company loanedMr. Cornwell an additional $375,000 to repay a loan, for which the proceeds had beenused by Mr. Cornwell to acquire shares of the Company’s common stock in theopen market.  OnFebruary 15, 2001, the Company agreed to consolidate the five loansinto one promissory note in the amount of $3,286,000.  The promissory note matured on January 25,2006.  Interest at an annual rate of 6.75% was imputed on the promissory note as additional compensation to the officer.

 

In 1995, theCompany loaned Stuart Beck, the Company’s President, $221,200. OnFebruary 15, 2001, the Company agreed to cancel this note and issue anew promissory note in the same amount. As more fully described below, Mr. Beck’spromissory note was repaid in full in 2004.

 

InFebruary 2003, the Compensation Committee recommended, and the Board ofDirectors approved, an incentive award of $3,286,065 to each of Mr. Cornwelland Mr. Beck to be paid, subject to vesting terms, only upon the occurrence ofthe refinancing with a maturity of at least two years, of the senior debt dueApril 15, 2004. On December 22, 2003, the Company issued $405 millionaggregate principal amount of 9 3/4 % Senior Secured Notes, the proceeds ofwhich were used by the Company in part to repay all outstanding borrowings(plus accrued interest) under the Company’s then outstanding senior creditagreement, which satisfied the performance objective of the awards.  Mr. Cornwell’s award, which vests inone-third tranches over three years from the refinancing date, was to be usedto repay in full his outstanding loan from the Company of $3,286,065 dueJanuary 25, 2006.  Mr. Cornwellirrevocably elected to defer payment of the first two tranches under hisperformance award until January 25, 2006 when his loan was due.  On March 1, 2005, the Board of Directorsapproved the acceleration of payment of the third tranche of Mr. Cornwell’saward to January 25, 2006.  The Company’s Management Stock Plan, pursuantto which the performance award was granted, permits the compensation Committee,in its sole discretion, to require as a condition to payment of an award, thatthe award recipient pay to the Company the amount of any taxes that the Companyis required to withhold.  TheCompensation Committee has so elected to require Mr. Cornwell to pay to theCompany the applicable withholding taxes with respect to the performanceaward.  Mr. Cornwell has informed theCompany that he is presently unable to do so, since the full amount of theperformance award must be used to satisfy his outstanding loan from theCompany.  In light of the forgoing, theCompany has neither paid the performance award to Mr. Cornwell nor offset theamount of the award in repayment of the loan, which loan remains due andpayable.

 

On September21, 2004, Stuart Beck resigned from the Company to accept the appointment asAmbassador/Permanent Representative of the Republic of Palau to the UnitedNations.  Mr. Beck will remain on theCompany’s Board of Directors. Pursuant to his separation agreement, the Companygranted Mr. Beck severance totaling $1,008,000, payable in equal installmentsover eighteen months from the date of separation.  In addition, Mr. Beckwas awarded a pro-rated bonus of approximately $255,600 based upon achievementsof certain financial targets in 2004 which was paid during the first quarter of2005.

 

Under theterms of the separation agreement, the Company and Stuart J. Beck amended thePerformance Award and deferral of such payments pursuant to the SeparationAgreement.  Under the amended terms ofthe Performance Award, Mr. Beck’s Performance Award fully vested as of theseparation date and payment of $221,200 was made on September 30, 2004 to repayhis outstanding promissory note to the Company. The remaining vested award of $3,065,000 is payable in cash on December22, 2006. In addition, the Company modified the terms of Mr. Beck’s outstandingstock option awards to allow his options to continue to vest and have the rightto exercise his options until the earlier of (A) the later of January 2, 2007and 30 days after the last day of Mr. Beck’s continuous service on the Company’sBoard of Directors and (B) the fixed date on which each stock option award wasinitially set to expire.

 

During thefourth quarter of 2004 and pursuant to the separation agreement, Mr. Beckexchanged 80,250 shares of the Company’s Class A Voting Common Stock, par value$0.01 per share, for 80,250 shares of the Company’s Class B Non-Voting CommonStock, par value $0.01 per share.

 

During theyear ended December 31, 2004, the Company recorded one-time expenses for theseparation benefits and acceleration of the remaining portion of thePerformance Award of approximately $1,290,000 and $1,562,000, respectively.

 

From September2004 through July 2005, the Company allowed Mr. Beck to use office space at nocharge.

 

73

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**Note 18 –Quarterly Results of Operations (unaudited)**

 

The following is a summary of the quarterly results ofoperations for the years ended December 31, 2005 and 2004:

 

 
| ** **         | ** ** | **March 31,  2005** | ** ** | **June 30,  2005** | ** ** | **September 30,  2005** | ** ** | **December 31,  2005** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net revenue        |       | $                        | 17,821,000 |                    | $          | 23,057,000                   |       | $                           | 20,823,000 |   | $ | 24,458,000 |   |
| Net loss           |       | (19,494,000              | )          | (16,207,000             | )          | (19,654,000                  | )          | (44,027,000)                | (a)        |
|               |       |                     |       |                    |       |                         |       |                        |       |
| Per common  share: |       |                     |       |                    |       |                         |       |                        |       |
| Net loss           |       |                     |       |                    |       |                         |       |                        |       |
| Basic              |       | $                        | (1.00      | )                       | $          | (0.83                        | )          | $                           | (1.00      | ) | $ | (2.25 | ) |
| Diluted            |       | (1.00                    | )          | (0.83                   | )          | (1.00                        | )          | (2.25                       | )          |

 
| ** **         | ** ** | **March 31,  2004** | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **         | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Net revenue        |       | $                        | 17,673,000 |                    | $          | 20,220,000                   |       | $                           | 19,437,000 |   | $ | 23,170,000 |   |
| Net loss           |       | (17,413,000              | )          | (15,703,000             | )          | (20,002,000                  | )          | (30,174,000                 | )(b)       |
|               |       |                     |       |                    |       |                         |       |                        |       |
| Per common  share: |       |                     |       |                    |       |                         |       |                        |       |
| Net loss           |       |                     |       |                    |       |                         |       |                        |       |
| Basic              |       | $                        | (0.90      | )                       | $          | (0.81                        | )          | $                           | (1.03      | ) | $ | (1.56 | ) |
| Diluted            |       | (0.90                    | )          | (0.81                   | )          | (1.03                        | )          | (1.56                       | )          |

 

----

 

(a)          Inaccordance with Statement 142, the Company completed its required annualimpairment test as of December 31, 2005, and recorded an impairment charge onthe carrying value of goodwill of approximately $7,669,000. In addition, theCompany wrote down the remaining carrying value of its network affiliationsagreements at its KBWB-TV and WDWB-TV television stations by approximately$23,381,000 due to the announcement by the WB Network that effective September2006, the WB Network will no longer provide programming to current WBaffiliates.

 

(b)         Inaccordance with Statement 142, the Company completed its required annualimpairment test as of December 31, 2004, and recorded an impairment charge onthe carrying value of goodwill of approximately $15,491,000.

 

74

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**SCHEDULE IIGRANITE BROADCASTING CORPORATION****VALUATION AND QUALIFYING ACCOUNTS**
| **Allowance for  Doubtful Accounts** | ** ** | **Balance at  beginning of  year** | ** ** | **Amount charged  to costs  and expenses** | ** ** | **Amount  written off(1)** | ** ** | **Balance  at end  of year** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
|                                           |       |                                         |       |                                                      |       |                            |       |                                   |       |
| For the year  ended December 31, 2005     |       | $                                            | 967,000    | (2)                                                       | $          | 134,000                         |       | $                                      | (469,000   | ) | $ | 632,000 |   |
|                                           |       |                                         |       |                                                      |       |                            |       |                                   |       |
| For the year  ended December 31, 2004     |       | 1,319,000                                    |       | (299,000                                                  | )     | (124,000                        | )          | 896,000                                |       |
|                                           |       |                                         |       |                                                      |       |                            |       |                                   |       |
| For the year  ended December 31, 2003     |       | $                                            | 748,000    |                                                      | $          | 541,000                         |       | $                                      | 30,000     |   | $ | 1,319,000 |   |

 

----

(1)                                  Netof recoveries.

 

(2)                                  Balanceincludes the inclusion of Malara Broadcast Group’s KDLH-TV serving Duluth,Minnesota and the Company’s WISE-TV, the NBC affiliate serving Fort Wayne,Indiana, which were acquired in March 2005 and not included in our 2004balances.

 

75

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

 

None.

 

**Item9A.  Controls and Procedures**

 

As of December 31, 2005, an evaluation wascarried out under the supervision and with the participation of the Company’s management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules  13a-15(e) and 15d-15(e ) under the Securities Exchange Act of1934). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were effective as of December 31, 2005. No change in the Company’s internal controlover financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934) occurred during the Company’s most recentfiscal quarter that materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**Item9B.  Other Information**

 

Effective March 28, 2006, Mr. Selwyn was notre-elected to the Board of Directors by the sole holder of our Voting CommonStock.

 

76

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**PART III**

 

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

 

The following table sets forth information concerningour executive officers and directors as of March 15, 2006:

 
| **Name**                          | ** ** | **Age**    | ** ** | **Position**                                                 |
|-----------------------------------|------------|------------|------------|--------------------------------------------------------------|
| ** **                        | ** ** | ** ** | ** ** | ** **                                                   |
| W. Don Cornwell (1)               |       | 58         |       | Chairman of the Board, Chief Executive Officer and  Director |
| Robert E. Selwyn, Jr.             |       | 62         |       | Senior Operating Advisor                                     |
| Lawrence I. Wills                 |       | 45         |       | Senior Vice President-Chief Financial Officer                |
| John Deushane                     |       | 49         |       | Chief Operating Officer                                      |
| James L. Greenwald(2)             |       | 78         |       | Director                                                     |
| Stuart J. Beck(1)                 |       | 59         |       | Director                                                     |
| Edward Dugger, III                |       | 56         |       | Director                                                     |
| Thomas R. Settle(1)(3)(4)         |       | 65         |       | Director                                                     |
| Charles J. Hamilton, Jr.(2)(3)(4) |       | 58         |       | Director                                                     |
| M. Fred Brown(2)                  |       | 59         |       | Director                                                     |
| Jon E. Barfield(3)                |       | 54         |       | Director                                                     |
| Veronica Pollard(3)               |       | 60         |       | Director                                                     |
| Eugene I. Davis                   |       | 51         |       | Director                                                     |
| Kirk W. Aubry                     |       | 44         |       | Director                                                     |

 

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

(2)                                  Memberof the Audit Committee.

(3)                                  Memberof the Compensation Committee.

(4)                                  Memberof the Management Stock Plan Committee.

 

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

 

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

 

Mr. Selwyn has been our Senior Operating Advisor sinceJanuary 1, 2003 and was member of our Board of Directors from May 11, 1998through March 27, 2006.  In addition, Mr.Selwyn served as our Chief Operating Officer from 1996 to 2002.  Prior to joining Granite, Mr. Selwyn wasemployed by New World Communications, Inc. from May 1993 to June 1996serving as Chairman and Chief Executive Officer of the New World TelevisionStation Group.  Mr. Selwyn received aBachelor of Science degree from the University of Tennessee in 1968.  From 1990 until 1993, Mr. Selwyn was thePresident of Broadcasting for SCI Television, Inc.

 

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

 

Mr. Deushane has been our Chief Operating Officersince January 1, 2003.  Mr. Deushaneserved as our Regional Vice President — Midwest from 1998 to 2002.  Prior to his position as Regional VicePresident – Midwest, Mr. Deushane served as President and General Manager ofKSEE-TV during 1997 and President and General Manager of WEEK-TV from 1991 to1996. Mr. Deushane is a director of the New York State BroadcastersAssociation.  Mr. Deushane graduatedmagna cum laude from Bradley University with a Bachelor of Science degree inbroadcast management and journalism.

 

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Mr. Greenwald has been a member of our Board ofDirectors since December 1988. Mr. Greenwald was the Chairman and ChiefExecutive Officer of Katz Communications, Inc. from May 1975 toAugust 1994 and has been Chairman Emeritus since August 1994.  Mr. Greenwald has served as President of theStation Representatives Association and the International Radio and TelevisionSociety and Vice President of the Broadcast Pioneers and was a director ofPaxson Communications Corp.  Mr. Greenwald currently serves on theexecutive committee of the Library American Broadcasting.  Mr. Greenwald received a Bachelor ofArts degree from Columbia University in 1949 and an Honorary Doctorate Degreein Commercial Science from St. Johns University in 1980.

 

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

 

Mr. Hamilton has been a member of our Board ofDirectors since July 1992.  Mr.Hamilton was a partner in the New York law firm of Battle Fowler LLP from 1983to 2000.  On June 8, 2000 BattleFowler LLP merged with the law firm Paul, Hastings, Janofsky & Walker LLP,where he is a partner.  Mr. Hamiltonreceived a Bachelor of Arts degree from Harvard College in 1969, a Juris Doctordegree from Harvard Law School in 1975 and a Masters degree in City Planning(MCP) from the Massachusetts Institute of Technology in 1975.  Mr. Hamilton is a member of the Board ofDirectors of the Environmental Defense Fund and Phoenix House Foundation, Inc.

 

Mr. Settle has been a member of our Board of Directorssince July 1992.  Mr. Settle foundedand is currently a director of The Winchester Group, Inc., an investmentadvisory firm, since 1990.  Mr. Settlewas the chief investment officer at Bernhard Management Corporation from 1985to 1989.  He was a Managing Director ofFurman Selz Capital Management from 1979 until 1985.  Mr. Settle received a Bachelor of Arts Degreefrom Muskingum College in 1963 and a Masters degree in Business Administrationfrom Wharton Graduate School in 1965.

 

Mr. Brown has been a member of our Board of Directorssince April 1999.  Mr. Brown foundedand has been President of Aerodyne Capital, Inc., a California companyspecializing in the trading and leasing of commercial jet aircraft andhigh-bypass jet engines since 1993. Mr. Brown is also a licensed real estate broker providing mortgage andreal estate brokerage services through Eagle Financial Services Company.Prior to founding Aerodyne, Mr. Brown was Senior Vice-President and ManagingDirector of Marketing for Blenhiem Aviation from 1989-1993.  In addition, Mr. Brown served asVice-President at Goldman Sachs & Co. While at Goldman Sachs & Co., Mr. Brown was seconded to FreedomNational Bank NA as its Senior Vice-President and Chief Financial Officer.  Mr. Brown is a Director of San Francisco JazzOrganization.  Mr. Brown received aBachelor of Arts degree from Middlebury College in 1969.  He received a Juris Doctor degree and aMasters degree in Business Administration from the University of California atBerkeley in 1973 and is a member of the California Bar.

 

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

 

Ms. Pollard has been a memberof our Board of Directors since January 2000. Ms. Pollard is Vice President of External Affairs for Save the Children,a non-profit humanitarian organization. Previously, she was Group Vice President,Corporate Communications, Toyota Motor North America, Inc. until June2004.  She had been VicePresident-External Affairs for Toyota Motor North America (formerly ToyotaMotor Corporate Services of North America, Inc.) since joining Toyota in 1998.  Prior to joining Toyota Motor. Ms. Pollardwas at ABC, Inc. for 17 years, including serving as Vice President-CorporatePublic Relations from 1994 to 1998.  Ms.Pollard is a trustee of the Museum for African Art in New York, a director ofThe Doe Fund and a member of the Individual Investor Advisory Committee of theNew York Stock Exchange.  Ms. Pollardattended the University of Wisconsin for two years, received a Bachelor’sdegree from Boston University in 1966, and a Master’s degree from ColumbiaUniversity, Teachers College, in 1968.

 

Mr. Davis has been a memberof our Board of Directors since October 2005. Mr. Davis is Chairman and Chief Executive Officer of PIRINATE ConsultingGroup, LLC, a privately held consulting firm. Since forming PIRINATE in 1997, Mr. Davis has advised, managed, sold,liquidated and served as Chief Executive Officer, Chief Restructuring Officer,Director, Committee Chairman and Chairman of the Board of a number of business. Previously, Mr. Davis served asPresident, Vice Chairman and Director of Emerson Radio Corporation and CEO andVice Chairman of Sport Supply Group, Inc. He began his career as an attorney and international negotiator withExxon Corporation and Standard Oil Company (Indiana) and as a prater in twoTexas-based law firms. Mr. Davis holds a bachelor’s degree from ColumbiaCollege, a masters in international affairs degree (MIA) in international lawand organization from the School of International Affairs of ColumbiaUniversity, and a Juris Doctorate from Columbia University School of Law.

 

Mr. Aubry has been a memberof our Board of Directors since October 2005. Since 2000, Mr. Aubry served asExecutive Vice President and Chief Commercial Operations Officer of Textron Automotive.From 1988 to 2000, Mr. Aubry was President of Trio, a marketing, communicationsand strategic service provider. Prior to that, Mr. Aubry introducedbreakthrough electronic technology to solve distribution, sales and marketingchallenges at Buick Motor Division.  Heplated a key role in launching Prodigy, the nation’s first national onlineservice. Mr. Aubry holds a BA degree from the University of Western Ontario.

 

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Each member of our Board ofDirectors elected by the holders of our Voting Common Stock holds office untilthe next annual meeting of our shareholders, unless such director resigns or isremoved before then, or until such director’s successor is duly elected andqualified.  Each member of our Board ofDirectors elected by the holders of a majority of the shares of our 12-3/4%Cumulative Exchangeable Preferred Stock (the “***Preferred Stock***”) holds office until thenext annual meeting, unless such director resigns or is removed by the holdersof a majority of the shares of our Preferred Stock before then, and until suchdirector’s successor is duly elected and qualified.  The right of the holders of a majority of theshares of our the Preferred Stock to elect such members of the Board ofDirectors continues 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. We are restricted from paying cash dividends underthe Indenture, which governs our Notes, and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.   Allofficers are elected annually and serve at the discretion of the Board ofDirectors.

 

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

 

**Board Committees and Membership**

 

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

 

*Audit Committee*.  The Audit Committee assists the Board ofDirectors in its oversight of the quality and integrity of our accounting,auditing, and reporting practices. The Audit Committee’s role includesdiscussing with management our processes to manage business and financial risk,and for compliance with significant applicable legal, ethical, and regulatoryrequirements.  The Audit Committee isresponsible for the appointment, replacement, compensation, and oversight ofthe independent auditor engaged to prepare and issue audit reports on ourfinancial statements. The Audit Committee relies on the expertise and knowledgeof management, the internal auditors, and the independent auditor in carryingout its oversight responsibilities. The specific responsibilities and functionsof the Audit Committee are delineated in the Audit Committee Charter, which isavailable on our corporate web site (www.granitetv.com). The Audit CommitteeCharter is reviewed annually and updated as necessary to reflect changes in regulatoryrequirements, authoritative guidance, and evolving practices.  The Board of Directors has determined thateach Audit Committee member is independent and has sufficient knowledge infinancial and auditing matters to serve on the Audit Committee. The AuditCommittee held eight meetings during 2005. The members of the Audit Committeeare Messrs. Hamilton (Chairman), Greenwald and Brown.  The Board has determined that Mr. Brown is anaudit committee financial expert within the meaning of applicable regulationsof the U.S. Securities and Exchange Commission.

 

*Compensation Committee*.  The Compensation Committee consists of fourmembers of our Board of Directors that are independent directors.  The primary responsibilities of theCompensation Committee are to (a) review and recommend to the Board thecompensation of the Chief Executive Officer and other officers of our company,(b) review executive bonus plan allocations, (c) oversee and advise the Boardon the adoption of policies that govern our compensation programs, (d) overseethe administration of our equity-based compensation and other benefit plans,and (e) approve grants of stock options and stock awards to our officers andemployees under our equity plans, subject to certain limitations.  The Compensation Committee’s role includesproducing the report on executive compensation required by SEC rules andregulations. The specific responsibilities and functions of the CompensationCommittee are delineated in the Compensation Committee Charter, which isavailable on our corporate web site (www.granitetv.com). The CompensationCommittee Charter is reviewed annually and updated as necessary to reflectchanges in regulatory requirements, authoritative guidance, and evolvingpractices.  The Compensation Committeeheld two meetings during 2005. The members of the Compensation Committee areMs. Pollard and Messrs. Settle (Chairman), Hamilton and Barfield.

 

*Management Stock Plan Committee*.  The responsibility of the Management StockPlan Committee is to administer our Management Stock Plan.  The Management Stock Plan Committee isappointed by our Board of Directors and consists of two members of the Board ofDirectors that are non-employee directors. The Management Stock Plan Committee, from time to time, selects eligibleemployees to receive a discretionary bonus of Bonus Shares or a PerformanceAward based upon such employee’s position, responsibilities, contributions andvalue to us and such other factors as the Management Stock Plan Committee deemsappropriate.  The Management Stock PlanCommittee has discretion to determine the date on which the Bonus Shares orPerformance Awards allocated to an employee will be issued to suchemployee.  The Management Stock PlanCommittee may, in its sole discretion, determine what part of an award of BonusShares or Performance Awards is paid in cash and what part of an award is paidin the form of Common Stock (Nonvoting). The Management Stock Plan Committee held one meeting during 2005. Themembers of the Management Stock Plan Committee are Messrs. Settle andHamilton.

 

*Stock Option Committee*.  The Stock Option Committee consists of threemembers of the Board of Directors appointed by the Board.  The Stock Option Committee is only authorizedto grant Options to persons who are not then “covered employees” within themeaning of Section 162(m) of the Internal Revenue Code or who are not then ourofficers or holders of 10% or more of the Voting Common Stock.  The Stock Option Committee had no meetingsduring 2005 (the Company did not award any stock options during 2005). Themembers of the Stock Option Committee are Messrs. Cornwell, Beck andSettle.

* *

*Section16(a) Beneficial Ownership Reporting Compliance*

 

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

 

For fiscal year 2005 Messrs. Wills and Deushane didnot report, on a timely basis, four transactions on one Form 4, Mr. Cornwelldid not report, on a timely basis, three transactions on two Form 4s, and Mr.Aubry did not report on a timely basis his holdings on Form 3.  All of thereports referred to above have been filed.

 

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* *

*Code of Business Conductand Ethics*

 

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

 

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

 

The following table sets forth the compensation paidto our Chief Executive Officer and each of its most highly compensatedexecutive officers whose total cash compensation exceeded $100,000 for each ofthe three years in the period ended December 31, 2005:

 

**Summary Compensation Table**

 

 
| ** **                                     | ** ** | ** **                   | ** ** | ** **                | ** ** | ** **             | ** ** | **Long-Term Compensation  Awards**   | ** ** | ** **                       | ** ** |
|------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Annual Compensation** | ** ** | **Bonus**                 | ** ** | **Restricted  Stock**  | ** ** | **Securities  Underlying  Options/** | ** ** | **All Other  Compensation** | ** ** |
| **Name and Principal Position** | ** ** | **Year**                     | ** ** | **Salary ($ )** | ** ** | **($ ) (1)** | ** ** | **Awards**                           | ** ** | **SARs (#)**                | ** ** | **($ )(2)** | ** ** |
|                                           |       |                         |       |                      |       |                   |       |                                 |       |                             |       |   |   |
| W. Don Cornwell                                |       | 2005                         |       | $                         | 605,000    |                   | $          | 450,425                              |       | $                                | —     |   | — |   | $ | 6,000 |   |
| Chief Executive  Officer                       |       | 2004                         |       | 672,000                   |       | 480,000                |       | 7,500                                | (3)        | —                           |       | 5,125 |   |
|                                           |       | 2003                         |       | 672,000                   |       | 679,000                |       | 96,000                               | (4)        |                             |       | 6,000 |   |
|                                           |       |                         |       |                      |       |                   |       |                                 |       |                             |       |   |   |
| John Deushane                                  |       | 2005                         |       | $                         | 290,000    |                   | $          | 236,500                              |       | $                                | 15,750     | (5) | — |   | $ | 14,850 |   |
| Chief Operating  Officer                       |       | 2004                         |       | 300,000                   |       | 170,000                |       | 21,850                               | (6)        | —                           |       | 14,725 |   |
|                                           |       | 2003                         |       | —                    |       | —                 |       | —                               |       | —                           |       | — |   |
|                                           |       |                         |       |                      |       |                   |       |                                 |       |                             |       |   |   |
| Robert E.  Selwyn, Jr.                         |       | 2005                         |       | $                         | 200,000    |                   | $          | 70,000                               |       | $                                | —     |   | — |   | $ | 14,850 |   |
| Senior Operating  Advisor                      |       | 2004                         |       | 325,000                   |       | 60,000                 |       | —                               |       | —                           |       | 14,725 |   |
|                                           |       | 2003                         |       | 400,000                   |       | 75,000                 |       | —                               |       | —                           |       | 15,600 |   |
|                                           |       |                         |       |                      |       |                   |       |                                 |       |                             |       |   |   |
| Lawrence I.  Wills                             |       | 2005                         |       | $                         | 240,000    |                   | $          | 206,500                              |       | $                                | 15,750     | (5) | — |   | $ | 14,850 |   |
| Senior Vice  President -                       |       | 2004                         |       | 250,000                   |       | 175,000                |       | 53,250                               | (7)        | —                           |       | 23,125 |   |
| Chief Financial  Officer                       |       | 2003                         |       | 242,500                   |       | 200,000                |       | —                               |       | —                           |       | 24,000 |   |

 

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(1)                                  Representsearned cash bonuses for service rendered in 2005, 2004 and 2003 that were paidin the subsequent year.  (See “EmployeeAgreements and Compensation Arrangements”.)

 

(2)                                  Theamounts shown in this column consists of a matching contribution by us underour Employees’ Profit Sharing and Savings (401(k)) Plan and an annual perquisiteallowance for Messrs. Deushane, and Selwyn of $9,600 each applicable year and$18,000 for Mr. Wills in 2005, 2004 and 2003, respectively.

 

(3)                                  Representsthe market value on the date of award of 30,000 Bonus Shares awarded under ourManagement Stock Plan on October 19, 2004 for services rendered during theyear-ended December 31, 2004.

 

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

 

(5)                                  Representsthe market value on the date of award of 75,000 Bonus Shares awarded under ourManagement Stock Plan on November 21, 2005 for services rendered during theyear-ended December 31, 2005 for both Messrs. Deushane and Wills.

 

 (6)                               Representsthe market value on the date of award of 5,000, 40,000 and 10,000 Bonus Sharesawarded under our Management Stock Plan on February 25, 2004, October 19, 2004and December 1, 2004, respectively, for services rendered during the year-endedDecember 31, 2004.

 

(7)                               Representsthe market value on the date of award of 25,000, 40,000 and 10,000 Bonus Sharesawarded under our Management Stock Plan on February 25, 2004, October 19, 2004and December 1, 2004, respectively, for services rendered during the year-endedDecember 31, 2004.

 

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** **

**Employment Agreements andCompensation Arrangements**

** **

Mr. Cornwell has an employment agreement with us.  The agreement provides for a two-yearemployment term, which is automatically renewed for subsequent two-year termsunless advance notice of nonrenewal is given (the current term under suchagreement, which was renewed in 2005, expires September 19, 2007).  The agreement stipulates that Mr. Cornwellwill devote his full time and efforts to our company and will not engage in anybusiness activities outside the scope of his employment with us unless approvedby a majority of our independent directors. Under the agreement, Mr. Cornwell is permitted to exchange any or all ofhis shares of Voting Common Stock for shares of Common Stock (Nonvoting),provided that, after such exchange is effected, there will continue to beshares of our voting stock outstanding.

 

The Compensation Committee of our Board of Directorsannually develops a compensation model to determine salary and incentivecompensation for Mr. Cornwell. The base salary was $605,000 for 2005 and$672,000 for 2004 and 2003. Incentive compensation can include cash bonuses,issuance of Common Stock (Nonvoting) or a combination thereof and is determinedif certain financial targets and strategic objectives are achieved. Based onthe compensation model, Mr. Cornwell was eligible to receive incentivecompensation for 2005 totaling $870,425. The strategic portion of this amount,totaling $420,000 related to the successful sale of our San Francisco andDetroit television stations and the successful redeployment of the saleproceeds to acquire the CBS affiliated station in Binghamton, New York. Sincethe buyers of the San Francisco and Detroit stations did not proceed forwardwith purchase of the stations after The WB Network announced that they will nolonger provide programming to current WB affiliated stations effectiveSeptember 2006 and the acquisition of the Binghamton, New York station was notcompleted, the strategic portion compensation was not earned. The financialtargets were largely achieved resulting in Mr. Cornwell earning incentivecompensation for 2005 totaling $450,425 all of which was paid in the firstquarter of 2006. Mr. Cornwell’s base salary for 2006 is $629,000.

 

Mr. Selwyn has an employment arrangement with uswhereby his salary is determined by Mr. Cornwell. In addition to his basesalary, Mr. Selwyn is eligible to receive a cash bonus if certain quantitativeand qualitative goals were achieved. The annual base salary determined by Mr.Cornwell was $200,000 for 2005, $325,000 for 2004 and $400,000 for 2003. Mr.Selwyn’s base salary for 2006 is $100,000. (See “—Employee Stock PurchasePlan,” “—Stock Option Plan” and “—Management Stock Plan.”)

 

Mr. Wills has an employment arrangement with us,whereby his salary is determined by Mr. Cornwell and is based on a subjectiveevaluation of his performance and accomplishments. Mr. Wills was eligible toreceive an annual cash bonus if certain financial targets and strategicobjectives as determined by Mr. Cornwell are achieved. Mr. Wills was eligibleto receive a cash bonus for 2005 totaling $225,000, of which, $18,750 wasrelated to the completion of the sale of the San Francisco and Detroittelevision stations and the acquisition of the CBS affiliate in Binghamton, NewYork. Since neither of those transactions were completed, Mr. Wills earned acash bonus of $206,250, all of which was paid in the first quarter of 2006. Mr.Wills’ 2005 base salary was fixed at $240,000 and his base salary for 2006 is$265,000.

 

Mr. Deushane has anemployment arrangement with us, whereby his salary is determined by Mr.Cornwell and is based on a subjective evaluation of his performance andaccomplishments. Mr. Deushane was eligible to receive an annual cash bonus ifcertain financial targets and strategic objectives as determined by Mr.Cornwell are achieved. Mr. Deushane was eligible to receive a cash bonus for2005 totaling $259,000, of which, $22,500 was related to the completion of thesale of the San Francisco and Detroit television stations and the acquisitionof the CBS affiliate in Binghamton, New York. Since neither of thosetransactions were completed, Mr. Deushane earned a cash bonus of $236,500, allof which was paid in the first quarter of 2006. Mr. Deushane’s 2005 base salarywas fixed at $290,000 and his base salary for 2006 is $305,000.

 

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*401(k) Profit Sharing and SavingsPlan*

 

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

 

We made an aggregate contribution to the 401(k) Planof $518,000 during 2005.

 

*Employee Stock Purchase Plan*

 

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

 

*Stock Option Plan*

 

In April 1990, we adopted a Stock Option Plan, or theStock Option Plan, providing for the grant, from time to time, of Options tokey employees and officers of our company or its affiliates to purchase sharesof Common Stock (Nonvoting).  The StockOption Plan terminated on April 1, 2000. As of March 15, 2006, options grantedunder the Stock Option Plan were outstanding for the purchase of 3,304,200shares of Common Stock (Nonvoting).

 

*2000 Stock Option Plan*

 

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

 

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

 

•                  Optionswhich do not qualify as ISOs, or NQSOs.

 

On April 23, 2002, the Director Participants weregranted an option to purchase 50,000 shares Common Stock (Nonvoting) asadditional compensation for attendance at regular quarterly meetings during theperiod beginning on July 1, 2002 and ending on October 31, 2004 in lieu ofadditional cash compensation.  Of eachsuch grant, Options to purchase 5,000 shares of Common Stock (Nonvoting) becomeexercisable on the date of attendance in person or by telephonic means, of aDirector Participant at each regular quarterly meeting of the Board ofDirectors.

 

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

 

The 2000 Stock OptionPlan is administered by both the Stock Option Committee which consists of notless than three members of the Board of Directors appointed by the Board, andour Compensation Committee, which consists of not less than two members all ofwhom are non-employee directors.  Werefer to the Stock Option Committee and the Compensation Committee collectivelyas the Committee.  The Stock OptionCommittee is only authorized to grant Options to persons who are not then “coveredemployees” within the meaning of Section 162(m) of the Internal Revenue Code orwho are not then our officers or holders of 10% or more of the Voting CommonStock.  The Compensation Committee isauthorized to make determinations with respect to all other persons.  Subject to the provisions of the 2000 StockOption Plan, the Committee is empowered to, among other things, grant Optionsunder the 2000 Stock Option Plan; determine which participating persons may begranted Options under the 2000 Stock Option Plan, the type of Option granted(ISO or NQSO), the number of shares subject to each Option, the time or timesat which Options may be granted and exercised and the exercise price thereof;construe and interpret the 2000 Stock Option Plan; determine the terms of any optionagreement pursuant to which Options are granted, and amend any option agreementwith the consent of the recipient of Options, or Optionee.

 

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The Board of Directors may amend or terminate the 2000Stock Option Plan at any time, except that approval of the holders of amajority of our outstanding Voting Common Stock is required for amendmentsthat:

 

•                  decreasethe minimum option price for ISOs;

 

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

 

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

 

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

 

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

 

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

 

The exercise price per share for all ISOs may not beless than 100% of the fair market value of a share of Common Stock (Nonvoting)on the date on which the Option is granted (or 110% of the fair market value onthe date of grant of an ISO if the Optionee owns more than 10% of the totalcombined voting power of all classes of voting stock of our company or any ofits affiliates, who we refer to as a 10% Holder).  The exercise price per share for NQSOs may beless than, equal to or greater than the fair market value of a share of CommonStock (Nonvoting) on the date such NQSO is granted.  Options are not assignable or transferableother than by will or the laws of descent and distribution.

 

The Committee may provide, at or subsequent to thedate of grant of any Option, that in the event the Optionee pays the exerciseprice for the Option by tendering shares of Common Stock (Nonvoting) previouslyowned by the Optionee, the Optionee will automatically be granted a “reloadoption” for the number of shares of Common Stock (Nonvoting) used to pay theexercise price plus the number of shares withheld to pay for taxes associatedwith the Option exercise (a “Reload Option”). The Reload Option has an exercise price equal to the fair market valueof the Common Stock (Nonvoting) on the date of grant of the Reload Option andremains exercisable for the remainder of the term of the Option to which itrelates.

 

Unless sooner terminated by the Board of Directors,the 2000 Stock Option Plan will terminate on April 27, 2010, 10 years after itseffective date.  Unless otherwisespecifically provided in an Optionee’s Option Agreement, each Option grantedunder the 2000 Stock Option Plan expires no later than 10 years after the date suchOption is granted (5 years for ISO’s granted to 10% Holders).  Options may be exercised only during theperiod that the original Optionee has a relationship with us which conferseligibility to be granted Options and for:

 

•                    aperiod of 30 days after termination of such relationship;

 

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

 

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

 

As of March 15, 2006, options granted under the 2000Stock Option Plan were outstanding for the purchase of 1,486,500 shares ofCommon Stock (Nonvoting).

 

*Management Stock Plan*

 

In April 1993, we adopted a Management Stock Plan,which provides for the grant to all our salaried executive employees (includingofficers and directors, except for persons serving as directors only) from timeto time of the following:

 

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

 

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

 

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

 

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

 

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

 

As of March 15, 2006, we had allocated a total of2,035,425 shares of Common Stock (Nonvoting) pursuant to the Management StockPlan, 1,958,925 of which had vested through March 15, 2006.

 

*Directors Stock Option Plan*

 

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

 

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

 

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

 

Unless otherwise specifically provided in a DirectorParticipant’s Option Agreement and except in the case of Reload Options asdescribed above, each Option granted under the Directors Stock Option Planexpires no later than 10 years after the date the Option is granted.  Options may be exercised only during theperiod that the original optionee is a non-employee director and (i) for aperiod of six months after the death or disability of the Director Participantor (ii) for a period of 2 years after termination of the Director Participant’sdirectorship for any other reason.

 

The aggregate number of shares of Common Stock(Nonvoting) allocated for grant under the Directors Stock Option Plan is 1,500,000.  As of March 15, 2006, Options granted underthe Directors Stock Option Plan were outstanding for the purchase of 660,250shares of Common Stock (Nonvoting).

 

*Non-Employee Directors Stock Plan*

 

On April 29, 1997, weadopted a Non-Employee Directors Stock Plan for the purpose of providing ameans to attract and retain highly qualified persons to serve as ournon-employee directors and to enable such persons to acquire or increase aproprietary interest in our company.  TheNon-Employee Directors Stock Plan provided for that on January 1stof each calendar year during the term of the Non-Employee Directors Stock Plan,our non-employee directors, who we refer to as Directors Stock PlanParticipants, shall receive a number of shares of Common Stock (Nonvoting)equal to $50,000 divided by the fair market value per share on the date ofgrant; provided, that, any Directors Stock Plan Participant may elect prior tothe grant date to be paid up to $30,000 of such grant in cash in lieu of shareshaving an aggregate fair market value equal to the amount of such cash payment.If a person first becomes a non-employee director after January 1stof any calendar year, such a person receives a prorated grant based on thenumber of regular board meetings scheduled from the date of his or hercommencement of service as a director until December 31st of thatyear. Each Directors Stock Plan Participant may elect to defer the payment ofshares of Common Stock (Nonvoting) by filing an irrevocable written electionwith our Secretary. On December 31, 2004, the Company’s Board of Directorssuspended the Director Stock Plan until such time the Board of Directorsdetermines otherwise.

 

*Non-Employee Directors Compensation*

 

Effective beginningJanuary 1, 2005, each eligible non-employee director receives an annual fee of$45,000 for director services payable semiannually in equal increments in cash.

 

84

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The Non-Employee Directors Stock Plan, unless earlierterminated by action of the Board of Directors, will terminate at such time asno shares remain available for issuance under the Non-Employee Directors StockPlan and our company and the Directors Stock Plan Participants have no furtherrights or obligations under the Non-Employee Directors Stock Plan. Theaggregate number of shares of Common Stock (Nonvoting) issuable under theNon-Employee Directors Stock Plan is 600,000. As of March 15, 2006, 532,698 shares had been granted under theNon-Employee Directors Stock Plan.

 

There were no Options granted to our executiveofficers during 2005.

 

The following table sets forth, as of December 31,2005, the number of options and the value of unexercised options held by ourexecutive officers that held options as of that date, and the options exercisedand the consideration received therefore by such persons during fiscal 2005:

 

Aggregated Option/SARExercisesIn Last Fiscal Year AndFY-End Option/SAR Values
| **Name**               | ** ** | **Shares  Acquired  on Exercise  (#)** | ** ** | **Value  Realized ($)** | ** ** | **Number  of  Securities Underlying  Unexercised Options  at December 31, 2005** | ** ** | **Value of  Unexercised  in-the-Money Options  at December 31, 2005 ($)** | ** ** |
|------------------------|------------|----------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Exercisable**        | ** ** | **Unexercisable**                      | ** ** | **Exercisable**         | ** ** | **Unexercisable**                                                                | ** ** |
| ** **             |       |                                   |       |                    |       |                                                                             |       |                                                                      |       |   |   |   |   |
| W. Don Cornwell        |       | —                                 |       | —                  |       | 985,600                                                                          |       | 610,000                                                                   |       | — |   | — |   |
|                   |       |                                   |       |                    |       |                                                                             |       |                                                                      |       |   |   |   |   |
| John Deushane          |       | —                                 |       | —                  |       | 220,500                                                                          |       | —                                                                    |       | — |   | — |   |
|                   |       |                                   |       |                    |       |                                                                             |       |                                                                      |       |   |   |   |   |
| Robert E.  Selwyn, Jr. |       | —                                 |       | —                  |       | 350,000                                                                          |       | —                                                                    |       | — |   | — |   |
|                   |       |                                   |       |                    |       |                                                                             |       |                                                                      |       |   |   |   |   |
| Lawrence I.  Wills     |       | —                                 |       | —                  |       | 178,750                                                                          |       | 2,500                                                                     |       | — |   | — |   |

 

**Compensation Committee Interlocks and InsiderParticipation**

 

During 2005, Thomas R. Settle, Charles J. Hamilton,Jr., Veronica Pollard and Jon E. Barfield served as members of the CompensationCommittee of our Board of Directors.

 

85

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**BOARD OF DIRECTORS COMPENSATIONCOMMITTEE REPORT****ON EXECUTIVE COMPENSATION**

 

**Compensation Philosophy**

 

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

 

**Components of Compensation**

 

The components ofexecutive compensation in 2005 were (i) a base salary, and (ii) incentivecompensation opportunity.

 

*Base Salary.*    The base salary for the Chief Executive Officer is determined annually at thediscretion of the Compensation Committee. No specific formula has been establishedto determine base salary for the other executive officers, but rather thesalary levels are determined by the Chief Executive Officer based on asubjective evaluation of the individual’s performance and accomplishments.

 

*Incentive Compensation Opportunity.*    Incentivecompensation opportunities can consist of cash bonuses, shares of common stockor a combination thereof. The 2005 incentive compensation opportunity for theChief Executive Officer and other executive officers was determined based on theachievement of certain financial targets and strategic objectives.

 

**Limitation of Deductions**

 

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

 

By the Compensation Committee of the Board of Directors

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

 

86

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**Item 12.**  **Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters (Akinto Update)**

 

The following table sets forth certain information, asof March 7, 2006, regarding beneficial ownership of our (i) Voting Common Stockby each shareholder who is known by us to own beneficially more than 5% of theoutstanding Voting Common Stock, each director, each executive officer and alldirectors and officers as a group, and (ii) Common Stock (Nonvoting) (assumingexercise of all options for the purchase of Common Stock (Nonvoting), whichexercise is at the option of the holder within sixty (60) days) by eachdirector, each executive officer and all directors and officers as a group.  We also have 200,376 shares of our 12.75%Cumulative Exchangeable Preferred Stock outstanding, none of which are owned byany of our officers or directors.  Exceptas set forth in the footnotes to the table, each shareholder listed below hasinformed us that such shareholder has (i) sole voting and investment power withrespect to such shareholder’s shares of stock, except to the extent thatauthority is shared by spouses under applicable law and (ii) record andbeneficial ownership with respect to such shareholder’s shares of stock.

 
| ** **                             | ** ** | **Voting Common Stock  Shares Beneficially Owned** | ** ** | **Common Stock (Nonvoting)  Shares Beneficially Owned** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Number**                                                             | ** ** | **Percent**                                                                 | ** ** | **Number** | ** ** | **Percent(1)** | ** ** |
| ** **                             |       |                                                                   |       |                                                                        |       |   |   |   |   |
| W. Don Cornwell                        |       | 98,250                                                                 |       | 100.0                                                                       | %          | 1,708,727 | (2) | 8.24 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Stuart J. Beck                         |       |                                                                   |       |                                                                        |       | 1,326,953 | (3) | 6.42 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| John Deushane                          |       |                                                                   |       |                                                                        |       | 459,974 | (4) | 2.30 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Robert E.  Selwyn, Jr.                 |       |                                                                   |       |                                                                        |       | 475,781 | (5) | 2.37 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Lawrence I.  Wills                     |       |                                                                   |       |                                                                        |       | 318,325 | (6) | 1.60 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| James L.  Greenwald                    |       |                                                                   |       |                                                                        |       | 263,856 | (7) | 1.33 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Edward Dugger  III                     |       |                                                                   |       |                                                                        |       | 186,530 | (8) |   | * |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Thomas R. Settle                       |       |                                                                   |       |                                                                        |       | 468,740 | (9) | 2.35 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Charles J.  Hamilton, Jr.              |       |                                                                   |       |                                                                        |       | 247,805 | (10) | 1.24 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| M. Fred Brown                          |       |                                                                   |       |                                                                        |       | 139,075 | (11) |   | * |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Jon E. Barfield                        |       |                                                                   |       |                                                                        |       | 233,628 | (12) | 1.17 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Veronica Pollard                       |       |                                                                   |       |                                                                        |       | 205,811 | (13) | 1.04 | % |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Eugene I. Davis                        |       |                                                                   |       |                                                                        |       | 0 |   |   | * |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| Kirk W. Aubry                          |       |                                                                   |       |                                                                        |       | 0 |   |   | * |
|                                   |       |                                                                   |       |                                                                        |       |   |   |   |   |
| All directors  and officers as a group |       | 98,250                                                                 |       | 100.0                                                                       | %          | 6,035,205 |   | 25.80 | % |

 

----

*                                         Lessthan 1%.

 

(1)                                  Percentagefigures assume the exercise of options for the purchase of Common Stock(Nonvoting) held by such shareholder, which conversion or exercise is at theoption of the holder within sixty days.

 

(2)                                  Includes985,600 shares issuable upon exercise of options granted to Mr. Cornwellunder the Stock Option Plan that are exercisable at the option of the holderwithin sixty days and a total of 29,200 shares held by Mr. Cornwell’simmediate family.  Mr. Cornwelldisclaims beneficial ownership with respect to such 29,200 shares.  The business address of Mr. Cornwell isGranite Broadcasting Corporation, 767 Third Avenue, 34th Floor, New York, NewYork, 10017.

 

(3)                                  Includes904,600shares issuable upon exercise of options granted to Stuart J. Beck underthe Stock Option Plan which are exercisable at the option of the holder withinsixty days and a total of 8,000 shares held in trust for Mr. Beck’schildren.  Mr. Beck disclaims beneficialownership with respect to such 8,000 shares. The business address of Mr. Stuart Beck is Granite BroadcastingCorporation, 767 Third Avenue, 34th Floor, New York, New York, 10017.

 

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(4)                                  Includes220,500 shares issuable upon exercise of options granted to Mr. Deushane underthe Stock Option Plan that are exercisable at the option of the holder withinsixty days and a total of 239 shares held by Mr. Deushane’s wife. Mr.Deushane disclaims beneficial ownership with respect to such 239 shares.

 

(5)                                  Includes350,000 shares issuable upon exercise of options granted to Mr. Selwyn underthe Stock Option Plan that are exercisable at the option of the holder withinsixty days.

 

(6)                                  Includes178,750 shares issuable upon the exercise of options granted to Mr. Willsunder the Stock Option Plan that are exercisable at the option of the holderwithin sixty days.

 

(7)                                  Includes145,000 shares issuable upon exercise of options granted to Mr. Greenwald underthe Directors’ Stock Option Plan that are exercisable at the option of theholder within sixty days.

 

(8)                                  Includes132,250 shares issuable upon exercise of options granted to Mr. Dugger underthe Directors’ Stock Option Plan that are exercisable at the option of theholder within sixty days.

 

(9)                                  Includes3,000 shares held by Mr. Settle’s wife as custodian for his children and 161,875shares issuable upon exercise of options granted to Mr. Settle under theDirectors’ Stock Option Plan that are exercisable at the option of the holderwithin sixty days.  Mr. Settledisclaims beneficial ownership with respect to the shares held by his spouse.

 

(10)                            Includes2,800 shares held by Mr. Hamilton’s wife as custodian for their minor childrenunder the UGMA and 175,875 shares issuable upon exercise of options granted toMr. Hamilton under the Directors’ Stock Option Plan, which are exercisable atthe option of the holder within sixty days. Mr. Hamilton disclaims beneficial ownership with respect to the sharesheld by his spouse.

 

(11)                            Includes200 shares held by Mr. Brown’s children and 135,875 issuable upon exercise ofoptions granted to Mr. Brown under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(12)                            Includes95,920 shares held in trust and 133,750 shares issuable upon exercise ofoptions granted to Mr. Barfield under the Directors’ Stock Option Plan that areexercisable at the option of the holder within sixty days.

 

(13)                            Includes116,250 shares issuable upon exercise of options granted to Ms. Pollard underthe Directors’ Stock Option Plan that are exercisable at the option of theholder within sixty days.

 

88

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**Item 13.**  **Certain Relationships andRelated Transactions**

 

Between 1995 and 1998, we loaned Mr. Cornwell, ChiefExecutive Officer and Chairman of the Board of Directors, $2,911,000 in fourseparate transactions to pay the exercise price on stock options exercises andcertain personal income taxes.  OnJanuary 1, 2001, we loaned Mr. Cornwell an additional $375,000 to repay a loan, for which the proceedshad been used by Mr. Cornwell to acquire shares of the Company’s commonstock in the open market.  OnFebruary 15, 2001, we agreed to consolidate the five loans into oneloan in the amount of $3,286,000.  Thepromissory note matured on January 25, 2006. Interest at an annual rate of 6.75% was imputed on the promissory noteas additional compensation to the officer. On February 15, 2001 we forgave $232,247 of interest accrued on Mr.Cornwell’s loans during the year ended December 31, 2000.

 

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

 

On February 25, 2003, the Compensation Committeerecommended, and the Board of Directors approved, an incentive award of$3,286,065 to each of Mr. Cornwell and Mr. Beck to be paid, subject to vestingterms, only upon the occurrence of the refinancing with a maturity of at leasttwo years of the senior debt due April 15, 2004.  On December 22, 2003, we issued $405 millionaggregate principal amount of 9 3/4 % Senior Secured Notes, the proceeds of whichwe used in part to repay all outstanding borrowings (plus accrued interest)under our then outstanding senior credit agreement, which satisfied theperformance objective of the awards.  Mr.Cornwell’s award, which vests in one-third tranches over three years from therefinancing date, was to be used to repay in full his outstanding loan from usof $3,286,065 due January 25, 2006. Mr. Cornwell irrevocably elected to deferpayment of the first two tranches under his performance award until January 25,2006 when his loan was due.  On March 1,2005, the Board of Directors approved the acceleration of payment of the thirdtranche of Mr. Cornwell’s award to January 25, 2006.  On September 21, 2004, we and Stuart J. Beckamended the Performance Award and deferral of such payments pursuant to theSeparation Agreement.  Under the amendedterms of the Performance Award, Mr. Beck’s Performance Award fully vested as ofthe separation date and payment of $221,200 was made on September 30, 2004 torepay his outstanding promissory note to us. The remaining vested award of$3,065,000 is payable in cash on December 22, 2006.  The Company’s Management Stock Plan, pursuant to which the performanceaward was granted, permits the Compensation Committee, in its sole discretion,to require as a condition to payment of an award, that the award recipient payto the Company the amount of any taxes that the Company is required towithhold.  The Compensation Committee hasso elected to require Mr. Cornwell to pay to the Company the applicablewithholding taxes with respect to the performance award.  Mr. Cornwell has informed the Company that heis presently unable to do so, since the full amount of the performance awardmust be used to satisfy his outstanding loan from the Company.  In light of the forgoing, the Company has neitherpaid the performance award to Mr. Cornwell nor offset the amount of the awardin repayment of the loan, which loan remains due and payable.

 

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

 

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

 

During the fourth quarter of 2004 and pursuant to theSeparation Agreement dated September 21, 2004, Mr. Beck exchanged 80,250 sharesof the Company’s Class A Voting Common Stock, par value $0.01 per share, for80,250 shares of the Company’s Class B Non-Voting Common Stock, par value $0.01per share.

 

During the year ended December 31, 2004, we recordedone-time expenses for the separation benefits and acceleration of the remainingportion of the Performance Award of approximately $1,290,000 and $1,562,000,respectively.

 

From September 2004 through July 2005, we allowed Mr.Beck to use office space at no charge.

 

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**Item 14.  Principal AccountantFees and Services**

 

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

 
| ** **          | ** ** | **Fiscal Year  December 31,** | ** ** |
|---------------------|------------|-----------------------------------------|------------|
| ** **          | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Audit fees          |       | $                                       | 955,000    |   | $ | 998,440 |   |
| Audit-related  fees |       | 40,000                                  |       | 159,500 |   |
| Tax fees            |       | 267,250                                 |       | 260,650 |   |
|                |       |                                    |       |   |   |
| Total               |       | $                                       | 1,262,250  |   | $ | 1,418,590 |   |

 

*Audit Fees:*Auditfees billed by Ernst & Young LLP related to the following services: 1)audit of our annual consolidated financial statements and 2) review of ourinterim consolidated financial statements included in our Quarterly Reports onForm 10-Q for the periods ended March 31st, June 30th andSeptember 30th. The 2004 audit fees include $125,000 for additionalfees related to 2004, but billed and paid in June 2005.

 

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

 

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

 

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

 

Under the SEC rules,subject to certain de minimis criteria, pre-approval is required for allprofessional services rendered by our principal accountant for all servicesrendered on or after May 6, 2003. In fiscal 2005 and 2004, all of the fees included above werepre-approved by the Audit Committee.

 

90

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**PART IV**

 

**Item 15.  Exhibits andFinancial Statement Schedules**

 

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

 

(a)3  Exhibits

 
| 2.1    |   | Purchase and Sale Agreement, dated as of April 23,  2004, by and among Malara Broadcast Group of Fort Wayne, LLC, WPTA-TV, Inc.,  WPTA-TV License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2    |   | Stock Purchase Agreement, dated as of April 23,  2004, by and among Granite Broadcasting Corporation, NVG-Fort Wayne, Inc. and  New Vision Group, LLC (incorporated by reference to Exhibit 2.2 to our  Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, filed on  May 10, 2004)                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.3    |   | Purchase and Sale  Agreement, dated as of September 8, 2005, by and among AM Broadcasting KBWB,  Inc., Granite Broadcasting Corporation, KBWB, Inc. and KBWB License, Inc.  (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K  filed on September 9, 2005)                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.4    |   | Purchase and Sale  Agreement, dated as of September 8, 2005, by and among AM Broadcasting WXON,  Inc., Granite Broadcasting Corporation, WXON, Inc. and WXON License, Inc.  (incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K  filed on September 9, 2005)                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.5    |   | Amendment, dated February  14, 2006, to that certain Purchase and Sale Agreement by and among AM  Broadcasting KBWB, Inc., Granite Broadcasting Corporation, KBWB, Inc. and KBWB  License, Inc., dated as of September 8, 2005 (incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed on February 21, 2006)                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.6    |   | Amendment, dated February  14, 2006, to that certain Purchase and Sale Agreement by and among AM  Broadcasting WXON, Inc., Granite Broadcasting Corporation, WXON, Inc. and  WXON License, Inc., dated as of September 8, 2005 (incorporated by reference  to Exhibit 10.2 to our Current Report on Form 8-K filed on February 21, 2006)                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1    |   | Third Amended and Restated Certificate of  Incorporation of Granite Broadcasting Corporation, as amended (incorporated  by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal  year ended December 31, 1994, filed on March 29, 1995).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | Amended and Restated Bylaws of Granite Broadcasting  Corporation (incorporated by reference to Exhibit 3.1 to our Current Report  on Form 8-K filed on January 1, 2005).                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.3    |   | Certificate of Designations of the Powers,  Preferences and Relative, Participating, Optional and Other Special Rights of  our 12-3/4%, Cumulative Exchangeable Preferred Stock and Qualifications,  Limitations and Restrictions Thereof (incorporated by reference to Exhibit  3.3 to our Annual Report on Form 10-K for the fiscal year ended December 31,  1996, filed on March 21, 1997). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Indenture, dated as of December 22, 2003, between  Granite Broadcasting Corporation and The Bank of New York, as Trustee,  relating to our $405,000,000 Principal Amount 9 3/4% Senior Secured Notes due  December 1, 2010 (including form of note) (incorporated by reference to  Exhibit 4.1 to our Current Report on Form 8-K filed on December 23, 2003).                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Registration Rights Agreement, dated as of December  22, 2003, between Granite Broadcasting Corporation and J.P. Morgan Securities  Inc. (incorporated by reference to Exhibit 4.2 to our Current Report on Form  8-K filed on December 23, 2003)                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | Indenture, dated as of January 31, 1997, between  Granite Broadcasting Corporation and The Bank of New York for our 12-3/4%  Series A Exchange Debentures and 12-3/4% Exchange Debentures due April 1,  2009 (incorporated by reference to Exhibit 4.44 to our Annual Report on Form  10-K for the fiscal year ended December 31, 1996, filed on March 21, 1997).                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Form of 12-3/4% Exchange Debenture due April 1, 2009  (included in the Indenture filed as Exhibit 4.3).                                                                                                                                                                                                                                                                                   |

 

91

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| 4.5    |   | Warrant to purchase 753,491 shares of Common Stock  (Nonvoting) of Granite Broadcasting Corporation issued March 6, 2001 to  Goldman Sachs & Co. (incorporated by reference to Exhibit 4.55 to our  Current Report on Form 8-K, filed on March 9, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6    |   | Credit Agreement, dated as of March 8, 2005, by and  among Malara Broadcast Group Inc., as Parent Guarantor, Malara Broadcast  Group of Duluth LLC, Malara Broadcast Group of Duluth Licensee LLC, Malara  Broadcast Group of Fort Wayne LLC, Malara Broadcast Group of Fort Wayne  Licensee LLC, as Borrowers, the lenders listed therein, as Lenders, D.B.  Zwirn Special Opportunities Fund, L.P., as Administrative Agent, Dresdner  Bank AG New York and Grand Cayman Branches, as Syndication Agent, and D. B.  Zwirn Special Opportunities Fund, L.P., as Arranger (incorporated by  reference to Exhibit 4.1 to our Current Report on Form 8-K filed on March 11,  2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.7    |   | First Supplemental Indenture, dated as of March 9,  2005, by and among Granite Broadcasting Corporation, the guarantors party  thereto and The Bank of New York, as Trustee, supplementing that certain  Indenture, dated as of December 22, 2003, relating to the Company’s  $405,000,000 Principal Amount 9 3/4% Senior Secured Notes due December 1,  2010 (incorporated by reference to Exhibit 4.2 to our Current Report on Form  8-K filed on March 11, 2005)                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Granite Broadcasting Corporation Stock Option Plan,  as amended through October 26, 1999 (incorporated by reference to Exhibit  10.1 to our Annual Report on Form 10-K for the fiscal year ended December 31,  1999, filed on March 30, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Employment Agreement dated as of September 20, 1991  between Granite Broadcasting Corporation and W. Don Cornwell (incorporated by  reference to Exhibit 10.13 to our Registration Statement No. 33-43770 filed  on November 5, 1991).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Granite Broadcasting Corporation Management Stock  Plan, as amended through January 1, 2003 (incorporated by reference to  Exhibit 10.15 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 2002, filed on March 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | Granite Broadcasting Corporation Directors’ Stock Option  Plan, as amended through October 26, 1999 (incorporated by reference to  Exhibit 10.19 to our Annual Report on Form 10-K for the fiscal year ended  December 31, 1999, filed on March 30, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5   |   | Network Affiliation Agreement (WTVH-TV) (incorporated  by reference to Exhibit 10.20 to our Registration Statement No. 33-94862  filed on July 21, 1995).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6   |   | Granite Broadcasting Corporation Employee Stock  Purchase Plan, dated February 28, 1995 (incorporated by reference to Exhibit  10.25 to our Annual Report on Form 10-K for the fiscal year ended December  31, 1994, filed on March 29, 1995).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7   |   | Network Affiliation Agreement (WKBW) (incorporated  by reference to Exhibit 10.28 to our Current Report on Form 8-K filed on July  14, 1995).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8   |   | Employment Agreement dated as of September 19, 1996  between Granite Broadcasting Corporation and Robert E. Selwyn, Jr.  (incorporated by reference to Exhibit 10.30 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 1996, filed on March 21, 1997).                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9   |   | Non-Employee Directors Stock Plan of Granite  Broadcasting Corporation, as amended through December 2, 2002 (incorporated  by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the  fiscal year ended December 31, 2002, filed on March 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10  |   | Extension Letter, dated February 28, 1999 between  Granite Broadcasting Corporation and Robert E. Selwyn, Jr. extending the term  of Mr. Selwyn’s Employment Agreement to January 31, 2003 (incorporated by  reference to Exhibit 10.38 to our Annual Report on Form 10-K for the fiscal  year ended December 31, 1998, filed on March 31, 1999).                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11  |   | Granite Broadcasting Corporation 2000 Stock Option  Plan, dated as of April 25, 2000 (incorporated by reference to Exhibit 10.46  to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,  filed on May 15, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12  |   | Amended and Restated Network Affiliation Agreement,  dated as of March 6, 2001 among Granite Broadcasting Corporation, the Parties  set forth on Schedule I thereto, and NBC Television Network (KSEE, KBJR-TV  and WEEK-TV) (incorporated by reference to Exhibit 10.51 to our Current  Report on Form 8-K, filed on March 9, 2001).                                                                                                                                                                                                                                                                                                                                            |

 

92

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| 10.13  |   | Stock Purchase Agreement, dated as of December 14,  2001, by and among National Broadcasting Company, Inc., Granite Broadcasting  Corporation, KNTV Television, Inc. and KNTV License, Inc. (incorporated by  reference to Exhibit 10.53 to our Current Report on Form 8-K, filed on December  19, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.14  |   | Amendment to Network Affiliation Agreement (WKBW)  (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 2003, filed on March 29, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15  |   | Separation Agreement dated September 21, 2004  between Granite Broadcasting Corporation and Stuart J. Beck (incorporated by  reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004, filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16  |   | Renewal of Network Affiliation Agreement, dated May  20, 2004, by and among The Warner Bros. Network, Granite Broadcasting  Corporation and WDWB-TV (incorporated by reference to Exhibit 10.2 to our  Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed  on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17  |   | Guaranty, dated as of March 8, 2005, by Granite  Broadcasting Corporation, in favor of and for the benefit of D.B. Zwirn  Special Opportunities Fund, L.P., as agent for and representative of (“Guarantied  Party”) the financial institutions (“Lenders”) party to that certain Credit  Agreement dated as of March 8, 2005, by and among Malara Broadcast Group,  Inc., Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of Duluth  Licensee LLC, Malara Broadcast Group of Fort Wayne LLC, Malara Broadcast  Group of Fort Wayne Licensee LLC, Dresdner Bank AG New York and Grand Cayman  Branches, as Syndication Agent, Guarantied Party and Lenders (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March  11, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Network Affiliation Agreement (WISE) (incorporated  by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the  fiscal year ended December 31, 2004, filed on March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.19  |   | Purchase And Sale Agreement,  dated as of January 13, 2006, by and among Television Station Group Holdings,  LLC Television Station Group, LLC Television Station Group License  Subsidiary, LLC, WBNG, Inc. and WBNG License, Inc (incorporated by reference  to Exhibit 10. to our Current Report on Form 8-K filed on January 17, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.20  |   | Form Of Security Agreement  by Granite Broadcasting Corporation, as Issuer, and the Guarantors Party  thereto and The Bank Of New York, as Collateral Agent (incorporated by  reference to Exhibit 10.3 to our Current Report on Form 8-K filed on February  21, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.21  |   | Form of Mortgage,  Assignment Of Leases And Rents, Security Agreement And Fixture Filing  (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K  filed on February 21, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.22  |   | Reimbursement And  Refinancing Agreement, dated as of March 8, 2005, by and by and among Malara  Broadcast Group of Duluth LLC, Malara Broadcast Group of Duluth Licensee LLC,  Malara Broadcast Group of Fort Wayne LLC, Malara Broadcast Group of Fort  Wayne Licensee LLC, and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 10.5 to our Current Report on Form 8-K filed on February  21, 2006)                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 21.    |   | Subsidiaries of Granite Broadcasting Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.    |   | Consent of Independent Registered Public Accounting  Firm (Ernst & Young LLP).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7241)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32     |   | Certifications of Chief Executive Officer and Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (18 U.S.C. § 1350)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

----

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

 

93

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, as amended, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized, in the City of New York, State of New York, on the 31 stday of March, 2006.

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

 

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

 
| **Signature**                | ** ** | **Title**                                                             | ** ** | **Date**       |
|------------------------------|------------|-----------------------------------------------------------------------|------------|----------------|
| ** **                   | ** ** |                                                                  |       |           |
| /s/ W. DON CORNWELL          |       | Chief Executive Officer                                               |       | March 31, 2006 |
| (W. Don Cornwell)            |       | (Principal Executive Officer) and Chairman of  the Board of Directors |       |           |
|                         |       |                                                                  |       |           |
| /s/  LAWRENCE  I. WILLS |       | Senior Vice President – Chief Financial                          |       | March 31, 2006 |
| (Lawrence I. Wills)          |       | Officer and Secretary (Principal Financial Officer)                   |       |           |
|                         |       |                                                                  |       |           |
| /s/ STUART J. BECK           |       | Director                                                              |       | March 31, 2006 |
| (Stuart J. Beck)             |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ JAMES L. GREENWALD       |       | Director                                                              |       | March 31, 2006 |
| (James L. Greenwald)         |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ EDWARD DUGGER III        |       | Director                                                              |       | March 31, 2006 |
|  (Edward  Dugger III)   |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ THOMAS R. SETTLE         |       | Director                                                              |       | March 31, 2006 |
| (Thomas R. Settle)           |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ CHARLES J. HAMILTON, JR. |       | Director                                                              |       | March 31, 2006 |
| (Charles J. Hamilton, Jr.)   |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ M. FRED BROWN            |       | Director                                                              |       | March 31, 2006 |
| (M. Fred Brown)              |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ EUGENE I. DAVIS          |       | Director                                                              |       | March 31, 2006 |
| (Eugene I. Davis)            |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ KIRK W. AUBRY            |       | Director                                                              |       | March 31, 2006 |
| (Kirk W. Aubry)              |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ JON E. BARFIELD          |       | Director                                                              |       | March 31, 2006 |
| (Jon E. Barfield)            |       |                                                                  |       |           |
|                         |       |                                                                  |       |           |
| /s/ VERONICA POLLARD         |       | Director                                                              |       | March 31, 2006 |
| (Veronica Pollard)           |       |                                                                  |       |           |

 

94

----

 

**Exhibit Index**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1                       |       | Purchase and Sale Agreement, dated as of April 23,  2004, by and among Malara Broadcast Group of Fort Wayne, LLC, WPTA-TV, Inc.,  WPTA-TV License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                                                                                                                                                                                                                                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.2                       |       | Stock Purchase  Agreement, dated as of April 23, 2004, by and among Granite Broadcasting  Corporation, NVG-Fort Wayne, Inc. and New Vision Group, LLC (incorporated by  reference to Exhibit 2.2 to our Quarterly Report on Form 10-Q for the quarter  ended March 31, 2004, filed on May 10, 2004)                                                                                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.3                       |       | Purchase  and Sale Agreement, dated as of September 8, 2005, by and among AM  Broadcasting KBWB, Inc., Granite Broadcasting Corporation, KBWB, Inc. and  KBWB License, Inc. (incorporated by reference to Exhibit 2.1 to our Current  Report on Form 8-K filed on September 9, 2005)                                                                                                                                                                                                                                                                                                                                                                                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.4                       |       | Purchase  and Sale Agreement, dated as of September 8, 2005, by and among AM  Broadcasting WXON, Inc., Granite Broadcasting Corporation, WXON, Inc. and  WXON License, Inc. (incorporated by reference to Exhibit 2.2 to our Current  Report on Form 8-K filed on September 9, 2005)                                                                                                                                                                                                                                                                                                                                                                                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.5                       |       | Amendment,  dated February 14, 2006, to that certain Purchase and Sale Agreement by and  among AM Broadcasting KBWB, Inc., Granite Broadcasting Corporation, KBWB,  Inc. and KBWB License, Inc., dated as of September 8, 2005 (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February  21, 2006)                                                                                                                                                                                                                                                                                                                                        |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.6                       |       | Amendment,  dated February 14, 2006, to that certain Purchase and Sale Agreement by and  among AM Broadcasting WXON, Inc., Granite Broadcasting Corporation, WXON,  Inc. and WXON License, Inc., dated as of September 8, 2005 (incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed on February  21, 2006)                                                                                                                                                                                                                                                                                                                                        |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1                       |       | Third Amended and  Restated Certificate of Incorporation of Granite Broadcasting Corporation, as  amended (incorporated by reference to Exhibit 3.1 to our Annual Report on  Form 10-K for the fiscal year ended December 31, 1994, filed on March 29,  1995).                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                       |       | Amended and Restated  Bylaws of Granite Broadcasting Corporation (incorporated by reference to  Exhibit 3.1 to our Current Report on Form 8-K filed on January 1, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3                       |       | Certificate of  Designations of the Powers, Preferences and Relative, Participating, Optional  and Other Special Rights of our 12-3/4%, Cumulative Exchangeable Preferred  Stock and Qualifications, Limitations and Restrictions Thereof (incorporated  by reference to Exhibit 3.3 to our Annual Report on Form 10-K for the fiscal  year ended December 31, 1996, filed on March 21, 1997).                                                                                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                       |       | Indenture, dated as of  December 22, 2003, between Granite Broadcasting Corporation and The Bank of  New York, as Trustee, relating to our $405,000,000 Principal Amount 9 3/4%  Senior Secured Notes due December 1, 2010 (including form of note)  (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K  filed on December 23, 2003).                                                                                                                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                       |       | Registration Rights  Agreement, dated as of December 22, 2003, between Granite Broadcasting  Corporation and J.P. Morgan Securities Inc. (incorporated by reference to Exhibit  4.2 to our Current Report on Form 8-K filed on December 23, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3                       |       | Indenture, dated as of  January 31, 1997, between Granite Broadcasting Corporation and The Bank of  New York for our 12-3/4% Series A Exchange Debentures and 12-3/4% Exchange  Debentures due April 1, 2009 (incorporated by reference to Exhibit 4.44 to  our Annual Report on Form 10-K for the fiscal year ended December 31, 1996,  filed on March 21, 1997).                                                                                                                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4                       |       | Form of 12-3/4%  Exchange Debenture due April 1, 2009 (included in the Indenture filed as  Exhibit 4.3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.5/a                     |       | Warrant to purchase  753,491 shares of Common Stock (Nonvoting) of Granite Broadcasting  Corporation issued March 6, 2001 to Goldman Sachs & Co. (incorporated by  reference to Exhibit 4.55 to our Current Report on Form 8-K, filed on March  9, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6                       |       | Credit Agreement, dated  as of March 8, 2005, by and among Malara Broadcast Group Inc., as Parent  Guarantor, Malara Broadcast Group of Duluth LLC, Malara Broadcast Group of  Duluth Licensee LLC, Malara Broadcast Group of Fort Wayne LLC, Malara  Broadcast Group of Fort Wayne Licensee LLC, as Borrowers, the lenders listed  therein, as Lenders, D.B. Zwirn Special Opportunities Fund, L.P., as  Administrative Agent, Dresdner Bank AG New York and Grand Cayman Branches, as  Syndication Agent, and D. B. Zwirn Special Opportunities Fund, L.P., as  Arranger (incorporated by reference to Exhibit 4.1 to our Current Report on  Form 8-K filed on March 11, 2005) |

 

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| 4.7    |   | First Supplemental  Indenture, dated as of March 9, 2005, by and among Granite Broadcasting  Corporation, the guarantors party thereto and The Bank of New York, as  Trustee, supplementing that certain Indenture, dated as of December 22, 2003,  relating to the Company’s $405,000,000 Principal Amount 9 3/4% Senior Secured  Notes due December 1, 2010 (incorporated by reference to Exhibit 4.2 to our  Current Report on Form 8-K filed on March 11, 2005) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1   |   | Granite Broadcasting  Corporation Stock Option Plan, as amended through October 26, 1999  (incorporated by reference to Exhibit 10.1 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 1999, filed on March 30, 2000).                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   |   | Employment Agreement  dated as of September 20, 1991 between Granite Broadcasting Corporation and  W. Don Cornwell (incorporated by reference to Exhibit 10.13 to our  Registration Statement No. 33-43770 filed on November 5, 1991).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   |   | Granite Broadcasting  Corporation Management Stock Plan, as amended through January 1, 2003 (incorporated  by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the  fiscal year ended December 31, 2002, filed on March 28, 2003).                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   |   | Granite Broadcasting  Corporation Directors’ Stock Option Plan, as amended through October 26, 1999  (incorporated by reference to Exhibit 10.19 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 1999, filed on March 30, 2000).                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   |   | Network Affiliation  Agreement (WTVH-TV) (incorporated by reference to Exhibit 10.20 to our Registration  Statement No. 33-94862 filed on July 21, 1995).                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.6   |   | Granite Broadcasting  Corporation Employee Stock Purchase Plan, dated February 28, 1995  (incorporated by reference to Exhibit 10.25 to our Annual Report on Form 10-K  for the fiscal year ended December 31, 1994, filed on March 29, 1995).                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7   |   | Network Affiliation  Agreement (WKBW) (incorporated by reference to Exhibit 10.28 to our Current  Report on Form 8-K filed on July 14, 1995).                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.8   |   | Employment Agreement  dated as of September 19, 1996 between Granite Broadcasting Corporation and  Robert E. Selwyn, Jr. (incorporated by reference to Exhibit 10.30 to our  Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed  on March 21, 1997).                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Non-Employee Directors  Stock Plan of Granite Broadcasting Corporation, as amended through December  2, 2002 (incorporated by reference to Exhibit 10.31 to our Annual Report on  Form 10-K for the fiscal year ended December 31, 2002, filed on March 28,  2003).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Extension Letter, dated  February 28, 1999 between Granite Broadcasting Corporation and Robert E.  Selwyn, Jr. extending the term of Mr. Selwyn’s Employment Agreement to  January 31, 2003 (incorporated by reference to Exhibit 10.38 to our Annual  Report on Form 10-K for the fiscal year ended December 31, 1998, filed on  March 31, 1999).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | Granite Broadcasting  Corporation 2000 Stock Option Plan, dated as of April 25, 2000 (incorporated  by reference to Exhibit 10.46 to our Quarterly Report on Form 10-Q for the  quarter ended March 31, 2000, filed on May 15, 2000).                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | Amended and Restated  Network Affiliation Agreement, dated as of March 6, 2001 among Granite  Broadcasting Corporation, the Parties set forth on Schedule I thereto, and  NBC Television Network (KSEE, KBJR-TV and WEEK-TV) (incorporated by reference  to Exhibit 10.51 to our Current Report on Form 8-K, filed on March 9, 2001).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13  |   | Stock Purchase  Agreement, dated as of December 14, 2001, by and among National Broadcasting  Company, Inc., Granite Broadcasting Corporation, KNTV Television, Inc. and  KNTV License, Inc. (incorporated by reference to Exhibit 10.53 to our Current  Report on Form 8-K, filed on December 19, 2001)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | Amendment to Network  Affiliation Agreement (WKBW) (incorporated by reference to Exhibit 10.16 to  our Annual Report on Form 10-K for the fiscal year ended December 31, 2003,  filed on March 29, 2004).                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.15  |   | Separation Agreement  dated September 21, 2004 between Granite Broadcasting Corporation and Stuart  J. Beck (incorporated by reference to Exhibit 10.1 to our Quarterly Report on  Form 10-Q for the quarter ended                                                                                                                                                                                                                                                       |
|   |   | September 30, 2004,  filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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| 10.16  |   | Renewal of Network  Affiliation Agreement, dated May 20, 2004, by and among The Warner Bros.  Network, Granite Broadcasting Corporation and WDWB-TV (incorporated by  reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the  quarter ended September 30, 2004, filed on November 10, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17  |   | Guaranty, dated as of  March 8, 2005, by Granite Broadcasting Corporation, in favor of and for the benefit  of  D.B. Zwirn Special Opportunities Fund, L.P., as agent for and representative  of (“Guarantied Party”) the financial institutions (“Lenders”) party to that  certain Credit Agreement dated as of March 8, 2005, by and among Malara  Broadcast Group, Inc., Malara Broadcast Group of Duluth LLC, Malara Broadcast  Group of Duluth Licensee LLC, Malara Broadcast Group of Fort Wayne LLC,  Malara Broadcast Group of Fort Wayne Licensee LLC, Dresdner Bank AG New York  and Grand Cayman Branches, as Syndication Agent, Guarantied Party and Lenders  (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K  filed on March 11, 2005) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.18  |   | Network Affiliation  Agreement (WISE) (incorporated by reference to Exhibit 10.18 to our Annual  Report on Form 10-K for the fiscal year ended December 31, 2004, filed  on March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19  |   | Purchase  And Sale Agreement, dated as of January 13, 2006, by and among Television  Station Group Holdings, LLC Television Station Group, LLC Television Station  Group License Subsidiary, LLC, WBNG, Inc. and WBNG License, Inc (incorporated  by reference to Exhibit 10. to our Current Report on Form 8-K filed on  January 17, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.20  |   | Form  Of Security Agreement by Granite Broadcasting Corporation, as Issuer, and the  Guarantors Party thereto and The Bank Of New York, as Collateral Agent  (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K  filed on February 21, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.21  |   | Form  of Mortgage, Assignment Of Leases And Rents, Security Agreement And Fixture  Filing (incorporated by reference to Exhibit 10.4 to our Current Report on  Form 8-K filed on February 21, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.22  |   | Reimbursement And Refinancing  Agreement, dated as of March 8, 2005, by and by and among Malara Broadcast  Group of Duluth LLC, Malara Broadcast Group of Duluth Licensee LLC, Malara  Broadcast Group of Fort Wayne LLC, Malara Broadcast Group of Fort Wayne  Licensee LLC, and Granite Broadcasting Corporation (incorporated by reference to Exhibit 10.5  to our Current Report on Form 8-K filed on February 21, 2006)                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 21.    |   | Subsidiaries of Granite  Broadcasting Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 23.    |   | Consent of Independent  Registered Public Accounting Firm (Ernst & Young LLP).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002  (15 U.S.C. § 7241)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002  (15 U.S.C. § 7241)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32     |   | Certifications of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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

 

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