** **

**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C.   20549**

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** **

**FORM 10-Q**

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**Quarterly Report Pursuant to Section 13 or 15 (d)of the****Securities Exchange Act of 1934**

| **For the quarterly period ended** | ** ** | ** ** | ** ** | **Commission  file number:** |
|------------------------------------|------------|------------|------------|------------------------------|
| **June  30, 2006**                 |       | ** ** |       | **0-25042**                  |

** **

**YOUNG BROADCASTING INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | ** ** |   | **13-3339681**       |
|----------------------------------|--------|------------|--------|----------------------|
| (State or other  jurisdiction of |   |       |   | (I.R.S. employer     |
| incorporation or  organization)  |   |       |   | identification  no.) |

** **

**599 Lexington Avenue****New York, New York 10022**(Address of principal executive offices)

Registrant’s telephone number, including areacode:       **(212) 754-7070**

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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 x  No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definitions of “accelerated file and large accelerated filer” in Rule 12b-2 of theExchange Act).

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

Number of sharesof Common Stock outstanding as of July 24, 2006: 19,832,069 shares ofClass A Common Stock, and 1,941,414 shares of Class B Common Stock.

 

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**YOUNG BROADCASTING INC.**

**FORM 10-Q**

**Table of Contents**
| Part I  |   | Financial Information |   |                                                                                                  |
|---------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------|
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 1.               |   | Financial Statements  (unaudited)                                                                     |   |   |
|    |   |                  |   |                                                                                                  |   |   |
|    |   |                  |   | Consolidated  Balance Sheets as of December 31, 2005 and June 30, 2006.                          |   | 2 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   |                  |   | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2005 and 2006 |   | 3 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   |                  |   | Consolidated  Statements of Stockholders’ Equity for the Six Months Ended June 30,  2006    |   | 4 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   |                  |   | Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2005 and 2006           |   | 5 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   |                  |   | Notes to Consolidated Financial Statements                                                            |   | 6 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 2.               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |   | 15 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 3.               |   | Quantitative  and Qualitative Disclosure About Market Risk                                            |   | 30 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 4.               |   | Controls and  Procedures                                                                              |   | 31 |
|    |   |                  |   |                                                                                                  |   |   |
| Part II |   | Other Items           |   |                                                                                                  |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 1.               |   | Legal Proceedings                                                                                     |   | 32 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item  1A.             |   | Risk  Factors                                                                                         |   | 32 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 2.               |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                          |   | 32 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 3.               |   | Defaults Upon  Senior Securities                                                                      |   | 32 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item 4.               |   | Submission of  Matters to a Vote of Security Holders                                                  |   | 32 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item  5.              |   | Other  Information                                                                                    |   | 33 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Item  6.              |   | Exhibits                                                                                              |   | 33 |
|    |   |                  |   |                                                                                                  |   |   |
|    |   | Signatures            |   | 34                                                                                                    |

 

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**Part I Financial Information**

**Item 1*. Financial Statements***

 

**Young Broadcasting Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                            | ** ** | **December 31,** | ** **  | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**              | ** **  | **2006**          | ** ** |
| ** **                                                                                                                                            | ** ** | ** **            | ** **  | **(Unaudited)**   | ** ** |
| **Assets**                                                                                                                                            |       |                  | ** **  | ** **        | ** ** |
| Current assets:                                                                                                                                       |       |                  | ** **  | ** **        | ** ** |
| Cash and cash equivalents                                                                                                                             |       | $                     | 78,099,123  | ** **        | **$**      | **107,910,352** | ** ** |
| Trade accounts receivable, less allowance for  doubtful accounts of $1,050,000 in 2005 and $1,057,000 in 2006                                         |       | 40,768,181            | ** **  | **40,319,719**    | ** ** |
| Current portion of program license rights                                                                                                             |       | 21,763,650            | ** **  | **9,200,372**     | ** ** |
| Prepaid expenses                                                                                                                                      |       | 2,785,369             | ** **  | **1,783,511**     | ** ** |
| Other current assets                                                                                                                                  |       | 1,979,314             | ** **  | **2,009,556**     | ** ** |
| Total current  assets                                                                                                                                 |       | 145,395,637           | ** **  | **161,223,510**   | ** ** |
|                                                                                                                                                  | ** ** | ** **            | ** **  | ** **        | ** ** |
| Property and  equipment, less accumulated depreciation and amortization of $184,348,672 in  2005 and $190,744,693 in 2006                             |       | 75,328,016            | ** **  | **70,495,037**    | ** ** |
| Program license  rights, excluding current portion                                                                                                    |       | 7,018,090             | ** **  | **5,660,815**     | ** ** |
| Deposits and  other assets                                                                                                                            |       | 3,575,404             | ** **  | **4,659,162**     | ** ** |
| Investments in  unconsolidated subsidiaries                                                                                                           |       | 4,451,831             | ** **  | **3,215,456**     | ** ** |
| Unamortizable  intangible assets                                                                                                                      |       | 475,928,822           | ** **  | **475,928,822**   | ** ** |
| Amortizable  intangible assets                                                                                                                        |       | 65,454,167            | ** **  | **63,351,677**    | ** ** |
| Deferred  charges, less accumulated amortization of $3,285,390 in 2005 and 4,077,449 in  2006                                                         |       | 10,395,399            | ** **  | **10,893,594**    | ** ** |
| **Total  Assets**                                                                                                                                     |       | $                     | 787,547,366 | ** **        | **$**      | **795,428,073** | ** ** |
| ** **                                                                                                                                            |       |                  | ** **  | ** **        | ** ** |
| **Liabilities and stockholders’  deficit**                                                                                                       |       |                  | ** **  | ** **        | ** ** |
| Current liabilities:                                                                                                                                  |       |                  | ** **  | ** **        | ** ** |
| Trade accounts payable                                                                                                                                |       | $                     | 8,933,428   | ** **        | **$**      | **5,549,248** | ** ** |
| Accrued interest                                                                                                                                      |       | 18,954,497            | ** **  | **19,102,014**    | ** ** |
| Accrued expenses                                                                                                                                      |       | 17,187,952            | ** **  | **15,736,556**    | ** ** |
| Current installments of program license liability                                                                                                     |       | 17,282,456            | ** **  | **7,306,238**     | ** ** |
| Current installment of long term debt                                                                                                                 |       | 3,000,000             | ** **  | **3,500,000**     | ** ** |
| Current installments of obligations under capital  leases                                                                                             |       | 45,445                | ** **  | **33,671**        | ** ** |
| Total current  liabilities                                                                                                                            |       | 65,403,778            | ** **  | **51,227,727**    | ** ** |
| Program license  liability, excluding current installments                                                                                            |       | 9,119,940             | ** **  | **7,564,848**     | ** ** |
| Long-term debt,  excluding current installments                                                                                                       |       | 782,791,781           | ** **  | **830,377,155**   | ** ** |
| Deferred tax  liability and other long-term tax liabilities                                                                                           |       | 26,684,273            | ** **  | **41,570,437**    | ** ** |
| Other  liabilities                                                                                                                                    |       | 4,847,411             | ** **  | **4,691,721**     | ** ** |
| Obligations  under capital leases, excluding current installments                                                                                     |       | 20,546                | ** **  | **6,421**         | ** ** |
| **Total  liabilities**                                                                                                                                |       | 888,867,729           | ** **  | **935,438,309**   | ** ** |
| Stockholders’ deficit:                                                                                                                           |       |                  | ** **  | ** **        | ** ** |
| Class A Common Stock, $.001 par value. Authorized  40,000,000 shares; issued and outstanding 18,907,651 shares at 2005 and  19,683,119 shares at 2006 |       | 18,908                | ** **  | **19,683**        | ** ** |
| Class B Common Stock, $.001 par value. Authorized  20,000,000 shares; issued and outstanding 1,941,414 shares at 2005 and 2006                        |       | 1,941                 | ** **  | **1,941**         | ** ** |
| Additional paid-in capital                                                                                                                            |       | 384,173,020           | ** **  | **386,138,574**   | ** ** |
| Accumulated other comprehensive loss                                                                                                                  |       | (2,481,117            | )           | **(1,513,681**    | **)**      |
| Accumulated deficit                                                                                                                                   |       | (483,033,115          | )           | **(524,656,753**  | **)**      |
| Total  stockholders’ deficit                                                                                                                     |       | (101,320,363          | )           | **(140,010,236**  | **)**      |
| **Total liabilities and  stockholders’ deficit**                                                                                                 |       | $                     | 787,547,366 | ** **        | **$**      | **795,428,073** | ** ** |

*See accompanying notes toconsolidated financial statements*

2

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**Young Broadcasting Inc. and Subsidiaries**

**ConsolidatedStatements of Operations(Unaudited)**
| ** **                                                                                                                               | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                                                                                               | ** ** | **June 30,**                | ** **  | **June 30,**              | ** ** |
| ** **                                                                                                                               | ** ** | **2005**                         | ** **  | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net operating  revenue                                                                                                                   |       | $                                | 50,865,534  | ** **                     | **$**      | **56,754,820** |   | $ | 96,374,664 | ** ** | **$** | **105,141,289** | ** ** |
|                                                                                                                                     |       |                             | ** **  | ** **                     |       |   | ** ** | ** ** | ** ** |
| Operating  expenses, excluding depreciation expense                                                                                      |       | 18,771,384                       | ** **  | **16,943,726**                 |       | 36,599,517 | ** ** | **34,014,405** | ** ** |
| Amortization of  program license rights                                                                                                  |       | 5,271,070                        | ** **  | **7,016,794**                  |       | 10,606,019 | ** ** | **13,872,611** | ** ** |
| Selling, general  and administrative expenses, excluding depreciation expense                                                            |       | 16,066,573                       | ** **  | **16,985,214**                 |       | 33,672,794 | ** ** | **33,833,489** | ** ** |
| Depreciation and  amortization                                                                                                           |       | 6,044,168                        | ** **  | **4,727,690**                  |       | 12,436,376 | ** ** | **9,520,508** | ** ** |
| Corporate  overhead, excluding depreciation expense                                                                                      |       | 3,064,096                        | ** **  | **3,417,579**                  |       | 7,154,027 | ** ** | **7,043,630** | ** ** |
| Operating income  (loss)                                                                                                                 |       | 1,648,243                        | ** **  | **7,663,817**                  |       | (4,094,069 | ) | **6,856,646** | ** ** |
|                                                                                                                                     |       |                             | ** **  | ** **                     | ** ** | ** ** |   |   |   |
| Interest  expense, net                                                                                                                   |       | (15,413,495                      | )           | **(16,480,261**                | **)**      | (31,237,011 | ) | **(32,339,507** | **)** |
| Non-cash gain  (loss) on market valuation of swaps                                                                                       |       | 1,164,572                        | ** **  | **—**                     | ** ** | (658,507 | ) | — |   |
| Loss on  extinguishment of debt                                                                                                          |       | (18,625,706                      | )           | **—**                     |       | (18,625,706 | ) | — | ** ** |
| Other expense,  net                                                                                                                      |       | (148,443                         | )           | **(329,636**                   | **)**      | (303,377 | ) | **(1,557,868** | **)** |
|                                                                                                                                     |       | (33,023,072                      | )           | **(16,809,897**                | **)**      | (50,824,601 | ) | **(33,897,375** | **)** |
|                                                                                                                                     |       |                             | ** **  | ** **                     | ** ** | ** ** |   |   |   |
| Loss from  continuing operations before income taxes                                                                                     |       | (31,374,829                      | )           | **(9,146,080**                 | **)**      | (54,918,670 | ) | **(27,040,729** | **)** |
| Income tax  expense                                                                                                                      |       | (4,778,684                       | )           | **(1,842,230**                 | **)**      | (11,793,537 | ) | **(14,582,909** | **)** |
| Loss from  continuing operations                                                                                                         |       | (36,153,513                      | )           | **(10,988,310**                | **)**      | (66,712,207 | ) | **(41,623,638** | **)** |
| Income (loss)  from discontinued operations, net of tax, including gain on sale of $11.2  million for the six months ended June 30, 2005 |       | (822                             | )           | **—**                     |       | 11,206,804 |   | — | ** ** |
| Net loss                                                                                                                                 |       | $                                | (36,154,335 | )                              | **$**      | **(10,988,310** | **)** | $ | (55,505,403 | ) | **$** | **(41,623,638** | **)** |
| Basic and diluted net  loss per common share:                                                                                            |       |                             |        |                           |       |   |   |   |   |
| Loss from  continuing operations                                                                                                         |       | $                                | (1.80       | )                              | **$**      | **(0.52** | **)** | $ | (3.32 | ) | **$** | **(1.98** | **)** |
| Income (loss)  from discontinued operations                                                                                              |       | —                           | ** **  | **—**                     |       | 0.56 | ** ** | **—** | ** ** |
| Net loss per  common share                                                                                                               |       | $                                | (1.80       | )                              | **$**      | **(0.52** | **)** | $ | (2.76 | ) | **$** | **(1.98** | **)** |
|                                                                                                                                     | ** ** | ** **                       | ** **  | ** **                     |       |   | ** ** | ** ** | ** ** |
| Weighted average shares  — Basic and dilutive                                                                                       |       | 20,121,791                       | ** **  | **21,223,347**                 |       | 20,089,076 | ** ** | **21,071,672** | ** ** |

*See accompanying notes to consolidated financialstatements.*

3

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**Young BroadcastingInc. and Subsidiaries**

**ConsolidatedStatements of Stockholders’ Deficit(Unaudited)**
| ** **                                                            | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** **  | ** **        | ** ** | **Accumulated**   | ** ** | **Total**              | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|-------------|-------------------|------------|-------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                            | ** ** | **Common Stock** | ** ** | **Paid-In**      | ** ** | **Accumulated** | ** **  | **Comprehensive** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                            | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Capital**     | ** **  | **Deficit**       | ** ** | **Loss**          | ** ** | **Loss**               | ** ** | **Deficit** | ** ** |
| Balance at December 31, 2005                                     |       | 18,908                |       | 1,941            |       | $               | 384,173,020 |              | $          | (483,033,115      | )          | $                      | (2,481,117 | )           |       |   | (101,320,363 | ) |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Contribution of shares into Company’s defined  contribution plan |       | 237                   |       |             |       | 719,226         |        |              |       |              |       |                   |       | 719,463     |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Non-cash stock compensation                                           |       | 527                   |       |             |       | 1,218,755       |        |              |       |              |       |                   |       | 1,219,282   |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Employee stock purchase plan                                          |       | 11                    |       |             |       | 27,573          |        |              |       |              |       |                   |       | 27,584      |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Net loss for the six months ended June 30, 2006                  |       |                  |       |             |       |            |        | (41,623,638       | )          |              |       | (41,623,638            | )          | (41,623,638 | )          |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Unrealized loss on derivative instrument                              |       |                  |       |             |       |            |        |              |       | 967,436           |       | 967,436                |       | 967,436     |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       | (40,656,202            | )          | (40,656,202 | )          |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |        |       |
| Balance at  June 30, 2006                                        |       | 19,683                |       | 1,941            |       | $               | 386,138,574 |              | $          | (524,656,753      | )          | $                      | (1,513,681 | )           |       |   | $ | (140,010,236 | ) |
|                                                                       |            |                       |            |                  |            |                 |             |                   |            |                   |            |                        |            |             |            |  |  |  |  |

 

*Seeaccompanying notes to consolidated financial statements*

4

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**Young Broadcasting Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                                          | ** **  | **2006** | ** ** |
| **Operating activities**                                                     | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Net loss                                                                     |       | $                                                 | (55,505,403 | ) | **$** | **(41,623,638** | **)** |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              | ** **  | ** ** | ** ** |
| Gain on sale of station, net taxes                                           |       | (11,207,149                                       | )           | **—** | ** ** |
| Depreciation and amortization of property and  equipment                     |       | 9,261,278                                         | ** **  | **6,625,959** | ** ** |
| Provision for uncollectible accounts                                         |       | 75,692                                            | ** **  | **37,213** | ** ** |
| Amortization of program license rights                                       |       | 10,606,019                                        | ** **  | **13,872,611** | ** ** |
| Amortization of intangibles and deferred charges                             |       | 3,175,098                                         | ** **  | **2,894,549** | ** ** |
| Non-cash compensation                                                        |       | 1,176,180                                         | ** **  | **2,282,759** | ** ** |
| Non-cash change on market valuation of swap                                  |       | 658,507                                           | ** **  | **—** | ** ** |
| Loss on unconsolidated subsidiaries, net of dividend                         |       | (62,364                                           | )           | **1,236,375** | ** ** |
| Provision for income taxes                                                   |       | 11,793,537                                        | ** **  | **14,582,909** | ** ** |
| Loss on extinguishment of debt                                               |       | 388,758                                           | ** **  | **—** | ** ** |
| Gain on sale of fixed assets                                                 |       | (4,447                                            | )           | **44,150** | ** ** |
| Payments on programming license liabilities                                  |       | (10,803,295                                       | )           | **(13,239,389** | **)** |
| Decrease in trade accounts receivable                                        |       | 908,218                                           | ** **  | **411,250** | ** ** |
| Decrease in prepaid expenses                                                 |       | 1,985,657                                         | ** **  | **1,001,858** | ** ** |
| Decrease in trade accounts payable                                           |       | (1,219,193                                        | )           | **(1,646,338** | **)** |
| Increase (decrease) in accrued expenses and other  liabilities               |       | 1,008,195                                         | ** **  | **(1,831,929** | **)** |
| Increase in other assets                                                     |       | (198,718                                          | )           | **(76,825** | **)** |
| Net cash used in  operating activities                                       |       | (37,963,430                                       | )           | **($15,428,486** | **)** |
| ** **                                                                   |       |                                              | ** **  | ** ** | ** ** |
| **Investing activities**                                                     |       |                                              | ** **  | ** ** | ** ** |
| Capital  expenditures                                                        |       | (2,457,621                                        | )           | **(2,433,179** | **)** |
| Net proceeds  from the sale of WTVO-TV                                       |       | 5,802,243                                         | ** **  | **—** | ** ** |
| Proceeds from  the disposal of fixed assets                                  |       | 45,075                                            | ** **  | **614,048** | ** ** |
| Net cash  provided by (used in) investing activities                         |       | 3,389,697                                         | ** **  | **(1,819,131** | **)** |
| ** **                                                                   |       |                                              | ** **  | ** ** | ** ** |
| **Financing activities**                                                     |       |                                              | ** **  | ** ** | ** ** |
| Principal  borrowings on long-term debt                                      |       | $                                                 | 300,000,000 | ** ** | **$** | **50,000,000** | ** ** |
| Redemption of  notes                                                         |       | (246,890,000                                      | )           | **—** | ** ** |
| Deferred debt  financing costs incurred                                      |       | (5,979,099                                        | )           | **(1,290,225** | **)** |
| Principal  payments under capital lease obligations                          |       | (362,041                                          | )           | **(25,899** | **)** |
| Principal  payments on Credit Facility                                       |       | **—**                                        | ** **  | **(1,625,000** | **)** |
| Net cash  provided by financing activities                                   |       | 46,768,860                                        | ** **  | **47,058,846** | ** ** |
|                                                                         |       |                                              | ** **  | ** ** | ** ** |
| **Net  increase in cash**                                                    |       | 12,195,127                                        | ** **  | **29,811,229** | ** ** |
| Cash and cash  equivalents at beginning of year                              |       | 93,831,317                                        | ** **  | **78,099,123** | ** ** |
| **Cash  and cash equivalents at June 30**                                    |       | $                                                 | 106,026,444 | ** ** | **$** | **107,910,352** | ** ** |
| ** **                                                                   |       |                                              | ** **  | ** ** | ** ** |
| **Supplemental disclosure of cash  flow information**                        |       |                                              | ** **  | ** ** | ** ** |
| Interest paid                                                                |       | $                                                 | 30,874,505  | ** ** | **$** | **34,109,578** | ** ** |

 

*See accompanying notes toconsolidated financial statements.*

5

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**1. Basis of Presentation**

The businessoperations of Young Broadcasting Inc. and subsidiaries (the “Company”) consistof nine network affiliated stations (five with ABC, three with CBS, and onewith NBC) and one independent commercial television broadcasting station. Themarkets served are located in Lansing, Michigan, Green Bay, Wisconsin,Lafayette, Louisiana, Nashville and Knoxville, Tennessee, Albany, New York,Richmond, Virginia, Davenport, Iowa, Sioux Falls, South Dakota and SanFrancisco, California. In addition, the accompanying condensed consolidatedfinancial statements include the Company’s wholly owned national televisionsales representation firm. Significant intercompany transactions and accountshave been eliminated.

On March 16, 2006,KRON-TV, our only independent station, entered into an affiliation agreementwith MyNetworkTV. Additionally, on March 28, 2006, KELO-DT, KDLO-DT and KPLO-DTentered into an affiliation agreement with MyNetworkTV.  MyNetworkTV has stated that the new networkwill be launched on September 5, 2006.

The accompanyingcondensed consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles for interim financialstatements and with the instructions to Form 10-Q and Article 10 of RegulationS-X. The interim financial statements are unaudited but include alladjustments, which are of a normal recurring nature, that the Company considersnecessary for a fair presentation of the consolidated financial position andthe consolidated results of operations and cash flows for such period.

For investments inwhich the Company owns 20% to 50% of voting shares and does have significantinfluence over operating and financial policies, the equity method ofaccounting is used.  Four of the Company’sstations are party to equity investments in third parties for tower agreementswhich are accounted for under the equity method.  Accordingly, the Company’s share of earningsand losses of these companies are included in other expense, net in theaccompanying consolidated statement of operations of the Company.  The Company recorded its share of losses ofapproximately $464,000 and approximately $1.1 million for the six months endedJune 30, 2005 and 2006, respectively, and its share of earnings ofapproximately $83,000 and $47,000 for the three months ended June 30, 2005 and2006, respectively.

Certain prior yearbalances have been reclassified to conform to the presentation adopted in thecurrent fiscal year. Operating results of interim periods are not necessarilyindicative of results for a full year. For further information, refer to the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended December 31, 2005.

**2.Stock-Based Compensation**

On May 4, 2004,the shareholders of the Company approved the 2004 Equity Incentive Plan (“2004Plan”).  The 2004 Plan is a continuationof the 1995 Stock Option Plan and supplants the 1995 Stock Option Plan, underwhich no further awards will be granted. The 2004 Plan has the same number of shares that were authorized underthe 1995 Stock Option Plan, which is 4,550,000. The Plan is administered by the Compensation Committee of the Board ofDirectors.

In June 2006, June2005 and May 2004, the Company awarded 636,700, 438,500 and 109,100 deferredstock units, respectively, to executive officers of the Company under the 2004Plan, with aggregate market values at the date of grant of approximately $2.3million, $2.0 million and $1.8 million, respectively.  Deferred stock awards represent the right toreceive shares of Class B common stock at the end of specified deferralperiods. The deferred stock awards vest ratably in three equal annual installmentsbeginning one year from the date of the grant and, as they vest, 

6

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are charged to theincome statement as non cash compensation expense included in the selling,general and administrative expenses. Upon vesting the recipients will be credited with units equivalent toshares.  During the deferral period, theparticipants have no voting or other rights associated with stock ownershipunless and until the shares are actually delivered at the end of the deferralperiod. The end of the deferral period for the deferred stock awards will occurafter the termination of employment. Additionally, granted but unvested deferred stock units are forfeitedupon termination of employment, unless for reasons of death or disability.

The June 2005awards of deferred stock units were subject to the consummation of atransaction that resulted in there being available for grant under the 2004Plan a number of additional shares of common stock equal to the aggregatenumber of deferred units conditionally awarded to such executive officers.  These conditional awards became effective onNovember 29, 2005, when the Company entered into an exchange agreement witheach of its executive officers (collectively, the “Exchange Agreements”).Pursuant to the Exchange Agreements, options to purchase an aggregate of 2,198,375shares of common stock of the Company, representing all of the outstanding andunexercised stock options held by such executive officers, were cancelled and,in exchange for such cancelled options (which had a fair market value ofapproximately $182,000), the executive officers were awarded an aggregate of318,791 deferred stock units (which had an aggregate value of approximately$602,000) under the 2004 Plan.  Thecompensation expense associated with the fair market value of the deferredstock units ($602,000) will be recognized ratably over the three year vestingperiod.

In June 2006, June2005 and May 2004, the Company awarded 590,450, 432,600 and 102,954 shares,respectively, of restricted stock to certain officers and other eligible keyemployees under the 2004 Equity Incentive Plan, with market values at the dateof grant of approximately $2.1 million, $2.0 million and $1.7 million,respectively.  The restricted shares vestratably in three equal annual installments beginning one year from the date ofthe grant and, as they vest, are charged to the income statement as non cashcompensation expense included in the selling, general and administrativeexpenses.  During the vesting period, theparticipants have voting rights and the right to receive all dividends paidwith respect to such shares.  Uponvesting, the restricted stock recipients will receive shares of unrestrictedClass A Common Stock.  Additionally,granted but unvested shares are forfeited upon termination of employment,unless for reasons of death or disability.

On November 30,2005, the Company commenced an offer to all eligible employees to exchange allof their outstanding stock options. Under the terms of this offer,participating employees had the ability to exchange their outstanding optionswith an exercise price of less than $30.44 per share for new restricted sharesthat vest over a period of three years. The number of restricted shares to bereceived was based upon certain exchange ratios. In order to participate inthis offer, employees were required to tender all of their options, regardlessof when granted or the exercise price. Pursuant to the terms of the offer,tendered options with exercise prices of $30.44 or above were to be cancelledupon expiration of the offer, without the payment of any consideration. Options to purchase an aggregate of 949,776 shares of common stock wereeligible for participation in the offer. The offer expired on December 30,2005, at which time the Company accepted for exchange and cancelled options topurchase a total of 945,776 shares of Common Stock with a fair market value ofapproximately $181,000, and issued an aggregate of 158,992 restricted shares ofClass A common stock, under 2004 Plan, for an aggregate value of approximately$401,000.  The compensation expenseassociated with the fair market value of the restricted stock issued ($401,000)will be recognized ratably over the three year vesting period.

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*StockOptions*

As a result of theabove-discussed Exchange Agreements and exchange offer, the Company had anaggregate of 900 outstanding stock options that were unvested which were fullyexpensed during the first quarter of 2006, in the amount of approximately$5,000.

*RestrictedShares and Deferred Stock Units*

The fair value of nonvested restricted shares and deferred stock unitsis determined based on the closing trading price of the Company’s Class Acommon stock on the grant date. The Company recorded non-cashcompensation expense in connection with the issuance of the restricted shares anddeferred stock units of approximately $259,000 and $544,000, respectively, forthe three months ended June 30, 2005 and 2006, and $799,000 and $1.4 million,respectively, for the six months ended June 30, 2005 and 2006.

Therewere 1,472,363 and 2,484,691 shares of unvested restricted and deferred stockunits with a weighted average share price of $4.89 and $3.97 as of December 31,2005 and June 30, 2006, respectively.

The Company estimates recording additional compensation expenserelating to previously issued restricted shares and deferred stock units ofapproximately $2.1 million for the remainder of 2006 and approximately $3.5million, $2.5 million and $740,000 during 2007, 2008 and 2009, respectively.

During the first quarter of 2006, the Companyadopted FASB Statement No. 123 (R), *Share-Based Payment*(“SFAS 123R”), which requires companies to measure and recognizecompensation expense for all stock-based payments at fair value.  The Company adopted SFAS 123R using themodified prospective method, and consequently has not retroactively adjustedresults from prior periods.

The Company does not currently recognize taxbenefits resulting from tax deductions in excess of the compensation costsrecognized because of the federal and state net operating loss carryforwardsavailable to offset future federal and state taxable income.  Accordingly, the adoption of SFAS 123R didnot have any impact on the Company’s consolidated statements of cash flows.

Prior to January 1, 2006, the Company hadaccounted for its share-based payments to employees under FASB Statement No.123, *Accounting for Stock Based Compensation*(SFAS “123”) which allowed companies to either expense the estimated fair valueof stock options or to follow the intrinsic value method set forth in AccountPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), but disclose the pro forma netincome (loss) had the fair value of the options been expensed.

Forstock options granted prior to the adoption of SFAS 123(R), the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123(R) to its stock option plans would have beenas follows for the three  and six monthsended June 30, 2005:

8

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| ** **                                                                                                                                | ** ** | **Three**             | ** ** | **Six**               | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                | ** ** | **Months Ended** | ** ** | **Months Ended** | ** ** |
| ** **                                                                                                                                | ** ** | **June 30,**     | ** ** | **June 30,**     | ** ** |
| **(dollars in  thousands, except per share data)**                                                                                        | ** ** | **2005**              | ** ** | **2005**              | ** ** |
|                                                                                                                                      |       |                  |       |                  |       |
| Net loss-as  reported                                                                                                                     |       | $                     | (36,154    | )                     | $          | (55,505 | ) |
| Add stock based  employee compensation expense included in reported net loss                                                              |       | —                |       | —                |       |
| Deduct total stock-based  employee compensation expense determined under fair value based method, including  employee stock purchase plan |       | (627                  | )          | (1,485                | )          |
| Net loss-pro  forma                                                                                                                       |       | $                     | (36,781    | )                     | $          | (56,990 | ) |
| Net loss per  basic common share-as reported                                                                                              |       | $                     | (1.80      | )                     | $          | (2.76 | ) |
| Net loss per basic  common share-pro forma                                                                                                |       | $                     | (1.83      | )                     | $          | (2.84 | ) |

 

**3.Intangible Assets**

Intangible assets,which include broadcasting licenses, network affiliation agreements, and otherintangibles, are carried on the basis of cost, less accumulated amortization.Cost is based upon appraisals performed at the time of acquisition. Broadcastlicenses are considered to have an indefinite life. Network affiliationagreements are amortized over 25 years, and other definite lived intangibleassets are amortized over 10 to 15 years.

The followingtable sets forth the summarized disclosures related to intangible assets:
| ** **                           | ** ** | **As of December 31, 2005** | ** ** | **As of June 30, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **Gross  Carrying  Amount**                     | ** ** | **Accumulated  Amortization**               | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**            | ** ** |
| Indefinite-lived  intangible assets: |       |                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Broadcast  licenses                  |       | $                                               | 475,929    |                                        | —     |   | $ | 475,929 |   | $ | 475,929 |   | — |   | $ | 475,929 |   |
| Definite-lived  intangible assets:   |       |                                            |       |                                        |       |   |   |   |   |   |   |   |   |
| Network  Affiliations                |       | $                                               | 91,164     |                                        | $          | (30,914 | ) | $ | 60,250 |   | $ | 91,164 |   | $ | (32,349 | ) | $ | 58,815 |   |
| Other intangible  assets             |       | $                                               | 13,401     |                                        | $          | (8,197 | ) | $ | 5,204 |   | $ | 13,401 |   | $ | (8,865 | ) | $ | 4,536 |   |
|                                 |       | $                                               | 104,565    |                                        | $          | (39,111 | ) | $ | 65,454 |   | $ | 104,565 |   | $ | (41,214 | ) | $ | 63,351 |   |

 

Aggregateamortization expense for the six months ended June 30, 2005 and 2006 was $2.2million and $2.1 million, respectively. Aggregate amortization expense for the three months ended June 30, 2005and 2006 was $1.1 million and $1.1 million, respectively.

It is the Company’spolicy to account for Network Affiliations and other definite-lived intangibleassets at the lower of amortized cost or estimated fair value. As part of anongoing review of the valuation and amortization of other intangible assets ofthe Company and its subsidiaries, management assesses the carrying value ofNetwork Affiliations and other definite-lived intangible assets if facts andcircumstances suggest that there may be impairment. If this review indicatesthat Network Affiliations and other definite-lived intangible assets will notbe recoverable as determined by a non-discounted cash flow analysis of theoperating assets over the remaining amortization period, the carrying value ofother intangible assets would be reduced to estimated fair value.

In June 2001, the FASB issued Statement of FinancialAccounting Standards No. 142, *Goodwill andOther Intangible Assets*(“SFAS 142”).  To assist the Company in evaluating itsintangible assets, the Company utilized the service of an independent valuationconsulting firm.  FCC

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licenses are valued using a “Greenfield” incomeapproach.  Under this approach, the FCClicense is valued by analyzing the estimated after-tax discounted future cashflows of the station.  The assumptionsused in the discounted cash flow models reflect historical station performance,industry standards and trends in the respective markets.  An analysis of the financial multiples forpublicly-traded broadcasting companies, as well as a comparable sales analysisof television station sales, was also utilized to confirm the results of theincome approach.  The Company adoptedthis methodology to value broadcast licenses as the Company believes thismethodology has, in recent years, become the methodology generally used withinthe broadcast industry to value FCC licenses.

If these estimates or related assumptions materiallychange in the future, the Company may be required to record impairment chargesnot previously recorded for these assets.

**4. Saleof Station**

On October 4, 2004, the Company entered into an agreement with MissionBroadcasting, Inc. (“Mission”) to sell the assets of WTVO-TV, its station inRockford, Illinois, for an aggregate cash purchase price of approximately $20.8million. The agreement provided for the purchase and sale of WTVO assets tooccur in two steps. On November 1, 2004, the Company completed the firstclosing of the sale.  At the firstclosing, Mission paid the Company $15.0 million (as adjusted) of the aggregatepurchase price for the physical assets of the station and the parties enteredinto a time barter arrangement, with respect to the sale of advertising to thestation.  The completion of the secondstep of this transaction was subject to Federal Communications Commissionsreview and approval.  During this period,the Company retained the FCC license, the programming assets (networkagreements, syndication contracts, etc.) and certain other assets of thestation. On January 4, 2005, the second step of the transaction was completedand the remaining $5.75 million of the purchase price was paid to the Company. Again of approximately $14.7 million, net of applicable taxes, was recognized onthe sale; $3.5 million of this gain, net of a provision for income taxes of$300,000, was recognized in 2004 and approximately $11.2 million, net of aprovision for income taxes of $450,000, was recognized in the first quarter of2005. The gain allocation was determined based on the relative fair value ofthe assets sold, at each closing date.

The Company applied Statement 144, *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,*to this transaction, and as such the operating results of WTVO-TV arenot included in the Company’s consolidated results from continuing operationsfor the three months and six months ended June 30, 2005 and 2006.

The Company a loss from discontinued operations of $345 for the sixmonths ended June 30, 2005.  For thethree months ended June 30, 2005, the Company recorded a loss from discontinuedoperations of $822.  Net revenue ofWTVO-TV for the six months ended June 30, 2005, was $1,300.

**5. Long-TermDebt**

On May 3, 2005,the Company (i) entered into an amended and restated senior creditfacility  (“Senior Credit Facility”) and(ii) accepted for payment and paid for, in connection with a cash tender offerand consent solicitation commenced on April 11, 2005, all of its $246,890,000outstanding principal amount of 81⁄2% Senior Notes Due 2008.  The Senior Credit Facility provided for a $300.0million term loan and a $20.0 million revolving credit facility.  The Senior Credit Facility bears variousfloating interest rates, based upon LIBOR, ranging from 7.69% to 7.88% at June30, 2006.  On May 3, 2005, the fullamount of the term loan was borrowed. Approximately $278.0 million of the proceeds of such term loan borrowingwas used to pay fees and expenses related to the Senior Credit Facility and tofinance the purchase of the Senior Notes

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in the tenderoffer, including the payment of related premiums, accrued interest, fees and expenses.  The balance of the term loan borrowing willbe used for working capital.  The termloan will mature in 2012 and the revolving facility will mature in 2010.  The Company capitalized approximately $6.0million of fees associated with the new term loan and revolving Senior CreditFacility.

In connection withthe cash tender offer and consent solicitation, the Company recorded a loss onthe extinguishment of debt in the second quarter of 2005, totalingapproximately $18.6 million.  This lossis comprised of the cost of the consent solicitations (approximately $18.1million), plus the write-off of the deferred financing costs (approximately$4.9 million), less the unamortized portion of the bond premium relating to the81⁄2% Senior Notes (approximately $4.6 million), plus various otheradministrative expenses (approximately $200,000).

On May30, 2006, the Company entered into (i) the First Amendment (the “FirstAmendment”) to the Senior Credit Facility and (ii) the Increase Joinder (the “IncreaseJoinder”) to the Senior Credit Facility. The First Amendment effected certainamendments to the Senior Credit Facility including, without limitation, (i) thereduction of the minimum amount of cash the Company must maintain from $35.0million to $10.0 million and (ii) an increase of 0.25% to each of the Base RateMargin and the Eurodollar Margin (used in the calculation of interest ratespayable by the Company under the Senior Credit Facility).  As a result of the margin increases, the BaseRate and the Eurodollar Rate margins are now equal to 1.50% and 2.50%,respectively.  The Increase Joinder provided for a $50.0 millionincremental term loan under the Senior Credit Facility.

On May30, 2006, the full $50.0 million of the incremental term loan was borrowed bythe Company. The proceeds of the incremental term loan borrowing will be usedfor working capital and to pay fees and expenses related to the incrementalterm loan and the First Amendment. The Company capitalized approximately $1.3million of fees associated with the incremental term loan and First Amendment.

Theincremental term loan has the same terms and conditions as the term loansoutstanding under the Senior Credit Facility (as amended by the FirstAmendment) immediately prior to the incremental term loan borrowing. The termloan portion of the Senior Credit Facility matures in 2012. As of June 30,2006, approximately $346.9 million was outstanding under the term loan portionof the Senior Credit Facility.

On May 3,2005, the Company entered into an interest rate swap agreement for a notionalamount of $71.0 million with a commercial bank who is also a lender under thesenior credit facility.  The swap becameeffective on May 8, 2006 and expires on May 8, 2008.  Upon effectiveness, the Company began to pay afixed interest of 4.3425% and the Company receives interest from the commercialbank, based upon a three month LIBOR rate. It is the Company’s intention to ensure the interest rate reset dates ofthe swap and the term loan will match over the term of the swap, and thereforethe changes in the fair value of the interest-rate swap are expected tosignificantly offset changes in the cash flows of the floating rate debt.  The Company accounts for this agreement as acash flow hedge under FASB Statement No. 133, Accounting for DerivativeInstruments and Hedging Activities, and as such, the change in the fair valueof the interest rate swap is reported as a component of other comprehensiveincome (loss).  For the three and sixmonths ended June 30, 2006 a gain of approximately $409,000 and $967,000 wasrecorded in other comprehensive income (loss).

On May 5, 2005,the Company entered into a partial termination agreement with Deutsche Bank toterminate one third of its original notional amount of $63.2 million interestrate swap, or approximately $21.1 million. In consideration of the termination, the Company was required to

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make a net paymentof approximately $702,000, reduced by the Company’s accrued interest incomefrom the last payment date of March 1, 2005 through the termination date of May5, 2005 (approximately $35,000).  Inaccordance with the termination, the swap liability was reduced by the fairmarket value of the one third portion of the swap as of the termination date(approximately $728,000).  The differencebetween the payment and the fair market value of the partially terminated swapwas recorded as interest expense for the period (approximately $9,000).

OnNovember 17, 2005, the Company entered into a partial termination agreementwith Deutsche Bank to terminate one half of its remaining notional amount $42.1million interest rate swap.  Further, onNovember 23, 2005, the Company entered into a final termination agreement withDeustche Bank to terminate the remaining notional amount $21.1 million interestrate swap.  In connection with theterminated interest rate swap agreement, the Company made net interest paymentsof $997,500 and $992,000, which includes the Company’s accrued interest on theswap from the last payment date of September 1, 2005 through the terminationdates of November 17, 2005 and November 23, 2005.  In accordance with the termination, the swapliability was reduced by the fair market value of the swap as of thetermination dates (approximately $2.0 million on both November 17, 2005 andNovember 23, 2005).  The differencebetween the two payments and the fair market value of the terminated swap wasrecorded as interest expense during the period (approximately $19,000).

Long-term debt atDecember 31, 2005 and June 30, 2006 consisted of the following:
| ** **                                            | ** ** | **12/31/05**            | ** ** | **6/30/06** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Senior Credit  Facility                               | ** ** | $                       | 298,500    |        | $          | 346,875 | ** ** |
| 83⁄4% Senior  Subordinated Notes due 2014          |       | 140,000                 |       | 140,000     |       |
| 10% Senior  Subordinated Notes due 2011               |       | 347,292                 | (1)        | 347,002     | (1)        |
| Total Long Term  Debt                                 |       | $                       | 785,792    |        | $          | 833,877 |   |
| Less:                                                 |       |                    |       |        |       |
| Scheduled  current maturities                         |       | ($3,000                 | )          | (3,500      | )          |
| Long term debt  excluding all current installments(2) |       | $                       | 782,792    |        | $          | 830,377 |   |

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(1) Includesunamortized premium balances of $3.0 million and $2.7 million as of December31, 2005 and June 30, 2006.

(3) Excludescapital leases.

**6. IncomeTaxes**

At December 31, 2005, the Company had net operating loss (“NOL”)carryforwards for tax purposes of approximately $340.8 million expiring atvarious dates through 2025, for which a full valuation allowance has beenprovided.

With the adoption of the FASB issuedStatement No.142 , *Goodwill and OtherIntangible Assets* (SFAS 142) the Company no longer amortizes thebook basis in the indefinite-lived intangibles, but continues to amortize theseintangibles for tax purposes. The Company’s income tax expense for the threeand six months ended June 30, 2006 primarily consists of deferred income taxes of $1.7 million and $14.2 million,respectively related to the increase in the Company’s deferred tax liabilityfor the tax effect of the difference between the book and tax basis of theintangible assets not expected to reverse during the net operating losscarryforward period.

 

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The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these assets will not reverse priorto the expiration period of the Company’s deductible temporary differencesunless the related assets are sold or an impairment of the assets is recorded.The Company expects that it will record a total of approximately $5.0 millionto increase deferred tax liabilities during the remaining six months of 2006.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes —an Interpretation of FASB Statement No. 109” (FIN 48), whichclarifies the accounting for uncertain tax positions. This Interpretationrequires that we recognize in our financial statements the impact of a taxposition if that position is more likely than not of being sustained on audit,based on the technical merits of the position. The provisions of FIN 48are effective as of the beginning of our 2007 fiscal year, with the cumulativeeffect, if any, of the change in accounting principle recorded as an adjustmentto opening retained earnings. We are currently evaluating the impact ofadopting FIN 48 on our condensed consolidated financial statements

**7.Employee Benefit Plans**

The Company’sdefined benefit pension plan covers the IBEW Local 45 of KRON-TV employees.

The Company expects to contribute approximately$352,000 to the benefit plan in 2006**. **To date approximately $217,000 hasbeen contributed.

Components of the netperiodic benefit (cost) were as follows:
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                       | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Service cost                                                     |       | $                                | 68,514     |                           | $          | 10,500 |   | $ | 137,028 |   | $ | 21,000 |   |
| Interest cost                                                    |       | 155,036                          |       | 150,000                        |       | 310,072 |   | 300,000 |   |
| Expected return of plan  assets                                  |       | (168,463                         | )          | (169,000                       | )          | (336,926 | ) | (338,000 | ) |
| Amortization of the  unrecognized obligation or transition asset |       | 33,269                           |       | 36,500                         |       | 66,538 |   | 73,000 |   |
| Recognized loss                                                  |       | 11,118                           |       | —                         |       | 22,236 |   | — |   |
| Recognized prior  service costs                                  |       | (5,933                           | )          | (3,500                         | )          | (11,866 | ) | (7,000 | ) |
| Curtailment loss                                                 |       | 135,556                          |       | —                         |       | 271,112 |   | — |   |
| Net periodic cost                                                |       | $                                | 229,097    |                           | $          | 24,500 |   | $ | 458,194 |   | $ | 49,000 |   |

 

**8.Commitments and Contingencies**

*NetworkAffiliation Agreements*

InSeptember 2005, the Company renewed its affiliations with ABC with respect toWKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV. The renewed ABC affiliations expire on December 31, 2009.   The Company has renewed its affiliationswith CBS with respect to WLNS-TV and KLFY-TV and with NBC with respect toKWQC-TV.  The renewed CBS affiliationsexpire on September 30, 2012 and the renewed NBC affiliation expires on January1, 2015.  Under the renewed ABC, CBS andNBC affiliations, the Company will be receiving significantly less networkcompensation than it received from ABC, CBS and NBC under the expiredagreements.   The Company received noticefrom CBS with respect to KELO that the network

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willnot renew the current affiliation agreement currently in place and that thenetwork wishes to negotiate a new agreement. This agreement with CBS expires on October 2, 2006.  While the Company is unable to predict theterms of a new affiliation agreement, the Company believes the station willhave a network affiliation in place at the expiration of the currentaffiliation.

On March 16, 2006,KRON-TV, our only independent station, entered into an affiliation agreementwith MyNetworkTV.   Additionally, onMarch 28, 2006, KELO-DT, KDLO-DT and KPLO-DT entered into an affiliationagreement with MyNetworkTV.  MyNetworkTVhas stated that the new network will be launched on September 5, 2006.

**9.Earnings Per Share**

Theweighted average number of shares of Class A and Class B common stockoutstanding during the period has been used to calculate earnings pershare.   The outstanding stock optionsand deferred stock units have not been included in the computation of earningsper share because they would be anti-dilutive.

For thethree and six months ended June 30, 2006, common stock equivalents, consistingof 207,742  and 190,347 shares of commonstock underlying outstanding deferred stock units, have been excluded from thecomputation as they are anti-dilutive on the loss per share. For the three andsix months ended June 30, 2005, common stock equivalents, consisting of 21,300shares of common stock underlying outstanding deferred stock units, have beenexcluded in the computation as they are anti-dilutive on the loss pershare.   For the three and six monthsended June 30, 2006 and June 30, 2005, there are no shares underlyingoutstanding stock options, since the exercise price of all previously grantedstock options that remain outstanding was greater than the average market priceof the common shares.

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** **

**Item 2. *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*.**

**FORWARD-LOOKINGSTATEMENTS**

**FORWARDLOOKING STATEMENTS ARE ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICALFACTS, INCLUDED IN THIS REPORT. THE FORWARD LOOKING STATEMENTS CONTAINED INTHIS REPORT CONCERN, AMONG OTHER THINGS, CERTAIN STATEMENTS UNDER “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, AND ARE SUBJECT TOCHANGE BASED ON VARIOUS IMPORTANT FACTORS, INCLUDING THE IMPACT OF CHANGES INNATIONAL AND REGIONAL ECONOMIES, PRICING FLUCTUATIONS IN LOCAL AND NATIONALADVERTISING, VOLATILITY IN PROGRAMMING COSTS AND GEOPOLITICAL FACTORS.**

**Introduction**

Management’sdiscussion and analysis of financial condition and results of operation (“MD&A”)is provided as a supplement to the accompanying consolidated financialstatements and footnotes to help provide an understanding of the Company’sfinancial condition, changes in financial condition and results ofoperations.  MD&A is organized asfollows:

***Overviewof our Business****—*This sectionprovides a general description of the Company’s business, as well as recentdevelopments that have occurred during 2006 that the Company believes areimportant in understanding its results of operations and financial condition orto anticipate future trends.

***Resultsof Operations***— This section provides an analysis of theCompany’s results of operations for the three and six months ended June 30,2006 and 2005.  This analysis ispresented on a consolidated basis.  Inaddition, this section provides a brief description of significant transactionsand events that impact the comparability of the results being analyzed.

***Liquidityand Capital Resources***—******Thissection provides an analysis of the Company’s cash flows for the six monthsended June 30, 2006 and 2005.  Includedin the discussion of outstanding debt is a discussion of the amount offinancial capacity available to fund the Company’s future commitments andobligations, as well as a discussion of other financing arrangements.

**Overviewof our Business**

The operatingrevenue of the Company’s stations is derived primarily from advertising revenueand, to a much lesser extent, from retransmission revenues from cable andsatellite operators and compensation paid by the networks to its affiliatedstations for broadcasting network programming.

Advertising issold for placement within and adjoining a station’s network and locallyoriginated programming.  Advertising issold in time increments and is priced primarily on the basis of a program’spopularity among the specific audience an advertiser desires to reach, asmeasured principally by periodic audience surveys.  In addition, advertising rates are affectedby the number of advertisers competing for the available time, the size anddemographic makeup of the

15

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market served bythe station and the availability of alternative advertising media in the marketarea. Rates are highest during the most desirable viewing hours, withcorresponding reductions during other hours. The ratings of a local station affiliated with a national televisionnetwork can be affected by ratings of network programming.

Most advertisingcontracts are short-term, and generally run only for a few weeks.Approximately 56% of the gross revenue of the Company’s stations during thequarter ended June 30, 2006 was generated from local advertising, which is soldby a station’s sales staff directly to local accounts. The remainder of thegross revenue is primarily comprised of revenues from national advertising,which is sold by the Company’s wholly owned subsidiary, Adam Young Inc. (“AYI”),a national advertising sales representative. The stations generally paycommissions to advertising agencies on local, regional and national advertising.

Expenditures byadvertisers tend to be cyclical, reflecting overall economic conditions, aswell as budgeting and buying patterns.  Adecline in the economic prospects of advertisers or the economy in generalcould alter current or prospective advertisers’ spending priorities.  This could cause our revenues or operatingresults to decline significantly in any given period.

The advertisingrevenue of the Company’s stations are generally highest in the second andfourth quarters of each year, due in part to increases in consumer advertisingin the spring and retail advertising in the period leading up to, andincluding, the holiday season. In addition, advertising revenue is generallyhigher during even numbered election years due to spending by politicalcandidates, which spending typically is heaviest during the fourth quarter.

Thestations’ primary operating expenses are for employee compensation,news-gathering, production, programming and promotion costs.  A high proportion of the operating expenses ofthe stations are fixed.

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**TelevisionRevenues**

Setforth below are the principal types of television revenues received by theCompany’s stations for the periods indicated and the percentage contribution ofeach to the Company’s total revenue, as well as agency and national salesrepresentative commissions:
| ** **       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **       | ** ** | **2005**                                            | ** ** | ** **                                        | ** ** | **2006** | ** ** | ** ** | ** ** | **2005** | ** ** | ** ** | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Amount**                                          | ** ** | **%**                                             | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**                | ** ** |
| Revenues         |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Local            |       | $                                                   | 35,844     |                                              | 60.8       |   | $ | 36,540 |   | 55.5 |   | $ | 66,912 |   | 59.8 |   | $ | 69,131 |   | 56.7 |   |
| National         |       | 18,831                                              |       | 32.0                                              |       | 20,564 |   | 31.3 |   | 36,380 |   | 32.5 |   | 38,080 |   | 31.2 |   |
| Network          |       | 399                                                 |       | 0.7                                               |       | 663 |   | 1.0 |   | 738 |   | 0.6 |   | 1,246 |   | 1.0 |   |
| Political        |       | 844                                                 |       | 1.4                                               |       | 4,826 |   | 7.3 |   | 1,228 |   | 1.1 |   | 6,068 |   | 5.0 |   |
| Barter           |       | 1,673                                               |       | 2.8                                               |       | 1,517 |   | 2.3 |   | 3,417 |   | 3.1 |   | 3,263 |   | 2.7 |   |
| Production/Other |       | 1,380                                               |       | 2.3                                               |       | 1,728 |   | 2.6 |   | 3,289 |   | 2.9 |   | 4,241 |   | 3.4 |   |
| Total            |       | $                                                   | 58,971     |                                              | 100.0      |   | $ | 65,838 |   | 100.0 |   | $ | 111,964 |   | 100.0 |   | $ | 122,029 |   | 100.0 |   |
|             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |       | (8,106                                              | )          | (13.7                                             | )          | (9,083 | ) | (13.8 | ) | (15,589 | ) | (13.9 | ) | (16,887 | ) | (13.8 | ) |
|             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue.     |       | $                                                   | 50,865     |                                              | 86.3       |   | $ | 56,755 |   | 86.2 |   | $ | 96,375 |   | 86.1 |   | $ | 105,142 |   | 86.2 |   |

** **

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**Resultsof Operations**

***Three Months Ended June 30, 2006 Compared to Three Months Ended June30, 2005***

The following table sets forth the Company’s operatingresults for the three months ended June 30, 2006 as compared to the threemonths ended June 30, 2005.  The resultsfrom continuing operations for the three months ended June 30, 2005 do notinclude the results of operations for WTVO-TV. Results for WTVO-TV are reflected as discontinued operations.
| ** **                                                | ** ** | **For the three months ended June 30,  (in thousands, except per share data)** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2005**                                                                                                                              | ** ** | **2006**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Net revenue                                               |       | $                                                                                                                                     | 50,865     |       | $          | 56,755 |   | $ | 5,890 |   | 11.6 | % |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Operating  expenses, including SG&A                   |       | 34,838                                                                                                                                |       | 33,929     |       | (909 | ) | (2.6 | ) |
| Amortization of  program license rights                   |       | 5,271                                                                                                                                 |       | 7,017      |       | 1,746 |   | 33.1 |   |
| Depreciation and  amortization                            |       | 6,044                                                                                                                                 |       | 4,728      |       | (1,316 | ) | (21.8 | ) |
| Corporate  overhead, excluding depreciation expense       |       | 3,064                                                                                                                                 |       | 3,417      |       | 353 |   | 11.5 |   |
| Operating income                                          |       | 1,648                                                                                                                                 |       | 7,664      |       | 6,016 |   | 365.0 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Interest  expense, net                                    |       | (15,414                                                                                                                               | )          | (16,480    | )          | (1,066 | ) | (6.9 | ) |
| Non-cash change  in market valuation of swaps             |       | 1,165                                                                                                                                 | ** ** | **—** |       | (1,165 | ) | (100.0 | ) |
| Loss on  extinguishment of debt                           |       | (18,626                                                                                                                               | )          | **—** |       | 18,626 |   | 100.0 |   |
| Other income/  (expense)                                  |       | (148                                                                                                                                  | )          | (330       | )          | (182 | ) | (123.0 | ) |
|                                                      |       | (33,023)                                                                                                                              |       | (16,810    | )          | 16,213 |   | 49.1 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Loss from  continuing operations before income taxes      |       | (31,375                                                                                                                               | )          | (9,146     | )          | 22,229 |   | 70.8 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Income tax  expense                                       |       | (4,778                                                                                                                                | )          | (1,842     | )          | 2,936 |   | 61.4 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Loss from  continuing operations                          |       | (36,153                                                                                                                               | )          | (10,988    | )          | 25,165 |   | 69.6 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| (Loss) income  from discontinued operations, net of taxes |       | (1                                                                                                                                    | )          | **—** |       | 1 |   | 100.0 |   |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Net loss                                                  |       | $                                                                                                                                     | (36,154    | )          | $          | (10,988 | ) | $ | 25,166 |   | 69.6 | % |
|                                                      |       |                                                                                                                                  |       |       |       |   |   |   |   |
| Basic loss from  continuing operations per common share   |       | $                                                                                                                                     | (1.80      | )          | $          | (0.52 | ) |   |   |   |   |
| Loss (income)  from discontinued operations, net          |       | (0.00                                                                                                                                 | )          | (0.00      | )          |   |   |   |   |
| Basic net loss  per common share                          |       | $                                                                                                                                     | (1.80      | )          | $          | (0.52 | ) |   |   |   |   |
| Basic shares used in  earnings per share calculation      |       | 20,121,791                                                                                                                            |       | 21,223,347 |       |   |   |   |   |

 

18

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NetRevenue includes: (i) cash and barter advertising revenues, net of agencycommissions; (ii) network compensation; and (iii) other revenues whichrepresent less than 3% of total net revenue. Net revenue for the three months ended June 30, 2006 was $56.8 million,as compared to $50.9 million for the three months ended June 30, 2005, anincrease of $5.9 million or 11.6%.  Themajor components of, and changes to, net revenue were as follows:

·                  Gross politicalrevenue for the three months ended June 30, 2006 was $4.8 million, as comparedto $844,000, for the three months ended June 30, 2005, an increase of $4.0million, or 471.8%.  This increase is dueto various local midterm elections in 2006 at seven geographic locations inwhich we own stations.

·                  The Company’sgross local revenues for the three months ended June 30, 2006 increased by 1.9%compared to the three months ended June 30, 2005, and gross national revenuesfor the three months ended June 30, 2006 were up 9.2% compared to the prioryear.  The increase in gross localrevenues is partially attributable to new advertisers, in conjunction with newlocal sales initiatives.  Additionally,nine of the ten stations increased local revenues from various accounts,including hospitals, furniture, automotive and healthcare. The increase ingross national revenues for the three months ended June 30, 2005 was mainly dueto increased national revenue from various categories, including automotiveaccounts at five of the Company’s stations. 

·                  Networkcompensation for the three months ended June 30, 2006 was $663,000, an increaseof $264,000, or 66.2%, compared to $399,000 for the three months ended June 30,2005.   The majority of this increaserelates to the ABC affiliation agreements which were renewed in September 2005and were retroactive to October 1, 2004. The ABC affiliates had deferred all compensation received during thesecond quarter of 2005, since the contract had not been renewed at thatpoint.  

Operatingexpenses, including selling, general and administrative expenses, for the threemonths ended June 30, 2006 were $33.9 million as compared to $34.8 million forthe three months ended June 30, 2005, a decrease of $909,000, or 2.6%.  The major causes of the decreases inoperating expenses were as follows:

·                  Personnel costs,including severance costs, decreased approximately $1.3 million, resultingprimarily from the cost cutting initiatives and headcount reductions that tookplace in 2005, which began to benefit the Company during the second half of2005.  Of this decrease, approximately$900,000 relates to expense reductions that will continue to benefit futureperiods.

·                  Approximately$471,000 of the decrease is attributable to decreases in media spending at oneof the Company’s stations during the three months ended June 30, 2006.

The following items acted to offset these changes:

·                  Included in theselling, general and administrative expenses is non-cash compensation expenseof approximately $1.3 million for the three months ended June 30, 2006, ofwhich approximately $799,000 relates to restricted and deferred stock awards.  The remaining $468,000 of non-cashcompensation relates to the Company’s matching contributions to eligibleemployees under its defined contribution plan. This compares to non-cash compensation of $557,000 for the three monthsended June 30, 2005.  This increase isdue primarily to the increased non-cash compensation expense associated withrestricted shares and deferred stock units awarded in 2005 and 2006.

Amortization of program license rights for the three months ended June30, 2006 was $7.0 million, compared to $5.3 million for the three months endedJune 30, 2005, an increase of $1.7 million, or 33.1%.  The increase for the three months ended June30, 2006 was primarily due the combination of increased renewal costs ofprogramming as well as the addition of *Sex and the City*at one of the Company’s stations.

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Depreciation of property and equipment and amortization of intangibleassets was $4.7 million for the three months ended June 30, 2006 as compared to$6.0 million for the three months ended June 30, 2005, a decrease ofapproximately $1.3 million or 21.8%.  Approximately $1.1 million of this decrease isthe result of various furniture, fixtures and computer at one of the Company’sstations becoming fully depreciated in June 2005.

Corporate Overhead for the three months ended June 30, 2006 was $3.4million, compared to $3.1 million for the three months ended June 30, 2005, anincrease of $353,000, or 11.5%.  Thisincrease was mainly due an increase in bonus expense of approximately $411,000,resulting from  increased revenues andthe Company meeting its interim performance targets during 2006.

Interestexpense for the three months ended June 30, 2006 was $16.5 million, compared to$15.4 million for the same period in 2005, an increase of $1.1 million, or6.9%.  The Company received a payment onits interest rate swaps of $409,000 for the three months ended June 30, 2005,which was recorded as a reduction of interest expense.  Pursuant to a refinancing transactioncompleted on May 3, 2005, the Company used borrowings under its $300.0 millioncredit facility to purchase all of its $246.9 million principal amount of 8 1⁄2%Senior Notes due 2008.  Furthermore, onMay 30, 2006, the Company entered into the First Amendment to the Senior CreditFacility.  The Company also requested anincremental term loan of $50.0 million under the Credit Agreement through anIncrease Joinder.  On May 30, 2006, thefull $50.0 million of the incremental term loan was borrowed by theCompany.  The senior credit facility andincremental term loan bears various floating interest rates, based upon LIBOR,ranging from 7.69% to 7.88%, at June 30, 2006, thus increasing interest expenseduring the second quarter of 2006.

The Company recorded a $1.2 million non-cash gain in connection withthe change in the market value of interest rate swaps for the three monthsended June 30, 2005.   This swap wasterminated at the end of 2005, and therefore, no non cash change in marketvalue was recorded for the three months ended June 30, 2006.

For the three months ended June 30, 2005 the Company recorded a loss onextinguishment of debt totaling approximately $18.6 million in connection withthe cash tender offer and consent solicitation completed on May 3, 2005.   This loss is comprised of the cost of theconsent solicitations (approximately $18.1 million), plus the write-off of thedeferred financing costs (approximately $4.9 million), less the unamortizedportion of the bond premium relating to the 81⁄2% Senior Notes (approximately$4.6 million), plus otherexpenses related to the cash tender offer (approximately $200,000) (see “Liquidityand Capital Resources”).

TheCompany recorded an income tax provision of $1.8 million and $4.8 million forthe three months ended June 30, 2006 and 2005, respectively.  This provision includes a deferred taxliability of $1.7 million and $4.6 million for the taxable temporary differencerelated to the amortization of the Company’s indefinite-lived intangible assetsfor 2006 and 2005, respectively, which continues to be amortized for taxpurposes.

On October 4, 2004, the Company entered into an agreement with MissionBroadcasting, Inc. to sell the assets of WTVO-TV, its station in Rockford,Illinois, for an aggregate cash purchase price of approximately $20.8 million.A gain of approximately $14.7 million, net of applicable taxes was recognizedon the sale; $3.5 million of this gain, net of a provision for income taxes of$300,000, was recognized in the fourth quarter of 2004 and approximately $11.2million, net of a provision for income taxes of $450,000, was recognized in thefirst quarter of 2005.  In connectionwith this transaction, the Company recorded a loss from discontinued operationsof approximately $822 for the three months ended June 30, 2005.

20

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As a result of the above-discussed factors, the net loss for theCompany was $11.0 million for the three months ended June 30, 2006, compared toa net loss of $36.2 million for the three months ended June 30, 2005, a changeof $25.2 million, or 69.6%.

***Six Months Ended June 30, 2006 Compared to Six Months Ended June 30,2005***

The following table sets forth the Company’s operating results for thesix months ended June 30, 2006 as compared to the six months ended June 30,2005.  The results from continuingoperations for the six months ended June 30, 2005 do not include the results ofoperations for WTVO-TV.  Results forWTVO-TV are reflected as discontinued operations.  
| ** **                                                                                                   | ** ** | **For the six months ended June 30,  (in thousands, except per share data)** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                   | ** ** | **2005**                                                                                                                            | ** ** | **2006**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Net revenue                                                                                                  |       | $                                                                                                                                   | 96,375     |       | $          | 105,141 |   | $ | 8,766 |   | 9.1 | % |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Operating  expenses, including SG&A                                                                      |       | 70,273                                                                                                                              |       | 67,848     |       | (2,425 | ) | (3.5 | ) |
| Amortization of  program license rights                                                                      |       | 10,606                                                                                                                              |       | 13,872     |       | 3,266 |   | 30.8 |   |
| Depreciation and  amortization                                                                               |       | 12,436                                                                                                                              |       | 9,520      |       | (2,916 | ) | (23.4 | ) |
| Corporate  overhead, excluding depreciation expense                                                          |       | 7,154                                                                                                                               |       | 7,044      |       | (110 | ) | (1.5 | ) |
| Operating income  (loss)                                                                                     |       | (4,094                                                                                                                              | )          | 6,857      |       | 10,951 |   | 267.5 |   |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Interest  expense, net                                                                                       |       | (31,237                                                                                                                             | )          | (32,340    | )          | (1,103 | ) | 3.5 |   |
| Non-cash change  in market valuation of swaps                                                                |       | (659                                                                                                                                | )          | —     |       | 659 |   | 100.0 |   |
| Loss on extinguishment  of debt                                                                              |       | (18,626                                                                                                                             | )          | —     |       | 18,626 |   | 100.0 |   |
| Other income/  (expense)                                                                                     |       | (303                                                                                                                                | )          | (1,558     | )          | (1,255 | ) | 414.1 |   |
|                                                                                                         |       | (50,825                                                                                                                             | )          | (33,898    | )          | 16,927 |   | 33.3 |   |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Loss from  continuing operations before income taxes                                                         |       | (54,919                                                                                                                             | )          | (27,041    | )          | 27,878 |   | 50.8 |   |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Income tax  expense                                                                                          |       | (11,793                                                                                                                             | )          | (14,583    | )          | (2,790 | ) | 23.7 |   |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Loss from  continuing operations                                                                             |       | (66,712                                                                                                                             | )          | (41,624    | )          | 25,088 |   | 37.6 |   |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| (Loss) income  from discontinued operations, net of taxes (including gain on sale of $11.2  million in 2005) |       | 11,207                                                                                                                              |       | —     |       | (11,207 | ) | (100.0 | ) |
|                                                                                                         |       |                                                                                                                                |       |       |       |   |   |   |   |
| Net loss                                                                                                     |       | $                                                                                                                                   | (55,505    | )          | $          | (41,624 | ) | $ | 13,881 |   | 25.0 | % |
| Basic loss from  continuing operations per common share                                                      |       | $                                                                                                                                   | (3.32      | )          | $          | (1.98 | ) |   |   |   |   |
| Loss (income)  from discontinued operations, net                                                             |       | 0.56                                                                                                                                |       | —     |       |   |   |   |   |
| Basic net loss  per common share                                                                             |       | $                                                                                                                                   | (2.76      | )          | $          | (1.98 | ) |   |   |   |   |
| Basic shares used in  earnings per share calculation                                                         |       | 20,089,076                                                                                                                          |       | 21,071,672 |       |   |   |   |   |

 

21

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Netrevenue for the six months ended June 30, 2006 was $105.1 million, as comparedto $96.4 million for the six months ended June 30, 2005, an increase of $8.8million or 9.1%.  The major componentsof, and changes to, net revenue were as follows:

·                  Gross politicalrevenue for the six months ended June 30, 2006 was $6.1 million, as compared to$1.2 million for the six months ended June 30, 2005, an increase ofapproximately $4.9 million, or 394.1%. This increase is due to various local midterm elections in 2006 at eightgeographic locations in which we own stations.

·                  The Company’sgross local revenues for the six months ended June 30, 2006 increased by 3.3%compared to the six months ended June 30, 2005, and gross national revenues forthe six months ended June 30, 2006 were up 4.7% compared to the prioryear.  The increase in gross localrevenues is partially attributable to new advertisers, in conjunction with newlocal sales initiatives.  Additionally,eight of the ten stations increased local revenues from various accounts,including hospitals, furniture, automotive and healthcare. The increase ingross national revenues for the six months ended June 30, 2006 was due tovarious factors.  A few of the stationsexperienced increases in prime time ratings.

·                  Networkcompensation for the six months ended June 30, 2006 was $1.2 million, anincrease of $508,000, or 69.0%, compared to $738,000 for the six months endedJune 30, 2005.  The majority of thisincrease relates to the ABC affiliation agreements which were renewed inSeptember 2005 and were retroactive to October 1, 2004.  The ABC affiliates had deferred allcompensation received during the first half of 2005, since the contract had notbeen renewed at that point.  

Operating expenses, including selling, general and administrativeexpenses, for the six months ended June 30, 2006 were $67.8 million as comparedto $70.3 million for the six months ended June 30, 2005, a decrease of $2.4million, or 3.5%.  The major causes ofthe decreases in operating expenses were as follows:

·                  Personnel costs,including severance costs, decreased approximately $2.4 million, resultingprimarily from the cost cutting initiatives and headcount reductions that tookplace in 2005, which began to benefit the Company during the second half of2005.  Of this decrease, approximately $1.8million relates to expense reductions that will continue to benefit futureperiods.

·                  Pension expensewas down approximately $602,000, due primarily to an additional pensionliability for a terminated executive of approximately $426,000 that wasrecorded during the first quarter of 2005, with no such expense recorded duringthe first half of 2006.

·                  Approximately$500,000 of the decrease is attributable to decreases in media spending at oneof the Company’s stations during the six months ended June 30, 2006.

The following items acted to offset these changes:

·                  Included inselling, general and administrative expenses is non-cash compensation expenseof approximately $2.3 million for the six months ended June, 2006, of whichapproximately $1.4 million relates to restricted shares and deferred stockawards.  The remaining $902,000 ofnon-cash compensation relates to the Company’s matching contributions to eligibleemployees under its defined contribution plan. This compares to non-cash compensation of $1.2 million for the sixmonths ended June 30, 2005, an increase of approximately $1.1 million.  This increase is due primarily to theincreased non-cash compensation expense associated with restricted shares anddeferred stock units awarded in 2005 and 2006.

Amortization of program license rights for the six months ended June30, 2006 was $13.9 million, compared to $10.6 million for the six months endedJune 30, 2005, an increase of $3.3 million, or

22

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30.8%.  The increase for the sixmonths ended June 30, 2006 was primarily due the combination of increasedrenewal costs of programming as well as the addition of *Sex and theCity* at one of the Company’s stations.

Depreciationof property and equipment and amortization of intangible assets was $9.5million for the six months ended June 30, 2006 as compared to $12.4 million forthe six months ended June 30, 2005, a decrease of approximately $2.9 million or23.4%.  This decrease is due to thefollowing:

·                  Approximately$2.4 million of this decrease is the result of various furniture, fixtures andcomputers at one of the Company’s stations becoming fully depreciated duringthe second quarter of 2005.

CorporateOverhead for the six months ended June 30, 2006 and June 30, 2005 was $7.0million for the six months ended June 30, 2006 compared to $7.2 million for thesix months ended June 30, 2005, a decrease of approximately $110,000 or1.5%.  The major components of corporateexpenses were as follows:

·                  Legal,professional and consulting fees were down approximately $806,000 for the sixmonths ended June 30, 2006. Approximately $246,000 of this decrease relates to a tax consultingproject, which took place during the first quarter of 2005, with no suchproject occurring during the first half of 2006.  The remaining decrease is due to an overallreduction in expenses relating to the Company’s review and compliance withcorporate governance legislation.

The following acted to offset the increase:

·                  Personnel costswere up approximately $722,000, due in part to an increase in bonus expense ofapproximately $428,000, as a result of increased revenues and the Companymeeting its performance targets. Additionally, the Company recorded a gain on the mark to market of theexecutive deferred compensation plan of approximately $312,000 for the sixmonths ended June 30, 2006 as compared to a loss on the mark to market of thedeferred compensation plan of approximately $179,000 for the six months endedJune 30, 2005.  The remaining increase isdue to the hiring of a new corporate employee in mid-2005 as well as standardinflationary and contractual salary increases.

Interestexpense for the six months ended June 30, 2006 was $32.3 million, compared to$31.2 million for the same period in 2005, an increase of $1.1 million, or3.5%.  The Company received a payment onits interest rate swaps of $672,000 for the six months ended June 30, 2005,which was recorded as a reduction of interest expense.  Pursuant to a refinancing transactioncompleted on May 3, 2005, the Company used borrowings under its $300.0 millioncredit facility to purchase all of its $246.9 million principal amount of 8 1⁄2%Senior Notes due 2008.  Furthermore, onMay 30, 2006, the Company entered into the First Amendment to the Senior CreditFacility.  The Company also requested anincremental term loan of $50.0 million under the Credit Agreement through anIncrease Joinder.  On May 30, 2006, thefull $50 million of the incremental term loan was borrowed by the Company.  The senior credit facility and incrementalterm loan bears various floating interest rates, based upon LIBOR, ranging from7.69% to 7.88%, at June 30, 2006, thus increasing interest expense during thefirst half of 2006.

The Company recorded a $659,000 non-cash loss in connection with thechange in the market value of interest rate swaps for the six months ended June30, 2005.  This swap was terminated atthe end of 2005, and therefore, no non cash change in market value was recordedfor the first half of 2006.

For the six months ended June 30, 2005 the Company recorded a loss onextinguishment of debt totaling approximately $18.6 million in connection withthe cash tender offer and consent solicitation completed May 3, 2005.   This loss is comprised of the cost of the consent

23

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solicitations (approximately $18.1 million),plus the write-off of the deferred financing costs (approximately $4.9million), less the unamortized portion of the bond premium relating to the 81⁄2%Senior Notes (approximately $4.6 million), plus various other administrativeexpenses (approximately $200,000) (see “Liquidity and CapitalResources.)

TheCompany recorded an income tax provision of $14.6 million and $11.8 million forthe six months ended June 30, 2006 and 2005, respectively.  This provision includes a deferred taxliability of $14.2 million and $11.5 million for the taxable temporarydifference related to the amortization of the Company’s indefinite-livedintangible assets for June 30, 2006 and 2005, which continues to be amortizedfor tax purposes.

On October 4, 2004, the Company entered into an agreement with MissionBroadcasting, Inc. (“Mission”) to sell the assets of WTVO-TV, its station inRockford, Illinois, for an aggregate cash purchase price of approximately $20.8million. A gain of approximately $14.7 million, net of applicable taxes wasrecognized on the sale; $3.5 million of this gain, net of a provision forincome taxes of $300,000, was recognized in the fourth quarter of 2004 andapproximately $11.2 million, net of a provision for income taxes of $450,000,was recognized in the first quarter of 2005. The Company recorded loss from discontinued operations of approximately$345 for the six months ended June 30, 2005.

As a result of the above-discussed factors, the net loss for theCompany was $41.6 million for the six months ended June 30, 2006 compared to anet loss of $55.5 million for the six months ended June 30, 2005, a change of$13.9 million, or 25.0%.

**Liquidity and Capital Resources**

CurrentFinancial Condition

The following tables present certain data that theCompany believes is helpful in evaluating the Company’s liquidity and capitalresources (dollars in thousands).
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                          | ** ** | **2006** | ** ** |
| Net cash  provided by (used in):           |       |                                              |       |   |   |
| Operating activities                       |       | $                                                 | (37,963    | ) | $ | (15,428 | ) |
| Investing activities                       |       | 3,389                                             |       | (1,819 | ) |
| Financing activities                       |       | 46,769                                            |       | 47,058 |   |
| Net increase in cash  and cash equivalents |       | $                                                 | 12,195     |   | $ | 29,811 |   |

 
| ** **                                 | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| Cash and cash  equivalents                 |       | $                     | 78,099     |              | $          | 107,910 |   |
| Long-term debt,  including current portion |       | $                     | 785,792    |              | $          | 833,877 |   |
| Available under senior  credit agreement   |       | $                     | 20,000     |              | $          | 20,000 |   |

 

TheCompany’s cash flow is highly dependent upon the state of the advertisingmarket and public acceptance of television programming.  Any significant decline in the advertisingmarket or performance of the television programming could adversely impact theCompany’s cash flow from operations.

Theperformance of KRON-TV has a large proportionate impact on the Company’soperating results.  Consequently, theCompany is particularly susceptible to economic conditions in the San

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Franciscoadvertising market.  The Company’soperating results have been adversely affected by a slower than expectedrecovery in the San Francisco market.

TheCompany has renewed its affiliations with ABC with respect to WKRN-TV, WTEN-TV,WRIC-TV, WATE-TV and WBAY-TV, with CBS with respect to WLNS-TV and KLFY-TV andwith NBC with respect to KWQC-TV.  The renewedABC affiliations expire on December 31, 2009, the renewed CBS affiliationsexpire on September 30, 2012 and the renewed NBC affiliation expires on January1, 2015.  Under the renewed ABC, CBS andNBC affiliations, the Company will be receiving significantly less networkcompensation than it received from ABC, CBS and NBC under the prior agreements.

TheCompany received notice from CBS with respect to KELO-TV that the network willnot renew the affiliation agreement currently in place and that the networkwishes to negotiate a new agreement. This agreement with CBS expires on October 2, 2006.  While the Company is unable to predict theterms of a new affiliation agreement, the Company believes the station willhave a network affiliation in place at the expiration of the currentaffiliation.

Theprincipal uses of cash that affect the Company’s liquidity position include thefollowing: the acquisition of and payments under programming rights forentertainment and sporting events, capital and operational expenditures andinterest payments on the Company’s debt. It should be noted that commencing on September 30, 2005, the Companywas required to make scheduled principal payments under the term loan portionof the senior credit agreement, on a quarterly basis, equal to 0.25% of the initial aggregate amount of the termloan.

On May30, 2006, the Company entered into the First Amendment to the Senior CreditFacility (“First Amendment”).  TheCompany also requested an incremental term loan of $50.0 million under theCredit Agreement through an Increase Joinder. On May 30, 2006, the full $50.0 million of the incremental term loan wasborrowed by the Company. The proceeds of the incremental term loan borrowingwill be used for working capital and to pay fees and expenses related to theincremental term loan and the First Amendment.

**Sourcesand Uses of Cash**

*OperatingActivities*

Net cash used inoperating activities for the six months ended June 30, 2006 and 2005 was $15.4million and $38.0 million, respectively. The decrease in net cash used for operating activities was primarily dueto the increases in the Company’s net revenue and resulting operating incomefor the six months ended June 30, 2006 as compared to the same period in2005.  The following major changes inoperating activities were noted:

·                  The Company madeapproximately $13.2 million of payments on its programming liability for thesix months ended June 30, 2006, an increase of approximately $2.4 million.

·                  Prepaid expensesdecreased by approximately $1.0 million for the six months ended June 30,2006.  Prepaid insurance decreasedapproximately $1.2 million, representing net prepaid insurance premiums whichwere expensed during the first half of 2006.

The followingitems acted to offset these changes:

·                  Accruedexpenses and other liabilities decreased approximately $1.8 million for the sixmonths ended June 30, 2006.  A portion ofthis decrease comprised of a payment made to ABC during 2006 for approximately$840,000, relating to compensation paid in excess of the amounts provided forin the renewed ABC affiliation agreements, which were not finalized untilSeptember 2005.  This excess compensationwas classified as deferred revenue.  Furthermore,the Company made principal payments during 2006 on its D&O

25

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and Earthquakepolicies totaling $473,000, which was accrued for at December 31, 2006.  Additionally, approximately $263,000 of thedecrease relates to an adjustment as a result of the finalization of unioncontract negotiations during 2006, resulting in the decrease of a prior accrualwhich was established to cover such liabilities.  Lastly, the Company paid approximately$163,000 of severance during the first quarter of 2006, which was accrued forat December 31, 2005.

·                  Trade accountspayable decreased approximately $1.6 million, due mainly to timing of payments,of which approximately $944,000 relates to Corporate accounts payable.

·                  TheCompany recorded its share of the losses on Investments in Unconsolidatedsubsidiaries, net of dividends, of approximately $1.2 million for the sixmonths ended June 30, 2006 as compared to recording its share of gains ofapproximately $62,000 for the six months ended June 30, 2005.

*Investing Activities*

Cash used in investingactivities for the six months ended June 30, 2006 was $1.8 million, compared tocash provided by investing activities for the six months ended June 30, 2005 of$3.4 million. The following changes in investing activities were noted:

·                  Investingactivities in 2005 included $5.8 million of proceeds from the closing onJanuary 4, 2005 of the second step of the sale of WTVO-TV to MissionBroadcasting.

·                  Capitalexpenditures for the six months ended June 30, 2006 of $2.4 million was lowerthan capital expenditures of $2.5 million for the six months ended June 30,2005.

·                  Proceedsfrom the disposal of fixed assets for the six months ended June 30, 2006 was$614,000 as compared to $45,000 for the six months ended June 30, 2005

*Financing Activities*

Cash provided byfinancing activities for the six months ended June 30, 2006 was $47.1 millioncompared to cash provided by financing activities of $46.8 million for the sixmonths ended June 30, 2005.  The following changes in financingactivities were noted:

·                  On May 30, 2006,the Company entered into the First Amendment to the Senior Credit Facility (“FirstAmendment”) and the Increase Joinder (“Increase Joinder”), which provided for a$50.0 million incremental term loan under the Senior Credit Facility.  On May 30, 2006, the full $50.0 millionincremental term loan was borrowed by the Company. See below for further details on the incremental term loan

·                  The Company madepayments under capital lease obligations of approximately $26,000 and $362,000for the six months ended June 30, 2006 and 2005, respectively.

·                  Additionally,the Company made principal repayments of $1.6 million on its Senior CreditFacility during the six months ended June 30, 2006.

**DebtInstruments, Guarantees and Related Covenants**

OnMay 3, 2005, the Company amended and restated its senior credit facility (asamended, the “Senior Credit Facility”). The Senior Credit Facility consists of(i) a term loan in the amount of $300.0 million that matures in 2012 and (ii) arevolving credit facility in the amount of $20.0 million that matures in 2010.On May 3, 2005, the full $300.0 million of the term loan was borrowed.  Approximately $278.0 million of the proceedsof the term loan borrowing were used to finance the purchase by the Company ofall of its $246,890,000 outstanding principal amount of 81⁄2% Senior Notes due2008 pursuant to the cash tender offer and consent solicitation commenced onApril 11, 2005.  The balance of the termloan borrowing will be used for working capital.  The Company pays an annual commitment fee atthe rate of 0.5% per annum of the unused available borrowings under therevolving credit portion of the Senior Credit Facility.  The Company capitalized approximately $6.0million of fees associated with the new term loan and revolving credit facility.

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In connection with the cash tender offer and consent solicitation, theCompany recorded a loss on the extinguishment of debt in the second quarter of2005, totaling approximately $18.6 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $4.9 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.6 million), plusvarious other administrative expenses (approximately $200,000).

On May 30, 2006, the Company entered into (i) theFirst Amendment (the “First Amendment”) to the Senior Credit Facility and (ii)the Increase Joinder (the “Increase Joinder”) to the Senior Credit Facility.The First Amendment effected certain amendments to the Senior Credit Facilityincluding, without limitation, (i) the reduction of the minimum amount of cashthe Company must maintain from $35.0 million to $10.0 million and (ii) anincrease of 0.25% to each of the Base Rate Margin and the Eurodollar Margin(used in the calculation of interest rates payable by the Company under theSenior Credit Facility).  As aresult of the margin increases, the Base Rate and the Eurodollar Rate marginsare now equal to 1.50% and 2.50%, respectively.   The Increase Joinder provided for a$50.0 million incremental term loan under the Senior Credit Facility.

On May 30, 2006, the full $50.0 million of theincremental term loan was borrowed by the Company. The proceeds of theincremental term loan borrowing will be used for working capital and to payfees and expenses related to the incremental term loan and the First Amendment.The Company capitalized approximately $1.3 million of fees associated with theincremental term loan and First Amendment.

The incremental term loan has the same terms andconditions as the term loans outstanding under the Senior Credit Facility (asamended by the First Amendment) immediately prior to the incremental term loanborrowing. The term loan portion of the Senior Credit Facility matures in 2012.

 At June 30, 2006, $346.9 million was outstanding under the term loanand the full $20.0 million was available under the revolving facility.

The Senior Credit Facility provides, at the optionof the Company, that borrowed funds bear interest based upon the LondonInterbank Offered Rate (“LIBOR”)” or “Base Rate.”  In addition to the index rate, the Companypays a fixed incremental percentage at 1.50% with the Base Rate and 2.50% withLIBOR. Each of the Company’s subsidiaries has guaranteed the Company’sobligations under the Senior Credit Facility. The Senior Credit Facility issecured by the pledge of all the capital stock of the Company’s subsidiariesand a first priority lien on all of the assets of the Company and itssubsidiaries. The Senior Credit Facility requires the Company to maintain acash and short-term investment balance of at least $10.0 million. The othercovenants contained in the Senior Credit Facility are substantially similar tothe covenants contained in the indentures governing the Company’s seniorsubordinated notes. At June 30 2006, the Company was in compliance with allcovenants contained under the Senior Credit Facility.

On May 3, 2005,the Company entered into an interest rate swap agreement for a notional amountof $71.0 million with a commercial bank who is also a lender under the SeniorCredit Facility.  The swap becameeffective on May 8, 2006 and expires on May 8, 2008.  Upon effectiveness, the Company began to paya fixed interest of 4.3425% and the Company receives interest from thecommercial bank, based upon a three month LIBOR rate.  It is the Company’s intention to ensure theinterest rate reset dates of the swap and the term loan will match over theterm of the swap, and therefore the changes in the fair value of theinterest-rate swap are expected to significantly offset changes in the cashflows of the floating rate debt.  TheCompany accounts for this agreement as a cash flow hedge under FASB StatementNo. 133, Accounting for Derivative Instruments and Hedging Activities, and assuch, the change in the fair value of the interest rate

27

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swap is reportedas a component of other comprehensive income (loss).  For the three and six months ended June 30,2006, a gain of approximately $409,000 and $967,000 was recorded in othercomprehensive income (loss).

On May 5, 2005,the Company entered into a partial termination agreement with Deutsche Bank toterminate one third of its original notional amount of $63.2 million interestrate swap, or approximately $21.1 million. In connection with the termination, the Company made a net interestpayment of approximately $702,000, reduced by the Company’s accrued interestincome (approximately $35,000).  Inaccordance with the termination, the swap liability was reduced by the fairmarket value of the one third portion of the swap as of the termination date(approximately $728,000).  The differencebetween the payment and the fair market value of the partially terminated swapwas recorded as interest expense during the period (approximately $9,000).

On November 17,2005, the Company entered into a partial termination agreement with DeutscheBank to terminate one half of its remaining notional amount $42.1 millioninterest rate swap.  Further, on November23, 2005, the Company entered into a final termination agreement with DeustcheBank to terminate the remaining notional amount $21.1 million interest rateswap.  In connection with the terminatedinterest rate swap agreement, the Company made net interest payments of$997,500 and $992,000, which includes the Company’s accrued interest on theswap from the last payment date of September 1, 2005 through the terminationdates of November 17, 2005 and November 23, 2005.  In accordance with the termination, the swapliability was reduced by the fair market value of the swap as of thetermination dates (approximately $2.0 million in total on both November 17,2005 and November 23, 2005).  Thedifference between the two payments and the fair market value of the terminatedswap was recorded as interest expense during the period (approximately$19,000).

The following is a summary of the Company’s outstanding indebtedness (inthousands) and related annualized interest payments that is recorded during theperiod.  Debt amounts outstanding atDecember 31, 2005 and June 30, 2006 were as follows:

|                                              | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**                | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|-------------------------------|------------|
| ** **                                   | ** ** | **12/31/05** | ** ** | **6/30/06** | ** ** | **Interest Payments(1)** | ** ** |
| Senior Credit  Facility                      |       | 298,500      |       | $           | 346,875    |                          | $          | 26,898 |   |
| 83⁄4% Senior  Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                        |       |
| 10% Senior  Subordinated Notes due 2011      |       | 347,292      | (2)        | 347,002     | (2)        | 34,430                        |       |
| Total Debt  (excluding capital leases)       |       | $            | 785,792    |        | $          | 833,877                       |       | $ | 73,578 |   |
|                                              |            |              |            |             |            |                               |            |  |  |  |

----

(1)The annualized interest payments are calculated based on theoutstanding principal amounts at June 30, 2006, multiplied by the interestrates of the related debt instruments.

(2)Includes unamortized premium balances of $3.0 million and $2.7million as of December 31, 2005 and June 30, 2006, respectively.

The Company’stotal debt at June 30, 2006 was approximately $834.0 million, consisting of$347.0 million under the term loan portion of the Senior Credit Facility,$484.3 million of Senior Subordinated Notes, $2.7 million of bond premiums and$40,000 of capital leases. In addition, at June 30, 2006, the Company had anadditional $20.0 million of unused available borrowings under the Senior CreditFacility.

It is anticipatedthat the Company will be able to meet its working capital needs, scheduledprincipal and interest payments under the Company’s Senior Credit Facility andSenior Subordinated Notes and capital expenditures, from cash on hand, cashflows from operations and funds available under the Senior Credit Facility.

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**IncomeTaxes**

At December 31, 2005, the Company had net operating loss (“NOL”)carryforwards for tax purposes of approximately $340.8 million expiring atvarious dates through 2025, for which a full valuation allowance has beenprovided.

With the adoption of the FASB issuedStatement No.142 , *Goodwill and Other IntangibleAssets* (SFAS 142) the Company no longer amortizes the book basis inthe indefinite-lived intangibles, but continues to amortize these intangiblesfor tax purposes. The Company’s income tax expense for the three and six monthsended June 30, 2006 primarilyconsists of deferred income taxes of $1.7 million and $14.2 million,respectively, related to the increase in the Company’s deferred tax liabilityfor the tax effect of the difference between the book and tax basis of theintangible assets not expected to reverse during the net operating losscarryforward period.

The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these assets will not reverse priorto the expiration period of the Company’s deductible temporary differencesunless the related assets are sold or an impairment of the assets is recorded.The Company expects that it will record a total of approximately $5.0 millionto increase deferred tax liabilities during the remaining six months of 2006.

**Contractual Obligations and Other Commercial Commitments**

The Company has obligations and commitments under its long-term debtagreements and instruments to make future payments of principal and interest. TheCompany also has obligations and commitments under certain contractualarrangements to make future payments for goods and services. These arrangementssecure the future rights to various assets and services to be used in thenormal course of operations. Under U.S generally accepted accountingprinciples, certain of these arrangements (i.e., programming contracts that arecurrently available for airing) are recorded as liabilities on the Company’sconsolidated balance sheet, while others (i.e., operating lease arrangementsand programming contracts not currently available) are not reflected asliabilities.

The following table summarizes separately the Company’smaterial obligations and commitments at June 30, 2006, the timing of paymentsrequired in connection therewith and the effect that such payments are expectedto have on the Company’s liquidity and cash flow in future periods.  The Company expects to fund its short termobligations with cash on hand, cash flow from operations and funds availableunder its Senior Credit Facility.
| ** **                             | ** ** | ** **                           | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**       | ** ** | ** **                           | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **4 – 5 years** | ** ** | **After 5  years** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)** | ** ** |
| Long-Term Debt  (principal only)       |       | $                                    | 832,049    |                                      | $          | 3,500 |   | $ | 7,000 |   | $ | 7,000 |   | $ | 814,549 |   |
| Cash Interest  Payments (1)            |       | 280,849                              |       | 46,780                                    |       | 93,560 |   | 93,551 |   | 46,958 |   |
| Capital Lease  Obligations             |       | 40                                   |       | 34                                        |       | 6 |   | - |   | - |   |
| Operating Leases                       |       | 5,733                                |       | 1,685                                     |       | 2,814 |   | 886 |   | 348 |   |
| Unconditional  Purchase Obligations(2) |       | 14,871                               |       | 7,306                                     |       | 6,895 |   | 670 |   | - |   |
| Other Long-Term  Obligations(3)        |       | 131,122                              |       | 20,432                                    |       | 48,822 |   | 44,808 |   | 17,060 |   |
| Total Contractual Cash  Obligations    |       | $                                    | 1,264,664  |                                      | $          | 79,737 |   | $ | 159,097 |   | $ | 146,915 |   | $ | 878,915 |   |
|                                        |            |                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1) Only includes interest on fixed rate debt.  The Senior Credit Facility, which matures onNovember 3, 2012, bears interest at various floating rates based on LIBOR.  The various June 30, 2006 LIBOR rates wereused to compute a weighted average LIBOR rate to calculate future

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cashinterest payments.  Based on thisweighted average, totaladditional interest over the term of the floating rate facility approximates$165.4 million.

(2)Unpaid program license liability reflected on the June 30, 2006 balance sheet.

(3)Obligations for programming that has been contracted for, but not recorded onthe June 30,2006 Balance Sheet because the programs were not currently available forairing.

**Impact of Recently Issued Accounting Standards**

In July 2006, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FASB StatementNo. 109” (FIN 48), which clarifies the accounting for uncertain taxpositions. This Interpretation requires that we recognize in our financialstatements the impact of a tax position if that position is more likely thannot of being sustained on audit, based on the technical merits of the position.The provisions of FIN 48 are effective as of the beginning of our 2007fiscal year, with the cumulative effect, if any, of the change in accountingprinciple recorded as an adjustment to opening retained earnings. We arecurrently evaluating the impact of adopting FIN 48 on our condensedconsolidated financial statements.

During the first quarter of 2006, the Companyadopted FASB Statement No. 123 (R), *Share-Based Payment*(“SFAS 123R”), which requires companies to measure and recognizecompensation expense for all stock-based payments at fair value.  The Company adopted SFAS 123R using themodified prospective method, and consequently has not retroactively adjustedresults from prior periods.

Prior to January 1, 2006, the Company hadaccounted for its share-based payments to employees under FASB Statement No.123, *Accounting for Stock Based Compensation*(SFAS “123”) which allowed companies to either expense the estimated fair valueof stock options or to follow the intrinsic value method set forth in AccountPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), but disclose the pro forma netincome (loss) had the fair value of the options been expensed.

OnNovember 29, 2005, the Company entered into an exchange agreement with each ofits executive officers whereby options to purchase an aggregate of 2,198,375shares of common stock of the Company, representing all of the outstanding andunexercised options held by the executive officers, were cancelled and, inexchange for such cancelled options, the executive officers were awarded anaggregate of 318,791 deferred stock units. On December 30, 2005 the Companyconcluded an offer to all eligible employees to exchange all of theiroutstanding stock options for restricted shares (see Note 2 to the ConsolidatedFinancial Statements).  As a result ofthe above-discussed exchange agreement and exchange offer, the Company had anaggregate of 900 outstanding stock options that were unvested which were fullyexpensed during the first quarter of 2006, in the amount of approximately$5,000.  In addition, the Company willincur compensation expense associated with the issuance of the restricted sharesand deferred stock awards.  The Companyestimates recording additional compensation expense relating to previouslyrestricted shares and deferred stock units of approximately $2.1 million forthe remainder of 2006 and approximately $3.5 million, $2.5 million and 740,000during 2007, 2008 and 2009, respectively.

**Item 3. *Quantitative andQualitative Disclosure About Market Risk*.**

TheCompany’s Senior Credit Facility, with $346.9 million outstanding as of June30, 2006, bears interest at floating rates. Accordingly, to the extent thereare amounts outstanding under the Senior Credit Facility, we are exposed topotential losses related to changes in interest rates.

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TheCompany’s Senior Subordinated Notes of approximately $484.3 million outstandingprincipal amount as of June 30, 2006 are general unsecured obligations of theCompany and are subordinated in right of payment to all senior debt, includingall indebtedness of the Company under the Senior Credit Facility. The 83⁄4%Senior Subordinated Notes, $140.0 million of which is outstanding, mature in2014.  The 10% Senior Subordinated Notes,$344.3 million of which is outstanding, mature in 2011. The annualized interestexpense on the outstanding Senior Subordinated Notes is approximately $46.7million.

The Company doesnot enter into derivatives or other financial instruments for trading orspeculative purposes; however, in order to manage its exposure to interest raterisk, the Company enters into derivative financial instruments.  The Company has entered into two derivativefinancial instruments.  In 2001, theCompany entered into an interest rate swap for a notional amount of $63.2million, which expires in 2011.  Thisswap was terminated during the year ended December 31, 2005.  On May 3, 2005 the Company entered into aninterest rate swap agreement for a notional amount of $71.0 million.  The swap became effective on May 8, 2006 andexpires on May 8, 2008.  The Companyaccounts for this agreement using hedge accounting under FAS 133, and as suchthe change in the fair value of the interest rate swap is reported as acomponent of other comprehensive income (loss).

**Item 4. *Controls and Procedures*.**

Our management carried out an evaluation, under thedirection of our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of June 30, 2006.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that (i) our disclosure controls and procedures wereeffective to ensure that information required to be disclosed by us in reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported, within the time periods specified in therules and forms of the Securities and Exchange Commission and (ii) ourdisclosure controls and procedures were designed to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures.

There has not been any change in our internal controlover financial reporting in connection with the evaluation required by Rule13a-15(d) under the Exchange Act that occurred during the quarter ended June30, 2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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** **

**PART II.  OTHER INFORMATION**

**Item 1.  *Legal Proceedings*.**

The Company isinvolved in legal proceedings and litigation arising in the ordinary course ofbusiness. In the Company’s opinion, the outcome of such proceedings andlitigation currently pending will not materially affect the Company’s financialcondition or results of operations.

**Item 1A.  *Risk Factors***

Therehave been no material changes in the Company’s risk factors from thosedisclosed in the Company’s annual report on Form 10-K for the year endedDecember 31, 2005 and the Company’s quarterly report on Form 10-Q for thequarterly period ended March 31, 2006.

**Item 2.  *Unregistered Sales ofEquity Securities and Use of Proceeds***

None.

**Item 3.  *Defaults Upon SeniorSecurities***

None.

**Item 4.  *Submission of Matters to aVote of Security Holders*.**

This item isanswered in respect of the Annual Meeting of Stockholders held on May 2, 2006(the “Annual Meeting”).  At the AnnualMeeting, the following number of votes were cast with respect to each mattervoted upon:

1.Proposal to approve management’s nominees for director as follows:
| ** **             | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------|------------|
| Vincent J. Young       |       | 29,228,339         |       | 7,039,289               |       | 0                         |       |
| Deborah A.  McDermott  |       | 29,229,505         |       | 7,038,123               |       | 0                         |       |
| James A. Morgan        |       | 31,992,113         |       | 4,275,515               |       | 0                         |       |
| Alfred J.  Hickey, Jr. |       | 28,936,451         |       | 7,331,177               |       | 0                         |       |
| Leif Lomo              |       | 30,329,228         |       | 5,938,400               |       | 0                         |       |
| Richard Lowe           |       | 29,931,211         |       | 6,338,417               |       | 0                         |       |
| David C. Lee           |       | 29,154,470         |       | 7,113,158               |       | 0                         |       |
| Reid Murray            |       | 30,370,587         |       | 5,897,041               |       | 0                         |       |

 

Such individualswere elected to serve as directors until the next annual meeting.  Such individuals constituted the entire Boardof Directors and served as directors of the Company immediately preceding themeeting.

2.  Proposal to ratify the appointment ofErnst & Young LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending December 31, 2006:

| For        | ** ** | ** ** | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|------------|------------|
| 33,430,589 |       | 112,813    |       | 2,724,225   |       | 0           |       |                      |       |

 

3.  Shareholder proposal to arrange for promptsale of the Company to the highest bidder

| For       | ** ** | ** ** | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** | ** ** | ** ** |
|-----------|------------|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|------------|------------|
| 5,002,996 |       | 24,334,813 |       | 397,034     |       | 6,532,785   |       |                      |       |

 

 

32

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**Item 5. *Other Items***

Not Applicable.

** **

**Item 6.  *Exhibits***
| Exhibit    | ** ** | ** **                                                                                |
|------------|------------|-------------------------------------------------------------------------------------------|
| **Number** | ** ** | ** **                                                                                | ** ** | **Exhibit Description** |
| 10.1       |       | First Amendment to  Fourth Amended and Restated Credit Agreement, dated May 30, 2006      |
| 10.2       |       | Increase Joinder to the  Fourth Amended and Restated Credit Agreement, dated May 30, 2006 |
| 11         |       | Statement Re  Computation of Per Share Earnings.                                          |
| 31         |       | Rule  13a-14(a)/15d-14(a) Certifications                                                  |
| 32         |       | Section 1350 Certifications                                                               |
|            |            |                                                                                           |  |  |

 

33

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |           | YOUNG BROADCASTING INC. |
|--------|----------------|-------------------------|
|   |           |                    |   |
|   |           |                    |   |
| Date:  | August 9, 2006 | By:                     | /s/ Vincent J. Young |
|   |           |                    | Vincent J. Young |
|   |           |                    | Chairman and Chief Executive Officer |
|   |           |                    |   |
|   |           |                    |   |
| Date:  | August 9, 2006 | By:                     | /s/ James A. Morgan |
|   |           |                    | James A. Morgan |
|   |           |                    | Executive Vice President and |
|   |           |                    | Chief Financial Officer |
|   |           |                    | (principal financial officer) |

 

34

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