**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,  D.C.   20549**

 

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**FORM10-Q**

 

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**Quarterly Report Pursuant toSection 13 or 15 (d) of theSecurities Exchange Act of 1934**

 

| **For the quarterly period ended** | ** ** | **Commission file number:** |
|------------------------------------|------------|-----------------------------|
| **June 30, 2005**                  | ** ** | **0-25042**                 |

 

**YOUNGBROADCASTING INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**599 Lexington AvenueNew York,  New York 10022**

(Address of principal executive offices)

 

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

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý  No o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes ý  Noo

 

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Number ofshares of Common Stock outstanding as of July 31, 2005: 18,175,734 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**

 
|       |                   | **Page**                                                                                          |
|------------|------------------------|---------------------------------------------------------------------------------------------------|
| Part I     | Financial  Information |                                                                                              |
|       |                   |                                                                                              |
|       | Item 1.                | Financial  Statements (unaudited)                                                                 |   |
|       |                   |                                                                                              |   |
|       |                   | Consolidated  Balance Sheets as of December 31, 2004 and June 30, 2005                            | 2 |
|       |                   |                                                                                              |   |
|       |                   | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2004 and  2005 | 3 |
|       |                   |                                                                                              |   |
|       |                   | Consolidated  Statements of Stockholders’ Equity for the Six Months Ended June 30, 2005      | 4 |
|       |                   |                                                                                              |   |
|       |                   | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2005            | 5 |
|       |                   |                                                                                              |   |
|       |                   | Notes to Consolidated Financial Statements                                                        | 6 |
|       |                   |                                                                                              |   |
|       | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       | 12 |
|       |                   |                                                                                              |   |
|       | Item 3.                | Quantitative  and Qualitative Disclosure About Market Risk                                        | 30 |
|       |                   |                                                                                              |   |
|       | Item 4.                | Controls and  Procedures                                                                          | 31 |
|       |                   |                                                                                              |   |
| Part II    |                   |                                                                                              |   |
|       |                   |                                                                                              |   |
|       | Item 1.                | Legal  Proceedings                                                                                | 32 |
|       |                   |                                                                                              |   |
|       | Item 4.                | Submission of  Matters to a Vote of Security Holders                                              | 32 |
|       |                   |                                                                                              |   |
|       | Item 6.                | Exhibits                                                                                          | 32 |
|       |                   |                                                                                              |
| Signatures | 33                     |

 

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**Part I     Financial Information**

**Item 1.   *FinancialStatements***

 

Young Broadcasting Inc. and SubsidiariesConsolidated Balance Sheets

 
| ** **                                                                                                                                            | ** ** | **December 31,** | ** **  | **June 30,**     | ** **      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|-----------------|
| ** **                                                                                                                                            | ** ** | **2004**         | ** **  | **2005**         | ** **      |
| ** **                                                                                                                                            | ** ** | ** **       | ** **  | **(Unaudited)**  | ** **      |
| **Assets**                                                                                                                                            |       |             | ** **  | ** **       | ** **      |
| Current  assets:                                                                                                                                      |       |             | ** **  | ** **       | ** **      |
| Cash and cash equivalents                                                                                                                             |       | $                | 93,831,317  | ** **       | **$**           | **106,026,444** | ** ** |
| Trade accounts receivable, less allowance  for doubtful accounts of $1,062,000 in 2004 and $1,037,000 in 2005                                         |       | 40,099,229       |        | **39,076,725**   | ** **      |
| Current portion of program license rights                                                                                                             |       | 14,892,686       |        | **6,233,593**    | ** **      |
| Prepaid expenses                                                                                                                                      |       | 4,034,408        |        | **2,048,752**    | ** **      |
| Other current assets                                                                                                                                  |       | 1,000,000        |        | **1,000,000**    | ** **      |
| Assets held for sale                                                                                                                                  |       | 1,459,370        |        | **—**       | ** **      |
| Total current assets                                                                                                                                  |       | $                | 155,317,010 |             | **154,385,514** | ** ** |
| ** **                                                                                                                                            | ** ** | ** **       |        | ** **       | ** **      |
| Property and equipment, less accumulated  depreciation and amortization of $169,309,245 in 2004 and $177,684,379 in  2005                             |       | 84,703,428       |        | **77,296,114**   | ** **      |
| Program license rights, excluding current  portion                                                                                                    |       | 393,586          |        | **204,755**      | ** **      |
| Deposits and other assets                                                                                                                             |       | 2,601,362        |        | **2,751,746**    | ** **      |
| Investments in unconsolidated subsidiaries                                                                                                            |       | 3,947,270        |        | **4,573,733**    | ** **      |
| Unamortizable intangible assets                                                                                                                       |       | 475,928,822      |        | **475,928,822**  | ** **      |
| Amortizable intangible assets                                                                                                                         |       | 70,346,609       |        | **68,145,879**   | ** **      |
| Deferred charges, less accumulated  amortization                                                                                                      |       | 11,029,308       |        | **11,073,021**   | ** **      |
| **Total Assets**                                                                                                                                      |       | $                | 804,267,395 |             | **$**           | **794,359,584** | ** ** |
| ** **                                                                                                                                            |       |             |        |             | ** **      | ** ** | ** ** |
| **Liabilities and stockholders’ deficit**                                                                                                        | ** ** | ** **       |        | ** **       | ** **      |
| Current liabilities:                                                                                                                                  | ** ** | ** **       |        | ** **       | ** **      |
| Trade accounts payable                                                                                                                                |       | $                | 6,384,045   |             | **$**           | **6,350,357** | ** ** |
| Accrued interest                                                                                                                                      |       | 17,575,523       |        | **19,708,811**   | ** **      |
| Accrued expenses                                                                                                                                      |       | 17,746,443       |        | **16,219,817**   | ** **      |
| Current installments of program license liability                                                                                                     |       | 14,375,405       |        | **4,297,637**    | ** **      |
| Current installment of long term debt                                                                                                                 |       | —           |        | **3,000,000**    | ** **      |
| Current installments of obligations under  capital leases                                                                                             |       | 625,845          |        | **301,107**      | ** **      |
| Liabilities held for sale                                                                                                                             |       | 7,636,284        |        | **—**       | ** **      |
| Total current liabilities                                                                                                                             |       | 64,343,545       |        | **49,877,729**   | ** **      |
| Program license liability, excluding  current installments                                                                                            |       | 523,771          |        | **212,389**      | ** **      |
| Long-term debt, excluding current  installments                                                                                                       |       | 739,736,233      |        | **784,581,406**  | ** **      |
| Deferred tax liability and other long-term  tax liabilities                                                                                           |       | 7,992,485        |        | **20,173,916**   | ** **      |
| Other liabilities                                                                                                                                     |       | 4,758,328        |        | **7,360,021**    | ** **      |
| Obligations under capital leases, excluding  current installments                                                                                     |       | 76,110           |        | **38,808**       | ** **      |
| **Total liabilities**                                                                                                                                 |       | 817,430,472      |        | **862,244,269**  | ** **      |
| Stockholders’ deficit:                                                                                                                           | ** ** | ** **       |        | ** **       | ** **      |
| Class A Common Stock, $.001 par value.  Authorized 40,000,000 shares; issued and outstanding 17,858,567 shares at  2004 and 18,083,903 shares at 2005 |       | 17,859           |        | **18,084**       | ** **      |
| Class B Common Stock, $.001 par value.  Authorized 20,000,000 shares; issued and outstanding 2,066,133 shares at 2004  and 1,941,414 shares at 2005   |       | 2,066            |        | **1,941**        | ** **      |
| Additional paid-in capital                                                                                                                            |       | 381,090,583      |        | **382,265,367**  | ** **      |
| Accumulated other comprehensive loss                                                                                                                  |       | (2,586,996       | )           | **(2,978,085**   | **)**           |
| Accumulated deficit                                                                                                                                   |       | (391,686,589     | )           | **(447,191,992** | **)**           |
| Total stockholders’ deficit                                                                                                                      |       | (13,163,077      | )           | **(67,884,685**  | **)**           |
| **Total liabilities and stockholders’ deficit**                                                                                                  |       | $                | 804,267,395 |             | **$**           | **794,359,584** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements*

 

2

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**YoungBroadcasting Inc. and SubsidiariesConsolidated Statements of Operations**(Unaudited)

 
| ** **                                                                                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**                         | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net operating revenue                                                                                                                    |       | $                                | 56,862,361 | ** **                     | **$**      | **50,865,534** |   | $ | 106,431,830 | ** ** | **$** | **96,374,664** | ** ** |
| ** **                                                                                                                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses, excluding depreciation  expense                                                                                      |       | 17,967,356                       |       | **18,771,384**                 |       | 35,820,732 | ** ** | **36,599,517** | ** ** |
| Amortization of program license rights                                                                                                   |       | 4,420,280                        |       | **5,271,070**                  |       | 9,108,699 | ** ** | **10,606,019** | ** ** |
| Selling, general and administrative  expenses, excluding depreciation expense                                                            |       | 15,521,799                       |       | **16,066,573**                 |       | 30,681,750 | ** ** | **33,672,794** | ** ** |
| Depreciation and amortization                                                                                                            |       | 6,239,171                        |       | **6,044,168**                  |       | 12,564,534 | ** ** | **12,436,376** | ** ** |
| Corporate overhead, excluding depreciation  expense                                                                                      |       | 3,793,051                        |       | **3,064,096**                  |       | 9,618,492 | ** ** | **7,154,027** | ** ** |
| Operating income (loss)                                                                                                                  |       | 8,920,704                        |       | **1,648,243**                  |       | 8,637,623 | ** ** | **(4,094,069** | **)** |
| ** **                                                                                                                               | ** ** |                             |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Interest (expense), net                                                                                                                  |       | (15,870,853                      | )          | **(15,413,495**                | **)**      | (32,856,796 | ) | **(31,237,011** | **)** |
| Non-cash change on market valuation of  swaps                                                                                            |       | (2,538,324                       | )          | **1,164,572**                  | ** ** | (1,276,640 | ) | **(658,507** | **)** |
| Loss on extinguishment of debt                                                                                                           |       | —                           |       | **(18,625,706**                | **)**      | (5,323,375 | ) | **(18,625,706** | **)** |
| Other income (expense), net                                                                                                              |       | (206,881                         | )          | **(148,443**                   | **)**      | (157,572 | ) | **(303,377** | **)** |
|                                                                                                                                     | ** ** | (18,616,058                      | )          | **(33,023,072**                | **)**      | (39,614,383 | ) | **(50,824,601** | **)** |
| ** **                                                                                                                               | ** ** |                             |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Loss from continuing operations before  expense for income taxes                                                                         |       | (9,695,354                       | )          | **(31,374,829**                | **)**      | (30,976,760 | ) | **(54,918,670** | **)** |
| Income tax expense                                                                                                                       |       | —                           |       | **(4,778,684**                 | **)**      | — |   | **(11,793,537** | **)** |
| Loss from continuing operations                                                                                                          |       | (9,695,354                       | )          | **(36,153,513**                | **)**      | (30,976,760 | ) | **(66,712,207** | **)** |
| Income (loss) from discontinued operations,  net of tax, including gain on sale of $11.2 million for the six months ended  June 30, 2005 |       | 130,993                          |       | **(822**                       | **)**      | 110,376 |   | **11,206,804** | ** ** |
| Net loss                                                                                                                                 |       | $                                | (9,564,361 | )                              | **$**      | **(36,154,335** | **)** | $ | (30,866,384 | ) | **$** | **(55,505,403** | **)** |
| ** **                                                                                                                               | ** ** |                             |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Basic and diluted net loss per common  share:                                                                                            | ** ** |                             |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Loss from continuing operations                                                                                                          |       | $                                | (0.49      | )                              | **$**      | **(1.81** | **)** | $ | (1.56 | ) | **$** | **(3.34** | **)** |
| Income (loss) from discontinued operations                                                                                               |       | 0.01                             |       | **(0.00**                      | **)**      | 0.01 |   | **0.56** | ** ** |
| Net loss per common share                                                                                                                |       | $                                | (0.48      | )                              | **(1.81**  | **)** | $ | (1.55 | ) | **(2.78** | **)** |
| ** **                                                                                                                               | ** ** |                             |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Weighted average shares – Basic and  dilutive                                                                                       |       | 19,863,843                       |       | **19,997,889**                 | ** ** | 19,853,917 |   | **19,976,706** | ** ** |

* *

*Seeaccompanying notes to consolidated financial statements.*

 

3

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Young Broadcasting Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Deficit(Unaudited)

 
| ** **                                                            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** **  | ** **        | ** **  | **Accumulated**        | ** ** | **Total**    | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|-------------|-------------------|-------------|------------------------|------------|--------------|------------|
| ** **                                                            | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** **  | **Comprehensive** | ** **  | **Stockholders’** | ** ** |
| ** **                                                            | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Capital**     | ** **  | **Deficit**       | ** **  | **Loss**               | ** ** | **Deficit**  | ** ** |
| Balance at December 31, 2004                                          |       | 17,859           |       | 2,066       |       | $               | 381,090,583 |              | $           | (391,686,589           | )          | $            | (2,586,996 | ) | $ | (13,163,077 | ) |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Contribution of shares into Company’s defined  contribution plan |       | 62               |       |        |       | 582,694         |        |              |        |                   |       | 582,756      |       |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Conversion of Class B Common Stock to Class  A Common Stock           |       | 125              |       | (125        | )          |            |        |              |        |                   |       |         |       |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Non-cash stock compensation                                           |       | 26               |       |        |       | 466,682         |        |              |        |                   |       | 466,708      |       |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Employee stock purchase plan                                          |       | 12               |       |        |       | 125,408         |        |              |        |                   |       | 125,420      |       |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Net loss for the six months ended June 30,  2005                      |       |             |       |        |       |            |        | (55,505,403       | )           |                   |       | (55,505,403  | )          |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Unrealized loss on derivative instrument                              |       |             |       |        |       |            |        |              |        | (391,089               | )          | (391,089     | )          |
|                                                                  |       |             |       |        |       |            |        |              |        |                   |       |         |       |
| Balance at June 30, 2005                                              |       | $                | 18,084     |        | $          | 1,941           |        | $                 | 382,265,367 |                   | $          | (447,191,992 | )          | $ | (2,978,085 | ) | $ | (67,884,685 | ) |
|                                                                       |            |                  |            |             |            |                 |             |                   |             |                        |            |              |            |  |  |  |  |  |  |

 

*Seeaccompanying notes to consolidated financial statements*

 

4

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**Young Broadcasting Inc. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                                 | ** ** | **2004**                      | ** **  | **2005** | ** ** |
| **Operating activities**                                                                   | ** ** | ** **                    | ** **  | ** ** | ** ** |
| Net loss                                                                                   |       | $                             | (30,866,384 | ) | **$** | **(55,505,403** | **)** |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: | ** ** | ** **                    |        | ** ** | ** ** |
| Gain on sale of station, net taxes                                                         |       | —                        |        | **(11,207,149** | **)** |
| Depreciation and amortization of property  and equipment                                   |       | 9,542,927                     |        | **9,261,278** | ** ** |
| Provision for uncollectible accounts                                                       |       | 418,368                       |        | **75,692** | ** ** |
| Amortization of program license rights                                                     |       | 9,253,473                     |        | **10,606,019** | ** ** |
| Amortization of intangibles and deferred  charges                                          |       | 3,369,692                     |        | **3,175,098** | ** ** |
| Non-cash compensation                                                                      |       | 1,416,002                     |        | **632,160** | ** ** |
| Restricted stock awards                                                                    |       | —                        |        | **544,020** | ** ** |
| Non-cash change on market valuation of swap                                                |       | 1,276,640                     |        | **658,507** | ** ** |
| Provision for income taxes                                                                 |       | —                        |        | **11,793,537** | ** ** |
| Loss on extinguishment of debt                                                             |       | 1,305,790                     |        | **388,758** | ** ** |
| Loss (gain) on sale of fixed assets                                                        |       | 11,855                        |        | **(4,447** | **)** |
| Payments on programming license liabilities                                                |       | (9,120,776                    | )           | **(10,803,295** | **)** |
| Decrease in trade accounts receivable                                                      |       | 788,405                       |        | **908,218** | ** ** |
| Decrease in prepaid expenses                                                               |       | 1,476,003                     |        | **1,985,657** | ** ** |
| Decrease in trade accounts payable                                                         |       | (937,729                      | )           | **(1,219,193** | **)** |
| (Decrease) increase in accrued expenses and  other liabilities                             |       | (1,641,407                    | )           | **1,008,195** | ** ** |
| Increase in other assets                                                                   |       | (188,155                      | )           | **(198,718** | **)** |
| Net cash used in operating activities                                                      |       | (13,895,296                   | )           | **(37,901,066** | **)** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Investing activities**                                                                   | ** ** | ** **                    |        | ** ** | ** ** |
| Capital expenditures                                                                       |       | (7,578,127                    | )           | **(2,457,621** | **)** |
| Net proceeds from the sale of WTVO-TV                                                      |       | —                        |        | **5,802,243** | ** ** |
| Proceeds from the disposal of fixed assets                                                 |       | 76,331                        |        | **45,075** | ** ** |
| Decrease (increase) in deposits and other  assets                                          |       | 1,297                         |        | **(62,364** | **)** |
| Net cash (used in) provided by investing  activities                                       |       | (7,500,499                    | )           | **3,327,333** | ** ** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Financing activities**                                                                   | ** ** | ** **                    |        | ** ** | ** ** |
| Principal borrowings on long-term debt                                                     |       | —                        |        | **$** | **300,000,000** | ** ** |
| Redemption of notes                                                                        |       | (223,811,000                  | )           | **(246,890,000** | **)** |
| Deferred debt financing costs incurred                                                     |       | (596,809                      | )           | **(5,979,099** | **)** |
| Principal payments under capital lease  obligations                                        |       | (318,945                      | )           | **(362,041** | **)** |
| Proceeds from exercise of stock options                                                    |       | 69,897                        |        | **—** | ** ** |
| Net cash (used in) provided by financing  activities                                       |       | (224,656,857                  | )           | **46,768,860** | ** ** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Net (decrease) increase in cash**                                                        |       | (246,052,652                  | )           | **12,195,127** | ** ** |
| Cash and cash equivalents at beginning of  year                                            |       | 331,150,335                   |        | **93,831,317** | ** ** |
| **Cash and cash equivalents at June 30**                                                   |       | $                             | 85,097,683  |   | **$** | **106,026,444** | ** ** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Supplemental disclosure of cash flow  information**                                      | ** ** | ** **                    |        | ** ** | ** ** |
| Interest paid                                                                              |       | $                             | 32,149,944  |   | **$** | **30,874,505** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements.*

 

5

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**Notes to Consolidated Financial Statements**

**1. Basisof Presentation**

 

The business operations ofYoung Broadcasting Inc. and subsidiaries (the “Company”) consist of ninenetwork affiliated stations (five with ABC, three with CBS, and one with NBC)and one independent commercial television broadcasting station. The marketsserved 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 San Francisco,California. In addition, the accompanying condensed consolidated financialstatements include the Company’s wholly owned national television salesrepresentation firm. Significant intercompany transactions and accounts havebeen eliminated.

 

The accompanying condensedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles for interim financial statements andwith the instructions to Form 10-Q and Article 10 of Regulation S-X. Theinterim financial statements are unaudited but include all adjustments, whichare of a normal recurring nature, that the Company considers necessary for afair presentation of the consolidated financial position and the consolidatedresults of operations and cash flows for such period.

 

For investments in which theCompany owns 20% to 50% of voting shares and does have significant influenceover operating and financial policies, the equity method of accounting isused.  Four of the Company’s stations areparty to equity investments in third parties for tower agreements which areaccounted for under the equity method. Accordingly, the Company’s share of earnings and losses of thesecompanies are included in other income (expense), net in the accompanyingconsolidated statement of operations of the Company.  The Company recorded its share of losses ofapproximately $69,000 and earnings of approximately $464,000 for the six monthsended June 30, 2004 and 2005, respectively, and its share of losses ofapproximately $34,000 and earnings of approximately $83,000 for the threemonths ended June 30, 2004 and 2005, respectively.

 

Certain prior year balanceshave been reclassified to conform to the presentation adopted in the currentfiscal 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, 2004.

 

**2.Stock-Based Compensation**

 

The Company follows the provisions of FASB Statement No. 123, *Accounting for Stock-Based**Compensation* (“Statement 123”). Theprovisions of Statement 123 allow companies to either expense the estimatedfair value of stock options or to continue to follow the intrinsic value methodset forth in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*(“APB25”), but disclose the pro forma effects on net income (loss) had the fairvalue of the options been expensed. The Company has elected to continue toapply APB 25 in accounting for its stock option incentive plans.

 

In accordance with APB 25 and related interpretations, compensationexpense for stock options is recognized in income based on the excess, if any,of the quoted market price of the stock at the grant date of the award or othermeasurement date over the amount an employee must pay to acquire the stock.Generally, the exercise price for stock options granted to employees equals orexceeds the fair market value of the Company’s common stock at the date ofgrant, thereby resulting in no recognition of compensation expense by theCompany. For awards that generate compensation expense as defined under APB 25,the Company calculates the amount of compensation expense and recognizes theexpense over the vesting period of the award.

 

6

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The following table illustrates the effect on net loss and earnings pershare if the Company had applied the fair value recognition provisions ofStatement 123.

 
| ** **                                                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(dollars in thousands, except per share data)**                                                                                         | ** ** | **2004**                         | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss-as reported                                                                                                                      |       | $                                | (9,564     | )                              | $          | (36,154 | ) | $ | (30,866 | ) | $ | (55,505 | ) |
| Add stock based employee compensation  expense included in reported net loss                                                              |       | —                           |       | —                         |       | 830 |   | — |   |
| Deduct total stock-based employee  compensation expense determined under fair value based method, including  employee stock purchase plan |       | (942                             | )          | (627                           | )          | (1,871 | ) | (1,485 | ) |
| Net loss-pro forma                                                                                                                        |       | $                                | (10,506    | )                              | $          | (36,781 | ) | $ | (31,907 | ) | $ | (56,990 | ) |
| Net loss per basic common share-as reported                                                                                               |       | $                                | (0.48      | )                              | $          | (1.81 | ) | $ | (1.55 | ) | $ | (2.78 | ) |
| Net loss per basic common share-pro forma                                                                                                 |       | $                                | (0.53      | )                              | $          | (1.84 | ) | $ | (1.61 | ) | $ | (2.85 | ) |

 

In December2004, the FASB issued Statement No. 123R, Share-Based Payment (“SFAS 123R”),which requires companies to measure and recognize compensation expense for allstock-based payments at fair value. Companies are required to implementSFAS 123R at the beginning of their next fiscal year that begins on orafter June 15, 2005.  Accordingly,the Company expects to adopt Statement 123 R for the fiscal year beginningJanuary 1, 2006.

 

The Company is currentlyevaluating the impact of SFAS 123(R) on our financial position and results ofoperations, and does not anticipate that it will have a material impact on ouroverall financial position.

 

**3.Intangible Assets**

 

Intangible assets, whichinclude 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 following table sets forththe summarized disclosures related to intangible assets:

 
| ** **                          | ** ** | **As of December 31, 2004** | ** ** | **As of June 30, 2005**       | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)**  | ** ** |
| ** **                          | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Indefinite-lived intangible assets: |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Broadcast licenses                  |       | $                           | 475,929    |                          | —     |   | $ | 475,929 |   | $ | 475,929 |   | — |   | $ | 475,929 |   |
|                                |       |                        |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Definite-lived intangible assets:   |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Network Affiliations                |       | 91,164                      |       | (28,045                       | )          | 63,119 |   | 91,164 |   | (29,479 | ) | 61,685 |   |
| Other intangible assets             |       | 13,989                      |       | (6,761                        | )          | 7,228 |   | 13,989 |   | (7,527 | ) | 6,462 |   |
|                                |       | $                           | 105,153    |                          | $          | (34,806 | ) | $ | 70,347 |   | $ | 105,153 |   | $ | (37,006 | ) | $ | 68,147 |   |
|                                     |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

7

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Aggregate amortization expensefor the six months ended June 30, 2004 and 2005 was $2.2 million.  Aggregate amortization expense for the threemonths ended June 30, 2004 and 2005 was $1.1 million.

 

It is the Company’s policy toaccount for other definite-lived intangible assets at the lower of amortizedcost or estimated realizable value. As part of an ongoing review of thevaluation and amortization of other intangible assets of the Company and itssubsidiaries, management assesses the carrying value of other definite-livedintangible assets if facts and circumstances suggest that there may beimpairment. If this review indicates that other definite-lived intangibleassets will not be recoverable as determined by a non-discounted cash flowanalysis of the operating assets over the remaining amortization period, thecarrying value of other intangible assets would be reduced to estimated fairvalue.

 

**4. Sale ofStation**

 

OnOctober 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 Commissions reviewand approval.  During this period, theCompany retained the FCC license, the programming assets (network agreements,syndication contracts, etc.) and certain other assets of the station. OnJanuary 4, 2005, the second step of the transaction was completed and theremaining $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.

 

TheCompany 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-TVare not included in the Company’s consolidated results from continuingoperations for the three months and six months ended June 30, 2004 and 2005.

 

TheCompany recorded income from discontinued operations related to WTVO-TV of$110,000 for the six months ended June 30, 2004 as compared to a loss fromdiscontinued operations of $345 for the six months ended June 30, 2005.  For the three months ended June 30, 2004, theCompany recorded income from discontinued operations of $131,000 as compared toa loss from discontinued operations of $822 for the three months ended June 30,2005.  Net revenue of WTVO-TV for the sixmonths ended June 30, 2004 and 2005, was $2.8 million and $1,300, respectivelyand net revenue for the three months ended June 30, 2004 was $1.5 million.Since this agreement met all of the criteria for a qualifying plan of sale, thelong-lived assets to be disposed of by this sale were classified as “held forsale” on the balance sheet as of December 31, 2004.

 

8

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Thedetail of classifications on the balance sheets as “held for sale” is asfollows:

 
| ** **                                     | ** ** | **December 31, 2004**      | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| Assets:                                        |       |                       |       |
| Broadcast licenses and other intangibles,  net |       | $                          | 1,269      |   |
| Program license rights                         |       | 190                        |       |
| Assets held for sale                           |       | $                          | 1,459      |   |
|                                           |       |                       |       |
| Liabilities:                                   |       |                       |       |
| Program license liabilities                    |       | $                          | 157        |   |
| Deferred gain on sale of station               |       | 7,479                      |       |
| Liabilities held for sale                      |       | $                          | 7,636      |   |

 

**5. Long –TermDebt**

 

On May 3, 2005, the Company (i)entered into an amended and restated senior credit facility and (ii) acceptedfor payment and paid for, in connection with a cash tender offer and consentsolicitation commenced on April 11, 2005, all of its $246,890,000 outstandingprincipal amount of 81⁄2% Senior Notes Due 2008. The amended credit facility provides for a $300 million term loan and a$20 million revolving credit facility. The credit facility bears various floating interest rates, based uponLIBOR, ranging from 5.4% to 5.7%.  On May3, 2005, the full amount of the term loan was borrowed.  Approximately $278 million of the proceeds ofsuch term loan borrowing was used to pay fees and expenses related to theamended credit facility and to finance the purchase of the Senior Notes in thetender offer, including the payment of related premiums, accrued interest, feesand expenses.  The balance of the termloan borrowing will be used for working capital.  The term loan will mature in 2012 and therevolving facility will mature in 2010.  TheCompany capitalized approximately $6.0 million of fees associated with the newterm loan and revolving credit facility.

 

In connection with the cash tender offer andconsent solicitation, the Company recorded a loss on the extinguishment of debtin the second quarter of 2005, totaling approximately $18.6 million.  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 various other administrative expenses (approximately$172,000).

 

On December 23, 2003, theCompany completed a private add-on offering of $90.0 million principal amountof its 81⁄2% Senior Notes due 2008 (the “Senior Notes Add-On”) and a privateoffering of $140.0 million principal amount of its 83⁄4% Senior SubordinatedNotes due 2014 (the “December 2003 Notes”). Both the Senior Notes Add-On and the December 2003 Notes were offered toqualified institutional buyers under Rule 144A and to persons outside theUnited States under Regulation S. The Senior Notes Add-On was sold at a premiumof approximately $6.2 million. On January 22, 2004, the Company used the netproceeds of approximately $230.6 million to redeem all of the Company’s 9%senior subordinated notes due 2006, plus accrued interest, and all of theCompany’s 83⁄4% Senior Subordinated Notes due 2007, plus a redemption premium andaccrued interest.

 

On May 3, 2005, the Companyentered into an interest rate swap agreement for a notional amount of $71.0 millionwith a commercial bank who is also a lender under the Senior CreditFacility.  The swap will become effectiveon May 8, 2006 and expires on May 8, 2008. Upon effectiveness, the Company will pay a fixed interest of 4.3425% andthe Company will receive

 

9

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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 will account for this agreement asa cash flow hedge under FASB Statement Number 133, *Accountingfor Derivative Instruments and Hedging Activities,* and as such thechange in the fair value of the interest rate swap is reported as a componentof other comprehensive income (loss). For the three months ended June 30, 2005 a loss of approximately$391,000 was recorded in other comprehensive loss.  This amount will be subsequently reclassifiedinto interest expense as a yield adjustment in the same period in which therelated interest on the floating-rate debt obligations affects earnings(losses).

 

On May 5, 2005, the Companyentered into a partial termination agreement with Deutsche Bank to terminateone third of its original notional amount of $63.2 million interest rate swap,or approximately $21.1 million.  Inconsideration of the termination, the Company was required to make a netpayment of approximately $702,000, reduced by the Company’s accrued interestincome from the last payment date of March 1, 2005 through the termination dateof May 5, 2005 (approximately $35,000). In accordance with the termination, the swap liability was reduced bythe fair market value of the one third portion of the swap as of thetermination date (approximately $728,000). The difference between the payment and the fair market value of thepartially terminated swap was recorded as an interest expense for the period(approximately $9,000).

 

Long-term debt at December 31,2004 and June 30, 2005 consisted of the following:

 
| ** **                                            | ** ** | **12/31/04**       | ** ** | **6/30/05** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Senior Credit Facility                                |       | $                  | —     |        | $          | 300,000 |   |
| 81⁄2% Senior Notes due 2008                        |       | 251,865            | (1)        | —      |       |
| 8 3⁄4% Senior Subordinated Notes due 2014          |       | 140,000            |       | 140,000     |       |
| 10% Senior Subordinated Notes due 2011                |       | 347,871            | (2)        | 347,581     | (2)        |
| Total Long Term Debt                                  |       | $                  | 739,736    |        | $          | 787,581 |   |
| Less:                                                 |       |               |       |        |       |
| Scheduled current maturities                          |       | —             |       | (3,000      | )          |
| Long term debt excluding all current  installments(3) |       | $                  | 739,736    |        | $          | 784,581 |   |

 

----

(1)   Includes an unamortized premium balance of $5.0 million asof December 31, 2004.

(2)   Includes unamortized premium balances of $3.6 million and$3.3 million as of December 31, 2004 and June 30, 2005.

(3)   Excludes capital leases.

 

**6. IncomeTaxes**

 

TheCompany recorded a gain from the sale of WTVO-TV for the six months ended June30, 2005 of $11.2 million, net of a provision for state income taxes of $450,000.    At December 31, 2004, the Company had netoperating loss (“NOL”) carryforwards for tax purposes of approximately $238.6million expiring at various dates through 2024, for which a full valuationallowance has been provided.

 

10

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With the adoption of the FASB issued Statement No.142 , *Goodwill and Other Intangible Assets* (SFAS 142) the Companyno longer amortizes the book basis in the indefinite-lived intangibles, butcontinues to amortize these intangibles for tax purposes. Beginning with thefirst quarter of 2005, the Company is recording a deferred tax provision forthe excess of book basis over tax basis of intangible assets not expected toreverse during the net operating loss carryforward period.  Income tax expense for the three and sixmonths ended June 30, 2005 primarily consists of deferred income taxes of $4.6 million and $11.5 millionrelated to the increase in the Company’s deferred tax liability for the taxeffect of the difference between the book and tax basis of the intangibleassets not expected to reverse during the net operating loss carryforwardperiod.

 

The Company will have deferred tax liabilities that will arise eachquarter because the taxable temporary differences related to the amortizationof these assets will not reverse prior to the expiration period of the Company’sdeductible temporary differences unless the related assets are sold or animpairment of the assets is recorded. The Company expects that it will record atotal of approximately $6.0 million to increase deferred tax liabilities duringthe remaining six months of 2005.

 

**7.Employee Benefit Plans**

 

The Company’s defined benefitpension plan covers the IBEW Local 45 of KRON-TV employees.

 

The Company expects to contributeapproximately $341,000 to the benefit plan in 2005**. **To date approximately $214,000 hasbeen contributed.

 

Components of the net periodic benefit(cost) were as follows:

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **2004**                         | ** ** | **2005**                       | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                     |       | $                                | 95,136     |                           | $          | 63,126 |   | $ | 190,272 |   | $ | 167,522 |   |
| Interest cost                                                    |       | 151,466                          |       | 151,895                        |       | 302,932 |   | 311,338 |   |
| Expected return of plan assets                                   |       | (165,241                         | )          | (169,076                       | )          | (330,483 | ) | (337,867 | ) |
| Amortization of the unrecognized obligation  or transition asset |       | (5,933                           | )          | (5,932                         | )          | (11,865 | ) | (11,865 | ) |
| Recognized (gains) or loss                                       |       | 21,817                           |       | 28,041                         |       | 43,634 |   | 67,988 |   |
| Recognized prior service costs                                   |       | 14,044                           |       | 14,044                         |       | 28,088 |   | 28,088 |   |
| Net periodic cost                                                |       | $                                | 111,289    |                           | $          | 82,098 |   | $ | 225,578 |   | $ | 225,204 |   |

 

**8.Earnings Per Share**

 

Theweighted average number of shares outstanding during the period has been usedto calculate earnings per share.   Thestock options outstanding have not been included in the computation of earningsper share because they would be anti-dilutive.

 

11

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**Item 2. *Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.***

 

**FORWARD-LOOKING STATEMENTS**

 

**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’s discussion andanalysis of financial condition and results of operation (“MD&A”) isprovided as a supplement to the accompanying consolidated financial statementsand footnotes to help provide an understanding of the Company’s financialcondition, changes in financial condition and results of operations.  MD&A is organized as follows:

 

***Overview of our Business****—*This section provides a general description of the Company’sbusiness, as well as recent developments that have occurred during 2005 thatthe Company believes are important in understanding its results of operationsand financial condition or to anticipate future trends.

 

***Results of Operations***—This section provides an analysis of the Company’s results of operations forthe three and six months ended June 30, 2005 and 2004.  This analysis is presented on a consolidatedbasis.  In addition, this sectionprovides a brief description of significant transactions and events that impactthe comparability of the results being analyzed.

 

***Liquidity and Capital Resources***—******Thissection provides an analysis of the Company’s cash flows for the six monthsended June 30, 2005 and 2004.  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 operating revenue of theCompany’s stations is derived primarily from advertising revenue and, to a muchlesser extent, from compensation paid by the networks to its affiliatedstations for broadcasting network programming.

 

Advertising is sold forplacement within and adjoining a station’s network and locally originatedprogramming.  Advertising is sold in timeincrements and is priced primarily on the basis of a program’s popularity amongthe specific audience an advertiser desires to reach, as measured principallyby periodic audience surveys.  Inaddition, advertising rates are affected by the number of advertisers competingfor the available time, the size and demographic makeup of the market served bythe station and the availability of alternative advertising media in the market

 

12

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area. Rates are highest duringthe most desirable viewing hours, with corresponding reductions during otherhours.  The ratings of a local stationaffiliated with a national television network can be affected by ratings ofnetwork programming.

 

Most advertising contracts areshort-term, and generally run only for a few weeks. Approximately 61% ofthe gross revenue of the Company’s stations during the quarter ended June 30,2005 was generated from local advertising, which is sold by a station’s salesstaff directly to local accounts. The remainder of the gross revenue isprimarily comprised of revenues from national advertising, which is sold by theCompany’s wholly owned subsidiary, Adam Young Inc. (“AYI”), a nationaladvertising sales representative. The stations generally pay commissions toadvertising agencies on local, regional and national advertising.

 

Expenditures by advertiserstend to be cyclical, reflecting overall economic conditions, as well asbudgeting and buying patterns.  A declinein the economic prospects of advertisers or the economy in general could altercurrent or prospective advertisers’ spending priorities.  This could cause our revenues or operatingresults to decline significantly in any given period.

 

The advertising revenue of theCompany’s stations are generally highest in the second and fourth quarters ofeach year, due in part to increases in consumer advertising in the spring andretail advertising in the period leading up to, and including, the holidayseason. In addition, advertising revenue is generally higher during evennumbered election years due to spending by political candidates, which spendingtypically is heaviest during the fourth quarter.

 

The stations’ primary operatingexpenses are for employee compensation, news-gathering, production, programmingand promotion costs.  A high proportionof the operating expenses of the stations are fixed.

 

**RecentDevelopments**

 

*Executionof Amended Credit Facility and Purchase of Senior Notes.*On May 3, 2005, the Company (i) entered into an amended and restated seniorcredit facility and (ii) accepted for payment and paid for, in connection witha cash tender offer and consent solicitation commenced on April 11, 2005, allof its $246,890,000 outstanding principal amount of 81⁄2% Senior Notes Due2008.  The amended credit facilityprovides for a $300 million term loan and a $20 million revolving creditfacility.  The credit facility bearsvarious floating interest rates, based upon LIBOR, ranging from 5.4% to 5.7%.   On May 3, 2005, the full amount of the termloan was borrowed.  Approximately $278.0million of the proceeds of such term loan borrowing was used to pay fees andexpenses related to the amended credit facility and to finance the purchase ofthe Senior Notes in the tender offer, including the payment of relatedpremiums, accrued interest, fees and expenses. The balance of the term loan borrowing will be used for workingcapital.  The term loan will mature in2012 and the revolving facility will mature in 2010.  TheCompany capitalized approximately $6.0 million of fees associated with the newterm loan and revolving credit facility.

 

In connection with the cash tender offer andconsent solicitation, the Company recorded a loss on the extinguishment of debtin the second quarter of 2005, totaling approximately $18.6 million.  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 various other administrative expenses (approximately$172,000).

 

On May 3, 2005, the Companyentered into an interest rate swap agreement for a notional amount of $71.0million with a commercial bank who is also a lender under the Senior CreditFacility.

 

13

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The swap will become effectiveon May 8, 2006 and expires on May 8, 2008. Upon effectiveness, the Company will pay a fixed interest of 4.3425% andthe Company will receive interest from the commercial bank, based upon a threemonth LIBOR rate.  It is the Company’sintention to ensure the interest rate reset dates of the swap and the term loanwill match over the term of the swap, and therefore the changes in the fairvalue of the interest-rate swap are expected to significantly offset changes inthe cash flows of the floating rate debt. The Company will account for this agreement using hedge accounting underFAS 133, *Accounting for Derivative Instruments and HedgingActivities,* and as such the change in the fair value of the interestrate swap is reported as a component of other comprehensive income (loss).  For the three months ended June 30, 2005 aloss of approximately $391,000 was recorded in other comprehensive loss.  This amount will be subsequently reclassifiedinto interest expense as a yield adjustment in the same period in which therelated interest on the floating-rate debt obligations affects earnings(losses).

 

On May 5, 2005, the Companyentered into a partial termination agreement with Deutsche Bank to terminateone third of its original notional amount of $63.2 million interest rate swap,or approximately $21.1 million.  Inconsideration of the termination, the Company was required to make a netpayment of approximately $702,000, reduced by the Company’s accrued interestincome from the last payment date of March 1, 2005 through the termination dateof May 5, 2005 (approximately $35,000). In accordance with the termination, the swap liability was reduced bythe fair market value of the one third portion of the swap as of thetermination date (approximately $728,000). The difference between the payment and the fair market value of thepartially terminated swap was recorded as an interest expense for the period(approximately $9,000).

 

*NetworkAffiliation Agreements*.  The Company has renewed its affiliations withCBS with respect to WLNS-TV and KLFY-TV and with NBC with respect to KWQC-TV.  The renewed CBS affiliations expire onSeptember 30, 2012 and the renewed NBC affiliation expires on January 1,2014.  Under the renewed CBS and NBCaffiliations, the Company will be receiving significantly less networkcompensation than it received from CBS and NBC under the expired agreements.

 

During thefirst quarter of 2004 the Company received notice from ABC with respect toWKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV, that the network would notrenew the affiliation agreements then in place and that the networks wished tonegotiate new agreements.  The agreementswith ABC expired on September 30, 2004. Negotiations with ABC are ongoing. The Company is operating under extensions of the ABC affiliationagreements that have been extended through August 12, 2005.  While the Company is unable to predict theterms of the renewed ABC affiliation agreements, the Company believes thatrenewed affiliations will be in place by the end of August 2005, but on termsthat provide less network compensation to the stations than was provided underthe expired agreements.  In the event,however, of the Company’s inability to maintain its current affiliations forthe five ABC affiliated stations, the respective station may no longer be ableto carry programming of the ABC network. This loss in network programming would require the Company to obtainreplacement programming, which may involve higher costs and which may not be asattractive to audiences, resulting in reduced advertising revenues.  Additionally, the Company would be requiredto write off the net book value of its intangible assets associated with thenetwork affiliation agreements.

 

*Sale of WTVO-TV. *On October 4, 2004, the Company entered intoan agreement with Mission Broadcasting, Inc. (“Mission”) to sell the assets ofWTVO-TV, its station in Rockford, Illinois, for an aggregate cash purchaseprice of approximately $20.8 million. The agreement provided for the purchaseand sale of WTVO-TV assets to occur in two steps. On November 1, 2004 the Companycompleted the first closing of the sale. At the first closing, Mission paid the Company

 

14

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$15.0million (as adjusted) of the aggregate purchase price for the physical assetsof the station and the parties entered into a time barter arrangement, withrespect to the sale of advertising to the station.  The completion of the second step of thistransaction was subject to Federal Communications Commissions review and approval.  During this period, the Company retained theFCC license, the programming assets (network agreements, syndication contracts,etc.) and certain other assets of the station. On January 4, 2005, the secondstep of the transaction was completed and the remaining $5.75 million of thepurchase price was paid to the Company. A gain of approximately$14.7 million, net of applicable taxes was recognized on the sale; $3.5 millionof this gain, net of a provision for income taxes of $300,000, was recognizedin 2004 and approximately $11.2 million, net of a provision for income taxes of$450,000, was recognized in the first quarter of 2005.  The gain allocation wasdetermined based on the relative fair value of the assets sold.

 

*Digital Upgrades.*  The Company has completed the upgrade of itstelevision stations to enable them to broadcast with digital technology.  As of July 25, 2005, however, the FCC had notgranted the final digital construction permit for WTEN-TV (Albany) due to thefailure of the FCC and the Canadian government to resolve certain interferenceissues.   Pending such final approval,the FCC, in August 2004, granted WTEN-TV’s request for special temporaryauthority, to operate under reduced power pending final approval of the finaldigital upgrades.

 

**TelevisionRevenues**

 

Set forth below are theprincipal types of television revenues received by the Company’s stations forthe periods indicated and the percentage contribution of each to the Company’stotal revenue, as well as agency and national sales representative commissions:

 
| ** **       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **       | ** ** | **2004**                        | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **       | ** ** | **Amount**                      | ** ** | **%**                         | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**      | ** ** |
| Revenues         |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Local            |       | $                               | 33,916     |                          | 51.3       |   | $ | 35,844 |   | 60.8 |   | $ | 63,113 |   | 51.0 |   | $ | 66,912 |   | 59.8 |   |
| National         |       | 22,446                          |       | 33.9                          |       | 18,831 |   | 32.0 |   | 41,143 |   | 33.2 |   | 36,380 |   | 32.5 |   |
| Network          |       | 2,373                           |       | 3.6                           |       | 399 |   | 0.7 |   | 4,717 |   | 3.8 |   | 738 |   | 0.6 |   |
| Political        |       | 4,587                           |       | 6.9                           |       | 844 |   | 1.4 |   | 8,434 |   | 6.8 |   | 1,228 |   | 1.1 |   |
| Barter           |       | 1,733                           |       | 2.6                           |       | 1,673 |   | 2.8 |   | 3,481 |   | 2.8 |   | 3,417 |   | 3.1 |   |
| Production/Other |       | 1,097                           |       | 1.7                           |       | 1,380 |   | 2.3 |   | 2,973 |   | 2.4 |   | 3,289 |   | 2.9 |   |
| Total            |       | $                               | 66,152     |                          | 100.0      |   | $ | 58,971 |   | 100.0 |   | $ | 123,861 |   | 100.0 |   | $ | 111,964 |   | 100.0 |   |
|             |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |       | (9,290                          | )          | (14.0                         | )          | (8,106 | ) | (13.7 | ) | (17,429 | ) | (14.1 | ) | (15,589 | ) | (13.9 | ) |
|             |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue      |       | $                               | 56,862     |                          | 86.0       |   | $ | 50,865 |   | 86.3 |   | $ | 106,432 |   | 85.9 |   | $ | 96,375 |   | 86.1 |   |

 

15

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**Results ofOperations**

 

***Three Months Ended June 30, 2005 Compared to Three Months Ended June30, 2004***

 

The followingtable sets forth the Company’s operating results for the three months endedJune 30, 2005 as compared to the three months ended June 30, 2004.  The results from continuing operations forthe three months ended June 30, 2005 and 2004 do not include the results ofoperations for WTVO-TV.  Results forWTVO-TV are reflected as discontinued operations.

 
| ** **                                                | ** ** | **For the three months ended June 30,  (in thousands, except per share data)** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                                                       | ** ** | **2005** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Net revenue                                               |       | $                                                                              | 56,862     |   | $ | 50,865 |   | $ | (5,997 | ) | (10.5 | )% |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Operating expenses, including SG&A                    |       | 33,489                                                                         |       | 34,838 |   | 1,349 |   | 4.0 |   |
| Amortization of program license rights                    |       | 4,420                                                                          |       | 5,271 |   | 851 |   | 19.3 |   |
| Depreciation and amortization                             |       | 6,239                                                                          |       | 6,044 |   | (195 | ) | (3.1 | ) |
| Corporate overhead, excluding depreciation  expense       |       | 3,793                                                                          |       | 3,064 |   | (729 | ) | (19.2 | ) |
| Operating income                                          |       | 8,921                                                                          |       | 1,648 |   | (7,273 | ) | (81.5 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Interest expense, net                                     |       | (15,871                                                                        | )          | (15,414 | ) | 457 |   | 2.9 |   |
| Non-cash change in market valuation of  swaps             |       | (2,538                                                                         | )          | 1,165 |   | 3,703 |   | 145.9 |   |
| Loss on extinguishment of debt                            |       | —                                                                         |       | (18,626 | ) | (18,626 | ) | (100.0 | ) |
| Other income/ (expense)                                   |       | (207                                                                           | )          | (148 | ) | 59 |   | 28.5 |   |
|                                                      |       | (18,616                                                                        | )          | (33,023 | ) | (14,407 | ) | (77.4 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Loss from continuing operations before  income taxes      |       | (9,695                                                                         | )          | (31,375 | ) | (21,680 | ) | (223.6 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Income tax expense                                        |       | —                                                                         |       | (4,778 | ) | (4,778 | ) | (100.0 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Loss from continuing operations                           |       | (9,695                                                                         | )          | (36,153 | ) | (26,458 | ) | (272.9 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| (Loss) income from discontinued operations,  net of taxes |       | 131                                                                            |       | (1 | ) | (132 | ) | (100.8 | ) |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Net loss                                                  |       | $                                                                              | (9,564     | ) | $ | (36,154 | ) | $ | (26,590 | ) | (278.0 | )% |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Basic loss from continuing operations per  common share   |       | $                                                                              | (0.49      | ) | $ | (1.81 | ) |   |   |   |   |
| Loss (income) from discontinued operations,  net          |       | 0.01                                                                           |       | (0.00 | ) |   |   |   |   |
| Basic net loss per common share                           |       | $                                                                              | (0.48      | ) | $ | (1.81 | ) |   |   |   |   |
| Basic shares used in earnings per share  calculation      |       | 19,863,843                                                                     |       | 19,997,889 |   |   |   |   |   |

 

16

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Net Revenueincludes: (i) cash and barter advertising revenues, net of agency commissions;(ii) network compensation; and (iii) other revenues which represent less than3% of total net revenue.  Net revenue forthe three months ended June 30, 2005 was $50.9 million, as compared to $56.9million, for the three months ended June 30, 2004, a decrease of $6.0 millionor 10.5%.  The major components of, andchanges to, net revenue were as follows:

•                  Gross politicalrevenue for the three months ended June 30, 2005 was $844,000, as compared to$4.6 million for the three months ended March 31, 2004, a decrease of $3.7million.  Political revenue for thesecond quarter of 2004 was positively impacted by the strongly contested localraces in Iowa, California and South Dakota as well as significant spending onthe presidential campaign.  The Companyanticipates political revenue to continue to decrease significantly in 2005, asthere will not be a presidential campaign and the Company anticipates thatthere will be no significant local races in the markets that it serves.

•                  The Company’sgross local revenues for three months ended June 30, 2005 increased by 5.7%compared to the three months ended June 30, 2004, and gross national revenuesfor the three months ended June 30, 2005 were down 16.1% 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 decrease ingross national revenues for the three months ended June 30, 2005 was mainly dueto decreased spending by various national accounts, including automotive accountsin five of the Company’s stations.

•                  Networkcompensation for the three months ended June 30, 2005 was $399,000, a decreaseof $2.0 million, or 83.2%, compared to $2.4 million for the three months endedJune 30, 2004.   The decrease in networkcompensation is primarily due to the changes in the new network affiliationagreements with CBS and NBC and the pending renewal of network affiliationagreements with ABC (as discussed further in “*Liquidityand Capital Resources*”) whereby the Company will be receivingsignificantly less network compensation over the term of the agreements, theamounts of which are recorded on a straight line basis over the life of the newagreements.  Network compensation wasfurther impacted by the inability to finalize new ABC agreements to date.  The Company is currently operating underextensions of the ABC affiliation agreements which are set to expire on August12, 2005.  The network compensation receivedby the Company under the ABC affiliation agreements for the second quarter of2005 was not recognized in the second quarter of 2005 because renewed ABCaffiliation agreements had not been finalized by the end of the quarter. 

 

Operatingexpenses, including selling, general and administrative expenses, for the threemonths ended June 30, 2005 were $34.8 million as compared to $33.5 million forthe three months ended March 31, 2004, an increase of $1.3 million, or4.0%.  The major causes of the increasesin operating expenses were as follows:

•                  Approximately$550,000 of the increase relates to the Company’s new local sales initiatives,which were not implemented until the fourth quarter of 2004.

•                  Approximately$631,000 of the increase is attributable to increases in media spending at oneof the Company’s stations during the three months ended June 30, 2005.

•                  The Companyincurred approximately $495,000 in severance costs relating to cost cuttinginitiatives and anticipated headcount reduction.

•                  Approximately$229,000 of the increase is attributable to the increase in local salescommissions paid to employees due to the increase in local revenues, as notedabove.

•                  Included in theselling, general and administrative expenses is non-cash compensation expenseof approximately $557,000 for the three months ended June 30, 2005, of whichapproximately $259,000 relates to restricted and deferred stock awards.  The remaining $298,000 of non-cashcompensation relates to the Company’s matching contributions to

 

17

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eligible employees under its defined contribution plan.  This compares to non-cash compensation of$274,000 for the three months ended June 30, 2004, relating to the Company’smatching contributions for eligible employees under its defined contributionplan.

•                  Offsetting thisincrease was a reduction in bad debt expense of approximately $338,000, whichis consistent with the reduced net revenues for the three months ended June 30,2005.

 

Amortizationof program license rights for the three months ended June 30, 2005 was $5.3million, compared to $4.4 million for the three months ended June 30, 2004, anincrease of $851,000, or 19.3%.  Theincrease for the three months ended June 30, 2005 was primarily due toincreased renewal costs of the *Dr. Phil*broadcast rights at one of the Company’s stations.

 

Depreciationof property and equipment and amortization of intangible assets was $6.0million for the three months ended June 30, 2005 as compared to $6.2 millionfor the three months ended June 30, 2004, a decrease of approximately $195,000or 3.1%.  Approximately $100,000 of thisdecrease is the result of various furniture, fixtures and computer at one ofthe Company’s stations becoming fully depreciated in June 2005. Additionally,$87,000 of this decrease is due to lower amortization expense on debt issuancecosts associated with the May 3, 2005 debt refinancing transaction (see “*Liquidity and Capital Resources”*).

 

CorporateOverhead for the three months ended June 30, 2005 was $3.1 million, compared to$3.8 million for the three months ended June 30, 2004, a decrease of $729,000,or 19.2%.  The major components andchanges in corporate expenses were as follows:

•                  Travel expensesdecreased by approximately $183,000, due to various corporate training andother initiative that took place in the second quarter of 2004, which did notoccur for in the three months ended June 30, 2005.

•                  Personnel costsdecreased approximately $385,000 for the three months ended June 30, 2005.

•                  Businessinsurance decreased approximately $73,000 for the quarter, due primarily torenewed policy premiums, which were negotiated at lower rates.

•                  Additionally,the Company incurred less costs associated with the preparation anddistribution of its public filings, as evidenced by a decrease of approximately$71,000 in shareholder and annual report administration fees for the secondquarter of 2005.

 

Interestexpense for the three months ended June 30, 2005 was $15.4 million, compared to$15.9 million for the same period in 2004, a decrease of $457,000, or2.9%.  Pursuant to the refinancingtransaction completed on May 3, 2005 (see “Liquidity and Capital Resources”)the Company used borrowings under its new $300.0 million senior credit facilityto purchase all of its $246,890,000 principal amount of 81⁄2% Senior Notes due2008.  The credit facility bears variousfloating interest rates, based upon LIBOR, ranging from 5.4% to 5.7%, thusreducing interest expense for fifty eight days of second quarter of 2005.

 

The Companyrecorded a $1.2 million non-cash gain and $2.5 million non-cash loss inconnection with the change in the market value of interest rate swaps for thethree months ended June 30, 2005 and 2004, respectively.  Since the Company receives interest at afixed rate and pays interest at a floating rate, the Company’s exposuredeclines or improves when interest rates rise or fall.  During the three months ended June 30, 2005,the interest rates declined, thus leading to improved exposure, and a non-cashgain.

 

For the threemonths ended June 30, 2005 the Company recorded a loss on extinguishment ofdebt totaling approximately $18.6 million in connection with the cash tenderoffer and consent solicitation completed on May 3, 2005.   This loss is comprised of the cost of theconsent

 

18

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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), plus various other administrative expenses(approximately $172,000) (see “Liquidity and Capital Resources”).

 

The Companyrecorded an income tax provision of $4.8 million for the three months endedJune 30, 2005.  This provision includes adeferred tax liability of $4.6 million for the taxable temporary differencerelated to the amortization of the Company’s indefinite-lived intangibleassets, which continues to be amortized for tax purposes (see “Income Taxes”).

 

On October 4,2004, the Company entered into an agreement with Mission Broadcasting, Inc. (“Mission”)to sell the assets of WTVO-TV, its station in Rockford, Illinois, for anaggregate cash purchase price of approximately $20.8 million. A gain ofapproximately $14.7 million, net of applicable taxes was recognized on thesale; $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.  The Companyrecorded loss from discontinued operations of approximately $822 and incomefrom discontinued operations of $131,000 for the three months ended June 30,2005 and June 30, 2004, respectively.

 

As a result ofthe above-discussed factors, the net loss for the Company was $36.2 million forthe three months ended June 30, 2005, compared to a net loss of $9.6 millionfor the three months ended June 30, 2004, a change of $26.6 million, or 278.0%.

 

19

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***Six Months Ended June 30, 2005 Comparedto Six Months Ended June 30, 2004***

 

The following table sets forth the Company’soperating results for the six months ended June 30, 2005 as compared tothe six months ended June 30, 2004. The results from continuing operations for the six months ended June 30,2005 and 2004 do not include the results of operations for WTVO-TV.  Results for WTVO-TV are reflected asdiscontinued operations.

 
| ** **                                                                                                   | ** ** | **For the six months ended June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                                                                   | ** ** | **(in thousands, except per share  data)** | ** ** | **%**      | ** ** |
| ** **                                                                                                   | ** ** | **2004**                                   | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                                                                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenue                                                                                                  |       | $                                          | 106,432    |       | $          | 96,375 |   | $ | (10,057 | ) | (9.4 | )% |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Operating  expenses, including SG&A                                                                      |       | 66,502                                     |       | 70,273     |       | 3,771 |   | 5.7 |   |
| Amortization  of program license rights                                                                      |       | 9,109                                      |       | 10,606     |       | 1,497 |   | 16.4 |   |
| Depreciation  and amortization                                                                               |       | 12,565                                     |       | 12,436     |       | (129 | ) | (1.0 | ) |
| Corporate  overhead, excluding depreciation expense                                                          |       | 9,618                                      |       | 7,154      |       | (2,464 | ) | (25.6 | ) |
| Operating  income (loss)                                                                                     |       | 8,638                                      |       | (4,094     | )          | (12,732 | ) | (147.4 | ) |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Interest expense,  net                                                                                       |       | (32,857                                    | )          | (31,237    | )          | 1,620 |   | 4.9 |   |
| Non-cash  change in market valuation of swaps                                                                |       | (1,277                                     | )          | (659       | )          | 618 |   | 48.4 |   |
| Loss on  extinguishment of debt                                                                              |       | (5,323                                     | )          | (18,626    | )          | (13,303 | ) | (249.9 | ) |
| Other  income/ (expense)                                                                                     |       | (157                                       | )          | (303       | )          | (146 | ) | 93.0 |   |
|                                                                                                         |       | (39,614                                    | )          | (50,825    | )          | (11,211 | ) | 28.3 |   |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Loss from  continuing operations before income taxes                                                         |       | (30,976                                    | )          | (54,919    | )          | (23,943 | ) | (77.3 | ) |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Income tax  expense                                                                                          |       | —                                     |       | (11,793    | )          | (11,793 | ) | (100.0 | ) |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Loss from  continuing operations                                                                             |       | (30,976                                    | )          | (66,712    | )          | (35,736 | ) | (115.4 | ) |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| (Loss)  income from discontinued operations, net of taxes (including gain on sale of  $11.2 million in 2005) |       | 110                                        |       | 11,207     |       | 11,097 |   | 10088.2 |   |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Net loss                                                                                                     |       | $                                          | (30,866    | )          | $          | (55,505 | ) | $ | (24,639 | ) | (79.8 | )% |
|                                                                                                         |       |                                       |       |       |       |   |   |   |   |
| Basic loss  from continuing operations per common share                                                      |       | $                                          | (1.56      | )          | $          | (3.34 | ) |   |   |   |   |
| Loss  (income) from discontinued operations, net                                                             |       | 0.01                                       |       | 0.56       |       |   |   |   |   |
| Basic net  loss per common share                                                                             |       | $                                          | (1.55      | )          | $          | (2.78 | ) |   |   |   |   |
| Basic shares  used in earnings per share calculation                                                         |       | 19,853,917                                 |       | 19,976,706 |       |   |   |   |   |

 

20

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Net revenue for the six months ended June 30,2005 was $96.4 million, as compared to $106.4 million, for the six months endedJune 30, 2004, a decrease of $10.1 million or 9.4%.  The major components of, and changes to, netrevenue were as follows:

•                  Grosspolitical revenue for the six months ended June 30, 2005 was $1.2 million,as compared to $8.4 million for the six months ended June 31, 2004, adecrease of approximately $7.2 million. Political revenue for the first half of 2004 was positively impacted bythe national democratic primaries, as well as the strongly contested localraces in Iowa, California and South Dakota. The Company anticipates political revenue to continue to decreasesignificantly in 2005, as there will not be a presidential campaign and theCompany anticipates that there will be no significant local races in themarkets that is serves.

•                  TheCompany’s gross local revenues for six months ended June 30, 2005increased by 6.0% compared to the six months ended June 30, 2004, andgross national revenues for the six months ended June 30, 2005 were down11.6% compared to the prior year.  Theincrease in gross local revenues is partially attributable to new advertisersin conjunction with new local sales initiatives.  Additionally, nine of the ten stationsincreased local revenues from various accounts, including hospitals, furniture,automotive and healthcare. The decrease in gross national revenues for the sixmonths ended June 30, 2005 was mainly due to decreased spending by variousnational accounts, including automotive and telecommunications accounts in sixof the Company’s stations.

•                  Networkcompensation for the six months ended June 30, 2005 was $738,000, adecrease of $4.0 million, or 84.3%, compared to $4.7 million for the six monthsended June 30, 2004.  The decreasein network compensation is primarily due to the changes in the new networkaffiliation agreements with CBS and NBC and the pending renewal of networkaffiliation agreements with ABC (as discussed further in “*Liquidityand Capital Resources*”) whereby the Company will be receivingsignificantly less network compensation over the term of the agreements, theamounts of which are recorded on a straight line basis over the life of the newagreements.  Network compensation wasfurther impacted by the inability to finalize new ABC agreements to date.  The Company is currently operating underextensions of the ABC affiliation agreements which are set to expire on August 12,2005.  The network compensation receivedby the Company under the ABC affiliation agreements for the second quarter of2005 were not recognized in the first six months of 2005 because renewed ABCaffiliation agreements had not been finalized by the end of the quarter. 

 

Operating expenses, including selling,general and administrative expenses, for the six months ended June 30,2005 were $70.3 million as compared to $66.5 million for the six months ended June 20,2004, an increase of $3.8 million, or 5.7%. The major causes of the increases in operating expenses were as follows:

•                  Approximately$1.2 million of the increase relates to the Company’s new local salesinitiatives, which were not implemented until the fourth quarter of 2004.

•                  Duringthe first half of 2005, the Company recorded a pension benefit obligationapproximating $426,000 for a retired general manager at one of the Company’sstations.

•                  Duringthe first half of 2004, one of the Company’s stations realized variousoperating expense reductions which approximated $422,000.  No such reductions were realized during thefirst six months of 2005.

•                  TheCompany incurred approximately $836,000 in severance costs relating to costcutting initiatives and anticipated headcount reduction.

•                  Approximately$629,000 of the increase is attributable to the increase in local salescommissions paid to employees of the Company’s network affiliated stations dueto the increase in local revenues, as noted above.

 

21

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•                  Approximately$570,000 of the increase is attributable to increases in media spending at oneof the Company’s stations during the six months ended 2005.

•                  Includedin the selling, general and administrative expenses is non-cash compensationexpense of approximately $1.2 million for the six months ended June 30,2005, of which approximately $544,000 relates to restricted and deferred stockawards.  The remaining $632,000 ofnon-cash compensation relates to the Company’s matching contributions toeligible employees under its defined contribution plan.  This compares to non-cash compensation of$586,000 for the six months ended June 30, 2004, relating to the Company’smatching contributions for eligible employees under its defined contributionplan.

The following items acted to offset thesechanges:

•                  Baddebt expense decreased by approximately $327,000, which is consistent with thereduced net revenues for the six months ended June 30, 2005.

•                  Musiclicensing fees were down approximately $302,000, due to new music contracts(ASCAP, BMI and SESAC) at various stations, which are at lower rates than theprevious agreements.

 

Amortization of program license rights forthe six months ended June 30, 2005 was $10.6 million, compared to $9.1million for the six months ended June 30, 2004, an increase of $1.5million, or 16.4%.  The increase for thesix months ended June 30, 2005 was primarily due to increased renewalcosts of the *Dr. Phil* broadcast rights atone of the Company’s stations.

 

Depreciation of property and equipment andamortization of intangible assets was $12.4 million for the six months ended June 30,2005 as compared to $12.6 million for the six months ended June 30, 2004,a decrease of approximately $129,000 or 1.0%. This decrease was primarily due to lower amortization expense of debtissuance costs associated with the May 3, 2005 debt refinancingtransaction (see “*Liquidity and Capital Resources”*).

 

Corporate Overhead for the six months ended June 30,2005 was $7.2 million as compared to $9.6 million for the six months ended June 30,2004, a decrease of $2.5 million, or 25.6%. The major components and changes in corporate expenses were as follows:

•                  Approximately$2.2 million of this decrease relates to the severance package that wasprovided, during the six months ended June 30, 2004, to the Company’sformer president, who retired on March 31, 2004.  Additionally, there was no incrementalincrease in overhead resulting from the replacement of the former president, sincehe was replaced by an existing executive of the Company.

•                  Personnelcosts decreased by approximately 681,000 for the six months ended June 30,2005, due in part to decreased headcount, resulting from the death of two ofthe Company’s officers during 2004.

•                  Travelexpenses decreased by approximately $255,000, due to various corporate trainingand other initiative which took place in 2004, which did not occur for in thesix months ended June 30, 2005.

•                  Offsettingthis decrease, was approximately $833,000 of additional professional andconsulting fees for the six months ended June 30, 2005.  Approximately $246,000 of the increaserelates to a tax consulting project.  Theremaining increase relates to the Company’s continued review and compliancewith corporate governance legislation.

 

Interest expense for the six months endedJune, 2005 was $31.2 million, compared to $32.8 million for the same period in2004, a decrease of $1.6 million, or 4.9%. The Company had higher debt levels for the first twenty two days of 2004associated with the redemption on January 22, 2004 of its 9% seniorsubordinated notes due 2006 and 8 3⁄4% senior subordinated notes due 2007.  Furthermore, pursuant to the refinancingtransaction completed on May 3, 2005 (see

 

22

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“Liquidity and Capital Resources”) theCompany used borrowings under its new $300.0 million senior credit facility topurchase its all of its $246,890,000 principal amount of 81⁄2% Senior Notes due2008.  The credit facility bears variousfloating interest rates, based upon LIBOR, ranging from 5.4% to 5.7%, thusreducing interest expense for fifty eight days of 2005.  The Company received a payment on itsinterest rate swaps of $672,000 and $871,000 for the six months ended June 30,2005 and 2004, respectively, which was recorded as a reduction of interestexpense.

 

The Company recorded a $659,000 non-cash lossand $1.3 million non-cash loss in connection with the change in the marketvalue of interest rate swaps for the six months ended June 30, 2005 and2004, respectively.  Since the Companyreceives interest at a fixed rate and pays interest at a floating rate, the Company’sexposure declines or improves when interest rates rise or fall.  The interest rates declined year over year,leading to improved exposure, and therefore a smaller non-cash loss.

 

For the six months ended June 30, 2005the Company recorded a loss on extinguishment of debt totaling approximately$18.6 million in connection with the cash tender offer and consent solicitationcompleted 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 various other administrative expenses (approximately$172,000) (see “Liquidity and Capital Resources”).  Thiscompares to a loss on extinguishment of debt from the write-off ofrelated unamortized deferred financing costs for the six months ended June 30,2004 of $5.3 million relating to the redemption on January 22, 2004 of its9% senior subordinated notes due 2006 and 8 3⁄4% senior subordinated notes due2007.

 

The Company recorded an income tax provisionof $11.8 million for the six months ended June 30, 2005.  This provision includes a deferred taxliability of $11.5 million for the taxable temporary difference related to theamortization of the Company’s indefinite-lived intangible assets, whichcontinues to be amortized for tax purposes (see “Income Taxes”).

 

On October 4, 2004, the Company enteredinto an agreement with Mission Broadcasting, Inc. (“Mission”) to sell theassets of WTVO-TV, its station in Rockford, Illinois, for an aggregate cashpurchase price of approximately $20.8 million. A gain of approximately $14.7million, net of applicable taxes was recognized on the sale; $3.5 million ofthis gain, net of a provision for income taxes of $300,000, was recognized inthe fourth quarter of 2004 and approximately $11.2 million, net of a provisionfor income taxes of $450,000, was recognized in the first quarter of 2005.  The Company recorded loss from discontinuedoperations of approximately $345 and income from discontinued operations of$110,000 for the six months ended June 30, 2005 and June 30, 2004,respectively.

 

As a result of the above-discussed factors,the net loss for the Company was $55.5 million for the six months ended June 30,2005, compared to a net loss of $30.9 million for the six months ended June 30,2004, a change of $24.6 million, or 79.8%.

 

23

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**Liquidity and Capital Resources**

 

Current Financial Condition

 

The following tables present certain datathat the Company believes is helpful in evaluating the Company’s liquidity andcapital resources (dollars in thousands).

 
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **2004**                           | ** ** | **2005** | ** ** |
| Net cash  provided by (used in):           |       |                               |       |   |   |
| Operating  activities                      |       | $                                  | (13,895    | ) | $ | (37,901 | ) |
| Investing  activities                      |       | (7,500                             | )          | 3,327 |   |
| Financing  activities                      |       | (224,657                           | )          | 46,769 |   |
| Net decrease  in cash and cash equivalents |       | $                                  | (246,053   | ) | $ | 12,195 |   |

 
| ** **                                 | ** ** | **December 31,  2004** | ** ** | **June 30,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Cash and  cash equivalents                 |       | $                           | 93,831     |                    | $          | 106,026 |   |
| Long-term  debt, including current portion |       | $                           | 740,438    |                    | $          | 787,921 |   |
| Available  under senior credit agreement   |       | $                           | 20,000     |                    | $          | 20,000 |   |

 

The Company’s cash flow is highly dependentupon the state of the advertising market and public acceptance of televisionprogramming.  Any significant decline inthe advertising market or performance of the television programming couldadversely impact the Company’s cash flow from operations.

 

The performance of KRON-TV has a largeproportionate impact on the Company’s operating results.  Consequently, the Company is particularlysusceptible to economic conditions in the San Francisco advertising market.

 

The Company has renewed its affiliations withCBS with respect to WLNS-TV and KLFY-TV for eight years to expire on September 30,2012 and with NBC with respect to KWQC-TV for ten years to expire on January 1,2014.  Under renewed CBS and NBCaffiliations, the Company will be receiving significantly less networkcompensation than it received from CBS and NBC under the expired agreements.

 

During the first quarter of 2004 the Companyreceived notice from ABC with respect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TV andWBAY-TV, that the network would not renew the affiliation agreements then inplace and that the networks wished to negotiate new agreements.  The agreements with ABC expired on September 30,2004.  Negotiations with ABC areongoing.  The Company is operating underextensions of the ABC affiliation agreements that have been extended through August 12,2005.  While the Company is unable topredict the terms of the renewed ABC affiliation agreements, the Companybelieves that renewed affiliations will be in place by the end of August 2005,but on terms that provide less network compensation to the stations than wasprovided under the expired agreements. In the event, however, of the Company’s inability to maintain itscurrent affiliations for the five ABC affiliated stations, the respectivestation may no longer be able to carry programming of the ABC network.  This loss in network programming wouldrequire the Company to obtain replacement programming, which may involve highercosts and which may not be as attractive to audiences, resulting in reducedadvertising revenues.  Additionally, theCompany would be required to write off the net book value of its intangibleassets associated with the network affiliation agreements.

 

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The principal uses of cash that affect theCompany’s liquidity position include the following: the acquisition of andpayments under programming rights for entertainment and sporting events,capital and operational expenditures and interest payments on the Company’sdebt.  It should be noted that commencingon September 30, 2005, the Company will be required to make scheduledprincipal payments under the term loan portion of the senior credit agreement,on a quarterly basis, equal to 0.25% of its outstanding principal balance.

 

**Sources and Uses of Cash**

 

*Operating Activities*

 

Net cash used in operating activities for thesix months ended June 30, 2005 and 2004 was $37.9 million and $13.9million, respectively.  The increase isnet cash used for operating activities was primarily due to the reduction inboth the Company’s net revenue and operating income for the six months ended June 30,2005 as compared to the same period in 2004. The following changes in operating activities were noted:

•                  Prepaidexpenses decreased by approximately $2.0 million for the six months ended June 30,2005, of which approximately $1.7 million relates to prepaid corporateexpenses.  During the first half of theyear, the Company expensed approximately $2.0 million of insurance costs, ofwhich approximately $1.6 million was allocated to each of the ten stations,representing prepaid insurance premiums which were expensed during the firsthalf of 2005.  In addition, during thefirst half of 2005, the Company expensed costs relating to a tax consultingproject.  This decrease was slightlyoffset by approximately $1.0 million of prepaid insurance premiums for thefirst half of 2005.

•                  Accountsreceivable decreased by approximately $908,000 for the six months ended June 30,2005.  This decrease is consistent withthe reduced revenues as discussed further in *Results ofOperations*section*.*

•                  Accruedexpenses and other liabilities increased approximately $1.0 million for the sixmonths ended June 30, 2005.  Thisincrease is comprised of an increase of approximately $2.1 million, relating tothe accrued interest and timing differences on the new $300.0 million termloan.  This increase was offset by adecrease in various accrued expenses, including accrued bonuses and accruedaudit fees relating primarily to expenses that were accrued for at December 31,2004, however, not paid out until 2005.

The following items acted tooffset these changes:

•                  Tradeaccounts payable decreased approximately $1.2 million, due mainly to timing ofpayments.  It should be noted that thenon-cash change in the barter programming liability is eliminated from the changein accounts payable balance for cash flow presentation purposes.  For the six months ended June 30, 2005,the change in barter programming liability, of approximately $1.3 million,related primarily to new barter programming arrangements entered into at one ofthe Company’s stations.

 

*Investing Activities*

Cash provided for investing activities for the six months ended June 30,2005 was $3.3 million, compared to cash used in investing activities for thesix months ended June 30, 2004 of $7.5 million. The following changes ininvesting activities were noted:

•                  Investingactivities in 2005 included $5.8 million of proceeds from the closing on January 4,2005, of the second step of the sale of WTVO-TV to Mission Broadcasting.

•                  Capitalexpenditures for the six months ended June 30, 2005 of $2.5 million wassignificantly lower than capital expenditures of $7.6 million for the sixmonths ended June 30, 2004.  Duringpart of 2004, the Company incurred significant capital expenditures forbuilding digital transmission facilities, as required by the FederalCommunications Commission regulations.

 

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•                  Depositsand other assets for the Company increased by approximately $62,000 for the sixmonths ended June 30, 2005 as compared to a decrease of $1,300 for the sixmonths ended June 30, 2004. Included in the deposits and other assets for the six months ended June 30,2005, is an increase in investments in unconsolidated subsidiaries ofapproximately $90,000 during the first half of 2005.

 

*Financing Activities*

Cash provided by financing activities for thesix months ended June 30, 2005 was $46.8 million compared to cash used infinancing activities of $224.7 million for the six months ended June 30,2004.  On May 3, 2005, the Company amended andrestated its senior credit facility (as amended, the “Senior Credit Facility”).See below for further details on the Senior Credit Facility.

 

On December 23, 2003, the Company completed a private add-onoffering of $90.0 million principal amount of its 81⁄2% Senior Notes due 2008(the “Senior Notes Add-On”) and a private offering of $140.0 million principalamount of its 83⁄4% Senior Subordinated Notes due 2014 (the “December 2003Notes”).  In connection with the December 2003Notes and the Senior Notes Add-On, the Company recorded approximately $597,000of deferred financing costs in 2004 that was to be amortized over the term ofthe respective notes.  See below forfurther details on the Senior Notes Add-On and the December 2003 Notes.

 

The Company made payments under capital leaseobligations of $362,000 and $319,000 for the six months ended June 30,2005 and 2004, respectively.

 

**Debt Instruments, Guarantees and RelatedCovenants**

 

On May 3, 2005, the Company amended andrestated its senior credit facility (as amended, 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) a revolving credit facilityin the amount of $20.0 million that matures in 2010. The credit facilitybears various floating interest rates, based upon LIBOR, ranging from 5.4% to5.7%.   On May 3, 2005, the full $300 million of the term loan wasborrowed.  Approximately $278.0 millionof the proceeds of the term loan borrowing were used to finance the purchase bythe Company of all of its $246,890,000 outstanding principal amount of 81⁄2%Senior Notes due 2008 pursuant to the cash tender offer and consentsolicitation commenced on April 11, 2005. The balance of the term loan borrowing will be used for workingcapital.  The Company pays an annualcommitment fee at the rate of 0.5% per annum of the unused available borrowingsunder the revolving credit portion of the Senior Credit Facility.  The Company capitalized approximately $6.0million of fees associated with the new term loan and revolving creditfacility.  At June 30, 2005, $300.0million was outstanding under the term loan and the full $20.0 million wasavailable under the revolving facility.

 

The Company recorded a loss on extinguishmentof debt totaling approximately $18.6 million in connection with the cash tenderoffer and consent solicitation, completed May 3, 2005.   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 $172,000) (see“Liquidity and Capital Resources”).

 

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 Company paysa fixed incremental percentage at 1.25% with the Base Rate and 2.25% 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

 

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the Company and its subsidiaries. The Senior CreditFacility requires the Company to maintain a cash and short-term investmentbalance of at least $35.0 million. The other covenants contained in the SeniorCredit Facility are substantially similar to the covenants contained in theindentures governing the Company’s senior subordinated notes.

 

On May 3, 2005, the Company entered into an interest rate swapagreement for a notional amount of $71.0 million with a commercial bank who isalso a lender under the Senior Credit Facility. The swap will become effective on May 8, 2006 and expires on May 8,2008.  Upon effectiveness, the Companywill pay a fixed interest of 4.3425% and the Company will receive interest fromthe commercial 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 will account for this agreement as a cash flow hedge under FASBStatement Number 133 and as such the change in the fair value of the interestrate swap is reported as a component of other comprehensive income (loss).  For the three months ended June 30, 2005a loss of approximately $391,000 was recorded in other comprehensive loss.  This amount will be subsequently reclassifiedinto interest expense as a yield adjustment in the same period in which therelated interest on the floating-rate debt obligations affects earnings(losses).

 

On May 5, 2005, the Company entered into a partial terminationagreement with Deutsche Bank to terminate one third of its original notionalamount of $63.2 million interest rate swap, or approximately $21.1million.  In consideration of thetermination, the Company was required to make a net payment of approximately$702,000, reduced by the Company’s accrued interest income from the lastpayment date of March 1, 2005 through the termination date of May 5,2005 (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 an interest expense for the period (approximately $9,000).

 

On December 23, 2003, the Companycompleted a private add-on offering of $90.0 million principal amount of its81⁄2% Senior Notes due 2008 (the “Senior Notes Add-On”) and a private offering of$140.0 million principal amount of its 83⁄4% Senior Subordinated Notes due 2014(the “December 2003 Notes”).  Boththe Senior Notes Add-On and the December 2003 Notes were offered toqualified institutional buyers under Rule 144A and to persons outside the UnitedStates under Regulation S. The Senior Notes Add-On was sold at a premium ofapproximately $6.2 million. On January 22, 2004, the Company used the netproceeds of approximately $230.6 million to redeem all of the Company’s 9%senior subordinated notes due 2006, plus accrued interest, and all of theCompany’s 83⁄4% Senior Subordinated Notes due 2007, plus a redemption premium andaccrued interest.

 

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The following is a summary of the Company’soutstanding indebtedness (in thousands) and related annualized interestpayments that is recorded during the period. Debt amounts outstanding at December 31, 2004 and June 30,2005 were as follows:

 
| ** **                                    | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**               | ** ** |
|-----------------------------------------------|------------|--------------|------------|-------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **12/31/04** | ** ** | **6/30/05** | ** ** | **Interest Payments****(1)** | ** ** |
| Senior  Credit Facility                       |       | $            | —     |        | $          | 300,000                      |       | $ | 16,863 |   |
| 81⁄2% Senior  Notes due 2008               |       | 251,865      | (2)        | —      |       | —                       |       |
| 8 3⁄4% Senior  Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                       |       |
| 10% Senior  Subordinated Notes due 2011       |       | 347,871      | (3)        | 347,581     | (3)        | 34,430                       |       |
| Total Debt  (excluding capital leases)        |       | $            | 739,736    |        | $          | 787,581                      |       | $ | 65,543 |   |

 

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(1)          The annualized interestpayments are calculated based on the outstanding principal amounts at June 30,2005, multiplied by the interest rates of the related debt instruments.

(2)          Includes an unamortizedpremium balance of $5.0 million as of December 31, 2004.

(3)          Includes unamortizedpremium balances of $3.6 million and $3.3 million as of December 31, 2004and June 30, 2005, respectively.

 

The Company’s total debt at June 30, 2005 was approximately $787.9million, consisting of $300.0 million under the term loan portion of the SeniorCredit Facility, $484.3 million of Senior Subordinated Notes, $3.2 million ofbond premiums and $340,000 of capital leases. In addition, at June 30,2005, the Company had an additional $20.0 million of unused availableborrowings under the Senior Credit Facility.

 

It is anticipated that the Company will be able to meet its workingcapital needs, scheduled principal and interest payments under the Company’sSenior Credit Facility and Senior Subordinated Notes and capital expenditures,from cash on hand, cash flows from operations and funds available under theSenior Credit Facility.

 

**Income Taxes**

 

The Company recorded a gain from the sale ofWTVO-TV for the six months ended June 30, 2005 of $11.2 million, net of aprovision for state income taxes of $450,000. At December 31, 2004, the Company had net operating loss (“NOL”)carryforwards for tax purposes of approximately $238.6 million expiring atvarious dates through 2024, for which a full valuation allowance has beenprovided.

 

With theadoption of the FASB issued Statement No.142 , *Goodwill andOther Intangible Assets* (SFAS 142) the Company no longer amortizesthe book basis in the indefinite-lived intangibles, but continues to amortizethese intangibles for tax purposes. Beginning with the first quarter of 2005,the Company is recording a deferred tax provision for the excess of book basisover tax basis of intangible assets not expected to reverse during the netoperating loss carryforward period. Income tax expense for the three and six months ended June 30, 2005primarily consists ofdeferred income taxes of $4.6 million and $11.5 million, related to theincrease in the Company’s deferred tax liability for the tax effect of thedifference between the book and tax basis of the intangible assets not expectedto reverse during the net operating loss carryforward period.

 

The Companywill have deferred tax liabilities that will arise each quarter because thetaxable temporary differences related to the amortization of these assets willnot reverse prior to the expiration period of the Company s deductibletemporary differences unless the related assets are sold or an impairment ofthe assets is recorded. The Company expects that it will record a total of

 

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approximately$6.0 million to increase deferred tax liabilities during the remaining sixmonths of 2005.

 

**ContractualObligations and Other Commercial Commitments**

 

The Company has obligations and commitmentsunder its long-term debt agreements and instruments to make future payments ofprincipal and interest. The Company also has obligations and commitments undercertain contractual arrangements to make future payments for goods andservices. These arrangements secure the future rights to various assets andservices to be used in the normal course of operations. Under U.S generallyaccepted accounting principles, certain of these arrangements (i.e.,programming contracts that are currently available for airing) are recorded asliabilities on the Company’s consolidated balance sheet, while others (i.e.,operating lease arrangements and programming contracts not currently available)are not reflected as liabilities.

 

The following table summarizes separately theCompany’s material obligations and commitments at June 30, 2005, thetiming of payments required in connection therewith and the effect that suchpayments are expected to have on the Company’s liquidity and cash flow infuture periods.  The Company expects tofund its short term obligations with cash on hand, cash flow from operationsand funds available under 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)        |       | $          | 784,299    |                       | $          | 3,000 |   | $ | 9,000 |   | $ | 6,000 |   | $ | 766,299 |   |
| Cash  Interest Payments (1)            |       | 310,439    |       | 46,780                     |       | 140,340 |   | 81,975 |   | 41,344 |   |
| Capital  Lease Obligations             |       | 340        |       | 301                        |       | 39 |   | — |   | — |   |
| Operating  Leases                      |       | 7,235      |       | 1,867                      |       | 4,605 |   | 706 |   | 57 |   |
| Unconditional  Purchase Obligations(2) |       | 4,510      |       | 4,298                      |       | 212 |   |   |   |   |   |
| Other  Long-Term Obligations(3)        |       | 119,676    |       | 21,610                     |       | 79,446 |   | 13,227 |   | 5,393 |   |
| Total  Contractual Cash Obligations    |       | $          | 1,226,499  |                       | $          | 77,856 |   | $ | 233,642 |   | $ | 101,908 |   | $ | 813,093 |   |

 

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(1)        Only includes interest onfixed rate debt.  The $300 million SeniorCredit Facility, which matures on November 3, 2010 bears interest atvarious floating rates based on LIBOR. The various June 30, 2005 LIBOR rates were used to compute aweighted average LIBOR rate to calculate future cash interest payments.  Based on this weighted average rate, totalinterest over the term of the facility approximates $119.9 million.

(2)        Unpaid program licenseliability reflected on the June 30, 2005 balance sheet.

(3)        Obligations forprogramming that has been contracted for, but not recorded on the June 30,2005 Balance Sheet because the programs were not currently available forairing.

 

**Impact of Recently Issued AccountingStandards**

 

On December 16, 2004, the FASB issuedFASB Statement No. 123 (revised 2004), *Share Based Payment,*whichis a revision of FASB Statement No. 123, *Accountingfor Stock Based Compensation*. Statement 123R supersedes APB No. 25, and amends FASB Statement No. 95,*Statement of Cash Flows. *Generally the approach inStatement 123R is similar to the approach described in Statement 123.  However, Statement 123R requires all sharebased payments to employees, including grants of employee stock options, to berecognized in the income statements based on their fair values.  Pro forma disclosure is no longer analternative.

 

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Companies are required to implement SFAS 123Rat the beginning of their next fiscal year that begins on or after June 15,2005.  Accordingly, the Company expectsto adopt Statement 123R for the fiscal year beginning January 1, 2006.

 

Statement No. 123 R permits publiccompanies to adopt its requirements using one of two methods:

 

1.               A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of Statement 123R for allshare-based payments granted after the effective date and (b) based onrequirements of Statement 123 for all rewards granted to employees prior to theeffective date of Statement 123R that remain unvested on the effective date.

2.               A “modifiedretrospective” method which includes the requirements of the modified prospectivemethod described above, but also permits entities to restate based on theamounts previously recognized under Statement 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

 

The Company plans to adopt Statement 123using the modified prospective method.

 

As permitted by SFAS 123, the Companycurrently accounts for share-based payments to employees using APB 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee stock options.  Accordingly,the adoption of Statement 123R will have a significant impact on the Company’sresults from operations, although it will not impact the Company’s overallfinancial position.  The impact of adoptionof Statement 123R cannot be predicted at this time because it all depends onthe levels of share-based payments granted in the future.  However, had the Company adopted Statement123R in prior periods the impact of that standard would have approximated theimpact of Statement 123 as described in the disclosure of pro forma net incomeand earnings per share.

 

**Item 3**. ***Quantitative and Qualitative Disclosure AboutMarket Risk.***

 

The Company’s Senior Credit Facility, with$300.0 million outstanding as of June 30, 2005, bears interest at floatingrates based on LIBOR. Accordingly, we are exposed to potential losses relatedto changes in interest rates.  We haveentered into an interest rate derivative agreement to reduce the impact ofchanging interest rates on our floating debt rate.

 

The Company’s Senior Subordinated Notes ofapproximately $484.3 million outstanding principal amount as of June 30,2005 are general unsecured obligations of the Company and are subordinated inright of payment to all senior debt, including all indebtedness of the Companyunder the Senior Credit Facility. The 83⁄4% Senior Subordinated Notes, $140.0million of which is outstanding, mature in 2011.  The 10% Senior Subordinated Notes, $344.3million of which is outstanding, mature in 2011. The annualized interestexpense on the outstanding Senior Subordinated Notes is approximately $46.7million.

 

The Company does not enter into derivatives or other financialinstruments for trading or speculative purposes; however, in order to manage itsexposure to interest rate risk, the Company enters into derivative financialinstruments.  The Company has enteredinto two derivative financial instruments. In 2001, the Company entered into an interest rate swap for a notionalamount of $63.2 million, which expires in 2011. This swap was partially terminated on May 5, 2005.  The Company does not apply hedge accountingto this instrument.  Additionally, on May 3,2005

 

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the Company entered into an interest rate swap agreement for a notionalamount of $71.0 million.  The swap willbe effective on May 8, 2006 and expires on May 8, 2008.  The Company will account for this agreementusing hedge accounting under FAS 133, and as such the change in the fair valueof the interest rate swap is reported as a component of other comprehensiveincome (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 30,2005. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that (i) our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in reports that we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and Exchange Commissionand (ii) our disclosure controls and procedures were designed to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

There has not been any change in our internalcontrol over financial reporting in connection with the evaluation required by Rule 13a-15(d) underthe Exchange Act that occurred during the quarter ended June 30, 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

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

 

The Company is involved in legal proceedings and litigation arising inthe ordinary course of business. In the Company’s opinion, the outcome of suchproceedings and litigation currently pending will not materially affect theCompany’s financial condition or results of operations.

 

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

 

On May 3, 2005, the Company held its2005 annual meeting of stockholders to (i) elect eight directors of theCompany to serve for a term of one year and (ii) ratify the selection ofErnst & Young as the Company’s independent auditors for the yearending December 31, 2005.

 

The following individuals were elected to serve as directors until thenext annual meeting:

 
| ** **                  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------------------|------------|---------------|------------|--------------------|------------|
| Vincent J.  Young           |       | 28,685,631    |       | 4,979,605          |       |
| Deborah A.  McDermott       |       | 28,648,351    |       | 5,016,885          |       |
| James A.  Morgan            |       | 28,603,831    |       | 5,061,405          |       |
| Alfred J.  Hickey, Jr. |       | 29,639,646    |       | 4,025,590          |       |
| Leif Lomo                   |       | 31,863,050    |       | 1,802,186          |       |
| Richard Lowe                |       | 28,761,725    |       | 4,903,511          |       |
| David C. Lee                |       | 29,580,827    |       | 4,084,409          |       |
| Reid Murray                 |       | 29,577,226    |       | 4,088,010          |       |

 

Such individuals constituted the entire Board of Directors and servedas directors of the Company immediately preceding the meeting.

 

The stockholders ratified the selection of Ernst & Young LLPas the Company’s independent auditors for the year ending December 31,2005. The result of the vote was as follows: 33,311,098 votes were for theselection, 323,868 votes were against the selection and 30,270 votes abstained.

 

**Item 6. * Exhibits***

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                      |
|---------------------|------------|---------------------------------------------------|
|                |       |                                              |
| 11                  |       | Statement Re  Computation of Per Share Earnings.  |
| 31                  |       | Rule 13a-14(a)/15d-14(a) Certifications |
| 32                  |       | Section 1350  Certifications                 |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   |                | YOUNG BROADCASTING INC. |
|--------|---------------------|-------------------------|
|   |                |                    |
|   |                |                    |
| Date:  | August 8, 2005 | By:                     | /s/ Vincent J. Young |   |
|   |                |                    | Vincent J. Young |
|   |                |                    | Chairman and Chief Executive Officer |
|   |                |                    |   |
|   |                |                    |   |
| Date:  | August 8, 2005 | By:                     | /s/ James A. Morgan |   |
|   |                |                    | James A. Morgan |
|   |                |                    | Executive Vice President and |
|   |                |                    | Chief Financial Officer |
|   |                |                    | (principal financial officer) |
|        |                     |                         |  |  |  |

 

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