**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,  D.C. 20549**

 

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**FORM 10-Q**

 

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

 
| **For the  quarterly period ended** | ** ** | **Commission  file number:** |
|-------------------------------------|------------|------------------------------|
| **March 31,  2005**            | ** ** | **0-25042**                  |

 

**YOUNG BROADCASTING INC.**

(Exact name of registrant asspecified in its charter)

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

 

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

(Address of principal executiveoffices)

 

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

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý     Noo

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes ý No o

 

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Number of shares of Common Stock outstandingas of April 18, 2005: 18,019,412 shares of Class A Common Stock, and1,941,334 shares of Class B Common Stock.

 

 

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**YOUNGBROADCASTING INC.**

 

**FORM 10-Q**

 

**Table ofContents**

 
| Part I                    Financial Information |                                                                                                      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 1.  Financial Statements  (unaudited)                                                           |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Consolidated Balance Sheets as of December 31, 2004 and March 31,  2005                         |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Consolidated Statements of Operations for  the Three Months Ended March 31, 2004 and 2005            |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Consolidated Statements of Stockholders’  Deficit for the Three Months Ended March 31, 2005     |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2004 and 2005            |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Notes to Consolidated Financial Statements                                                                |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 2.  Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 3.  Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 4.  Controls and Procedures                                                                     |   |
|                                                                                                                                                |                                                                                                      |   |
| Part II                                                                                                                                        |                                                                                                      |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 1.  Legal Proceedings                                                                           |   |
|                                                                                                                                                |                                                                                                      |   |
|                                                                                                                                                | Item 6.  Exhibits                                                                                    |   |
|                                                                                                                                                |                                                                                                      |   |
| Signatures                                                                                                                                          |                                                                                                      |   |
|                                                                                                                                                     |                                                                                                           |  |  |

 

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**Part I****                 FinancialInformation**

**Item 1.****           *FinancialStatements***

 

Young Broadcasting Inc. andSubsidiaries

ConsolidatedBalance Sheets

 
| ** **                                                                                                                                                 | ** ** | **December 31,** |        | **March 31,** | ** **      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|--------------------|-----------------|
| ** **                                                                                                                                                 | ** ** | **2004**              |        | **2005**           | ** **      |
| ** **                                                                                                                                                 | ** ** | ** **            |        | **(Unaudited)**    | ** **      |
| **Assets**                                                                                                                                                 | ** ** | ** **            |        | ** **         | ** **      |
| Current  assets:                                                                                                                                           | ** ** | ** **            |        | ** **         | ** **      |
| Cash and  cash equivalents                                                                                                                                 |       | $                     | 93,831,317  |               | **$**           | **79,594,420** | ** ** |
| Trade  accounts receivable, less allowance for doubtful accounts of $1,062,000 in  2004 and $1,270,000 in 2005                                             |       | 40,099,229            |        | **34,589,383**     | ** **      |
| Current  portion of program license rights                                                                                                                 |       | 14,892,686            |        | **12,870,882**     | ** **      |
| Prepaid  expenses                                                                                                                                          |       | 4,034,408             |        | **2,704,447**      | ** **      |
| Other  current assets                                                                                                                                      |       | 1,000,000             |        | **1,000,000**      | ** **      |
| Assets held  for sale                                                                                                                                      |       | 1,459,370             |        | **—**         | ** **      |
| Total  current assets                                                                                                                                      |       | $                     | 155,317,010 |               | **$**           | **130,759,132** | ** ** |
| ** **                                                                                                                                                 | ** ** | ** **            |        | ** **         | ** **      |
| Property and  equipment, less accumulated depreciation and amortization of $169,309,245 in  2004 and $173,306,122 in 2005                                  |       | 84,703,428            |        | **80,663,791**     | ** **      |
| Program  license rights, excluding current portion                                                                                                         |       | 393,586               |        | **243,821**        | ** **      |
| Deposits and  other assets                                                                                                                                 |       | 2,601,362             |        | **2,644,678**      | ** **      |
| Investments  in unconsolidated subsidiaries                                                                                                                |       | 3,947,270             |        | **4,589,178**      | ** **      |
| Unamortizable  intangible assets                                                                                                                           |       | 475,928,822           |        | **475,928,822**    | ** **      |
| Amortizable  intangible assets                                                                                                                             |       | 70,346,609            |        | **69,226,532**     | ** **      |
| Deferred  charges, less accumulated amortization                                                                                                           |       | 11,029,308            |        | **10,504,887**     | ** **      |
| **Total  Assets**                                                                                                                                          |       | $                     | 804,267,395 |               | **774,560,841** | ** ** |
| ** **                                                                                                                                                 | ** ** | ** **            |        | ** **         | ** **      |
| **Liabilities  and stockholders’ deficit**                                                                                                            | ** ** | ** **            |        | ** **         | ** **      |
| Current  liabilities:                                                                                                                                      | ** ** | ** **            |        | ** **         | ** **      |
| Trade  accounts payable                                                                                                                                    |       | $                     | 6,384,045   |               | **$**           | **7,746,856** | ** ** |
| Accrued  interest                                                                                                                                          |       | 17,575,523            |        | **11,493,076**     | ** **      |
| Accrued  expenses                                                                                                                                          |       | 17,746,443            |        | **14,464,514**     | ** **      |
| Current  installments of program license liability                                                                                                         |       | 14,375,405            |        | **9,541,856**      | ** **      |
| Current  installments of obligations under capital leases                                                                                                  |       | 625,845               |        | **471,360**        | ** **      |
| Liabilities  held for sale                                                                                                                                 |       | 7,636,284             |        | **—**         | ** **      |
| Total  current liabilities                                                                                                                                 |       | 64,343,545            |        | **43,717,662**     | ** **      |
| Program  license liability, excluding current installments                                                                                                 |       | 523,771               |        | **319,443**        | ** **      |
| Long-term  debt, excluding current installments                                                                                                            |       | 739,736,233           |        | **739,280,470**    | ** **      |
| Deferred tax  liability and other long-term tax liabilities                                                                                                |       | 7,992,485             |        | **15,275,232**     | ** **      |
| Other  liabilities                                                                                                                                         |       | 4,758,328             |        | **7,775,532**      | ** **      |
| Obligations  under capital leases, excluding current installments                                                                                          |       | 76,110                |        | **47,871**         | ** **      |
| **Total  liabilities**                                                                                                                                     |       | 817,430,472           |        | **806,416,210**    | ** **      |
| Stockholders’  deficit:                                                                                                                               | ** ** | ** **            |        | ** **         | ** **      |
| Class A  Common Stock, $.001 par value. Authorized 40,000,000 shares; issued and  outstanding 17,858,567 shares at 2004 and 18,005,112 shares at 2005 |       | 17,859                |        | **18,005**         | ** **      |
| Class B  Common Stock, $.001 par value. Authorized 20,000,000 shares; issued and  outstanding 2,066,133 shares at 2004 and 1,955,634 shares at 2005   |       | 2,066                 |        | **1,956**          | ** **      |
| Additional  paid-in capital                                                                                                                                |       | 381,090,583           |        | **381,749,323**    | ** **      |
| Accumulated  other comprehensive loss                                                                                                                      |       | (2,586,996            | )           | **(2,586,996**     | **)**           |
| Accumulated  deficit                                                                                                                                       |       | (391,686,589          | )           | **(411,037,657**   | **)**           |
| Total  stockholders’ deficit                                                                                                                          |       | (13,163,077           | )           | **(31,855,369**    | **)**           |
| **Total  liabilities and stockholders’ deficit**                                                                                                      |       | $                     | 804,267,395 |               | **$**           | **774,560,841** | ** ** |

 

*See accompanying notes to consolidatedfinancial statements*

 

2

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**Young Broadcasting Inc. andSubsidiaries**

**Consolidated Statements ofOperations**

(Unaudited)

 
| ** **                                                                                                 | ** ** | **Three Months Ended March 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                                 | ** ** | **2004**                              |        | **2005** | ** ** |
| ** **                                                                                                 | ** ** | ** **                            |        | ** ** | ** ** |
| Net  operating revenue                                                                                     |       | $                                     | 49,569,469  |   | **$** | **45,509,130** | ** ** |
| ** **                                                                                                 | ** ** | ** **                            |        | ** ** | ** ** |
| Operating  expenses, excluding depreciation expense                                                        |       | 17,853,376                            |        | **17,828,133** | ** ** |
| Amortization  of program license rights                                                                    |       | 4,688,419                             |        | **5,334,949** | ** ** |
| Selling,  general and administrative expenses, excluding depreciation expense                              |       | 15,159,951                            |        | **17,606,221** | ** ** |
| Depreciation  and amortization                                                                             |       | 6,325,363                             |        | **6,392,209** | ** ** |
| Corporate  overhead, excluding depreciation expense                                                        |       | 5,825,441                             |        | **4,089,931** | ** ** |
| Operating  loss                                                                                            |       | (283,081                              | )           | **(5,742,313** | **)** |
| ** **                                                                                                 | ** ** | ** **                            |        | ** ** | ** ** |
| Interest  (expense), net                                                                                   |       | (16,985,943                           | )           | **(15,823,516** | **)** |
| Non-cash  change on market valuation of swaps                                                              |       | 1,261,684                             |        | **(1,823,079** | **)** |
| Loss on  extinguishment of debt                                                                            |       | (5,323,375                            | )           | **—** | ** ** |
| Other income  (expense), net                                                                               |       | 49,309                                |        | **(154,933** | **)** |
|                                                                                                       | ** ** | (20,998,325                           | )           | **(17,801,528** | **)** |
| ** **                                                                                                 | ** ** |                                  |        | ** ** | ** ** |
| Loss from  continuing operations before expense for income taxes                                           |       | (21,281,406                           | )           | **(23,543,841** | **)** |
| Income tax  expense                                                                                        |       | —                                |        | **(7,014,853** | **)** |
| Loss from  continuing operations                                                                           |       | (21,281,406                           | )           | **(30,558,694** | **)** |
| (Loss)  income from discontinued operations, net of tax, including gain on sale of  $11.2 million for 2005 |       | (20,617                               | )           | **11,207,626** | ** ** |
| Net loss                                                                                                   |       | $                                     | (21,302,023 | ) | **$** | **(19,351,068** | **)** |
|                                                                                                       |       |                                  |        |   | ** ** | ** ** | ** ** |
| Basic and  diluted net loss per common share:                                                              | ** ** |                                  |        | ** ** | ** ** |
| Loss from  continuing operations                                                                           |       | $                                     | (1.07       | ) | **$** | **(1.53** | **)** |
| Income from  discontinued operations                                                                       |       | —                                |        | **0.56** | ** ** |
| Net loss per  common share                                                                                 |       | $                                     | (1.07       | ) | **$** | **(0.97** | **)** |
| ** **                                                                                                 | ** ** |                                  |        | ** ** | ** ** |
| Weighted  average shares – Basic and dilutive                                                         |       | 19,843,990                            |        | **19,955,286** | ** ** |

 

*See accompanying notes to consolidatedfinancial statements.*

 

3

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Young Broadcasting Inc. andSubsidiaries

 

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 |       | 23               |       |             |       | 248,602         |       |              |        |                   |       | 248,625      |       |
|                                                                  |       |             |       |             |       |            |       |              |        |                   |       |         |       |
| Conversion of Class B Common Stock to Class A  Common Stock |       | 110              |       | (110             | )          |            |       |              |        |                   |       |         |       |
|                                                                  |       |             |       |             |       |            |       |              |        |                   |       |         |       |
| Non-cash stock compensation                                           |       |             |       |             |       | 284,731         |       |              |        |                   |       | 284,731      |       |
|                                                                  |       |             |       |             |       |            |       |              |        |                   |       |         |       |
| Employee stock purchase plan                                          |       | 13               |       |             |       | 125,407         |       |              |        |                   |       | 125,420      |       |
|                                                                  |       |             |       |             |       |            |       |              |        |                   |       |         |       |
| Net loss for the three months ended March 31,  2005              |       |             |       |             |       |            |       | (19,351,068       | )           |                   |       | (19,351,068  | )          |
|                                                                  |       |             |       |             |       |            |       |              |        |                   |       |         |       |
| Balance at March 31, 2005                                        |       | $                | 18,005     |             | $          | 1,956           |       | $                 | 381,749,323 |                   | $          | (411,037,657 | )          | $ | (2,586,996 | ) | $ | (31,855,369 | ) |

 

*See accompanying notes to consolidatedfinancial statements*

 

4

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**YoungBroadcasting Inc. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2004**                              | ** **  | **2005** | ** ** |
| **Operating  activities**                                                                  |       |                                  |        |   |   |
| Net loss                                                                                   |       | $                                     | (21,302,023 | ) | $ | (19,351,068 | ) |
|                                                                                       |       |                                  |        |   |   |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities: |       |                                  |        |   |   |
| Gain on sale  of station, net of taxes                                                     |       | —                                |        | (11,207,149 | ) |
| Depreciation  and amortization of property and equipment                                   |       | 4,776,160                             |        | 4,748,781 |   |
| Provision  for uncollectible accounts                                                      |       | 209,236                               |        | 212,226 |   |
| Amortization  of program license rights                                                    |       | 4,760,806                             |        | 5,334,949 |   |
| Amortization  of intangibles and deferred charges                                          |       | 1,724,059                             |        | 1,643,428 |   |
| Non-cash  compensation                                                                     |       | 1,141,733                             |        | 334,131 |   |
| Restricted  stock awards                                                                   |       | —                                |        | 284,731 |   |
| Non-cash  change on market valuation of swap                                               |       | (1,261,684                            | )           | 1,823,079 |   |
| Provision  for income taxes                                                                |       | —                                |        | 7,282,747 |   |
| Loss on  extinguishment of debt                                                            |       | 1,305,790                             |        | — |   |
| Loss (gain)  on sale of fixed assets                                                       |       | 17,939                                |        | (8,892 | ) |
| Payments on  programming license liabilities                                               |       | (4,612,950                            | )           | (5,452,022 | ) |
| Decrease in  trade accounts receivable                                                     |       | 6,980,824                             |        | 5,233,451 |   |
| Increase in  deferred revenue                                                              |       | —                                |        | 140,653 |   |
| Decrease in  prepaid expenses                                                              |       | 657,174                               |        | 1,329,961 |   |
| Decrease in  trade accounts payable                                                        |       | (1,235,503                            | )           | (1,543,328 | ) |
| Decrease in  accrued expenses and other liabilities                                        |       | (7,502,222                            | )           | (9,302,174 | ) |
| Net cash  used in operating activities                                                     |       | (14,340,661                           | )           | (18,496,496 | ) |
| ** **                                                                                 | ** ** | ** **                            | ** **  | ** ** | ** ** |
| **Investing  activities**                                                                  | ** ** | ** **                            | ** **  | ** ** | ** ** |
| Capital  expenditures                                                                      |       | (3,249,726                            | )           | (1,227,205 | ) |
| Net proceeds  from the sale of WTVO-TV                                                     |       | —                                |        | 5,802,243 |   |
| Proceeds  from disposal of fixed assets                                                    |       | 24,681                                |        | 19,245 |   |
| Increase in  deposits and other assets                                                     |       | (374,442                              | )           | (151,960 | ) |
| Net cash  (used in) provided by investing activities                                       |       | (3,599,487                            | )           | 4,442,323 |   |
|                                                                                       |       |                                  |        |   |   |
| **Financing  activities**                                                                  |       |                                  |        |   |   |
| Redemption  of senior subordinated notes                                                   |       | (223,811,000                          | )           | — |   |
| Deferred  debt financing costs incurred                                                    |       | (418,476                              | )           | — |   |
| Principal  payments under capital lease obligations                                        |       | (154,051                              | )           | (182,724 | ) |
| Proceeds  from exercise of stock options                                                   |       | 55,948                                |        | — |   |
| Net cash  used in financing activities                                                     |       | (224,327,579                          | )           | (182,724 | ) |
|                                                                                       |       |                                  |        |   |   |
| **Net  decrease in cash**                                                                  |       | (242,267,727                          | )           | (14,236,897 | ) |
| Cash and  cash equivalents at beginning of year                                            |       | 331,150,335                           |        | 93,831,317 |   |
| **Cash and  cash equivalents at March 31**                                            |       | $                                     | 88,882,608  |   | $ | 79,594,420 |   |
| ** **                                                                                 | ** ** | ** **                            | ** **  | ** ** | ** ** |
| **Supplemental  disclosure of cash flow information**                                      |       |                                  |        |   |   |
| Interest  paid                                                                             |       | $                                     | 21,657,119  |   | $ | 22,804,040 |   |

 

*See accompanying notes to consolidatedfinancial statements.*

 

5

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**YoungBroadcasting Inc. and Subsidiaries**

 

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**1.     Basis of Presentation**

 

The business operations of Young Broadcasting Inc. and subsidiaries(the “Company”) consist of nine network affiliated stations (five with ABC,three with CBS, and one with NBC) and one independent commercial televisionbroadcasting station. The markets served are located in Lansing, Michigan,Green Bay, Wisconsin, Lafayette, Louisiana, Nashville and Knoxville, Tennessee,Albany, New York, Richmond, Virginia, Davenport, Iowa, Sioux Falls, SouthDakota and San Francisco, California. In addition, the accompanying condensedconsolidated financial statements include the Company’s wholly owned nationaltelevision sales representation firm. Significant intercompany transactions andaccounts have been eliminated.

 

The accompanying condensed consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles forinterim financial statements and with the instructions to Form 10-Q and Article 10of Regulation S-X. The interim financial statements are unaudited but includeall adjustments, which are of a normal recurring nature, that the Companyconsiders necessary for a fair presentation of the consolidated financialposition and the consolidated results of operations and cash flows for suchperiod.

 

For investments in which the Company owns 20% to 50% of voting sharesand does have significant influence over operating and financial policies, theequity method of accounting is used. Four of the Company’s stations are party to equity investments in thirdparties for tower agreements which are accounted for under the equitymethod.  Accordingly, the Company’s shareof earnings and losses of these companies are included in other income(expense), net in the accompanying consolidated statement of operations of theCompany.  The Company recorded its shareof losses of approximately $34,000 and earnings of approximately $382,000 forthe three months ended March 31, 2004 and 2005, respectively.

 

Certain prior year balances have been reclassified to conform to thepresentation adopted in the current fiscal year. Operating results of interimperiods are not necessarily indicative of results for a full year.  For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2004.

 

**2.     Stock-Based Compensation**

 

The Company follows the provisions of FASBStatement No. 123, *Accounting forStock-Based**Compensation*(“Statement 123”). The provisions of Statement 123 allow companies to eitherexpense the estimated fair value of stock options or to continue to follow theintrinsic value method set 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 relatedinterpretations, compensation expense for stock options is recognized in incomebased on the excess, if any, of the quoted market price of the stock at thegrant date of the award or other measurement date over the amount an employeemust pay to acquire the stock. Generally, the exercise price for stock optionsgranted to employees equals or exceeds the fair market value of the Company’scommon stock at the date of grant, thereby resulting in no recognition ofcompensation expense by the Company.  In addition,no compensation expense is recorded for purchases under the Employee StockPurchase Plan (“ESPP”) in accordance with APB 25.  For awards that generate compensation expenseas defined under APB 25, the Company calculates the amount of compensationexpense and recognizes the expense over the vesting period of the award.

 

6

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The following table illustrates the effect onnet loss and earnings per share if the Company had applied the fair valuerecognition provisions of Statement 123.

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**     | ** ** |
| **(dollars in thousands, except per share data)**                                                 | ** ** | **2004**               | ** ** | **2005** | ** ** |
| Net loss-as  reported                                                                             |       | $                      | (21,302    | ) | $ | (19,351 | ) |
| 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 |       | 929                    |       | 858 |   |
| Net loss-pro  forma                                                                               |       | $                      | 21,401     |   | $ | 20,209 |   |
| Net loss per  basic and diluted common share-as reported                                          |       | $                      | (1.07      | ) | $ | (0.97 | ) |
| Net loss per  basic and diluted common share-pro forma                                            |       | $                      | (1.08      | ) | $ | (1.01 | ) |

 

In December 2004,the FASB issued Statement No. 123(R), Share-Based Payment (“SFAS 123(R)”),which requires companies to measure and recognize compensation expense for allstock-based payments at fair value. Companies are required to implementSFAS 123(R) 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 beginning January 1,2006.

 

**3.     Intangible Assets**

 

Intangible assets, which include broadcasting licenses, networkaffiliation agreements, and other intangibles, are carried on the basis ofcost, less accumulated amortization. Cost is based upon appraisals performed atthe time of acquisition. Broadcast licenses are considered to have anindefinite life. Network affiliation agreements are amortized over 25 years,and other definite lived intangible assets are amortized over 10 to 15 years.

 

The following table sets forth the summarized disclosures related tointangible assets:

 
| ** **                           | ** ** | **As of December 31, 2004** | ** ** | **As of March 31, 2005** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands)**       | ** ** |
| ** **                           | ** ** | **Gross  Carrying**              | ** ** | **Accumulated**               | ** ** | **Net  Carrying** | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** | **Net  Carrying** | ** ** |
| ** **                           | ** ** | **Amount**                       | ** ** | **Amortization**              | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **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 |   | $ | (28,762 | ) | $ | 62,402 |   |
| Other  intangible assets             |       | $                                | 13,989     |                          | $          | (6,761 | ) | $ | 7,228 |   | $ | 13,989 |   | $ | (7,164 | ) | $ | 6,825 |   |
|                                 |       | $                                | 105,153    |                          | $          | (34,806 | ) | $ | 70,347 |   | $ | 105,153 |   | $ | (35,926 | ) | $ | 69,227 |   |

 

Aggregate amortization expense for the three months ended March 31,2004 and 2005 was $1.1 million.

 

It is the Company’s policy to account for other definite-livedintangible assets at the lower of amortized cost or estimated realizable value.As part of an ongoing review of the valuation and amortization of otherintangible assets of the Company and its subsidiaries, management assesses thecarrying value of other definite-lived intangible assets if facts andcircumstances suggest that

 

7

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there may be impairment. If this review indicates that otherdefinite-lived intangible assets will not be recoverable as determined by anon-discounted cash flow analysis of the operating assets over the remainingamortization period, the carrying value of other intangible assets would bereduced to estimated fair value.

 

**4.     Sale of Station**

 

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. The agreement provided for thepurchase and sale of WTVO assets to occur in two steps. On November 1,2004, the Company completed the first closing of the sale.  At the first closing, Mission paid theCompany $15.0 million (as adjusted) of the aggregate purchase price for thephysical assets of the station and the parties entered into a time barterarrangement, with respect to the sale of advertising to the station.  The completion of the second step of thistransaction was subject to Federal Communications Commissions review andapproval.  During this period, theCompany retained the FCC license, the programming assets (network agreements,syndication contracts, etc.) and certain other assets of the station. On January 4,2005, the second step of the transaction was completed and the remaining $5.75million of the purchase price was paid to the Company. 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 2004 and approximately $11.2 million, net of aprovision for income taxes of $450,000, was recognized in the first quarter of2005. The gain allocation was determined based on the relative fair value ofthe assets sold, at each closing date.

 

The Company applied Statement 144, *Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,*to this transaction, and assuch the operating results of WTVO-TV are not included in the Company’sconsolidated results from continuing operations for the three months ended March 31,2004 and 2005.

 

The Company recorded a loss from discontinuedoperations related to WTVO-TV of $20,617 and $477 for the three months ended March 31,2004 and 2005, respectively.  Net revenueof WTVO-TV for the three months ended March 31, 2004 and 2005, was $1.4million and $1,285, respectively. Since this agreement met all of the criteriafor a qualifying plan of sale, the long-lived assets to be disposed of by thissale were classified as “held for sale” on the balance sheet as of December 31,2004.

 

The detail of classifications on the balancesheets as “held for sale” is as follows:

 
| ** **                                     | ** ** | **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      |   |

 

8

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**5.     Long -Term Debt**

 

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”).  Both the Senior Notes Add-Onand the December 2003 Notes were offered to qualified institutional buyersunder Rule 144A and to persons outside the United States under RegulationS. The Senior Notes Add-On was sold at a premium of approximately $6.2 million.On January 22, 2004, the Company used the net proceeds of approximately$230.6 million to redeem all of the Company’s 9% senior subordinated notes due2006, plus accrued interest and the 83⁄4% Senior Subordinated Notes due 2007,plus a redemption premium and accrued interest.

 

The Company recorded a loss on extinguishment of debt resulting fromthe write-off of related unamortized deferred financing costs for the threemonths ended March 31, 2004 of $5.3 million relating to the redemption on January 22,2004 of its 9% senior subordinated notes due 2006 and 8 3⁄4% senior subordinatednotes due 2007

 

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

 
| ** **                                    | ** ** | **12/31/04** | ** ** | **3/31/05** | ** ** |
|-----------------------------------------------|------------|--------------|------------|-------------|------------|
| Senior  Credit Facility                       |       | $            | —     |        | $          | — |   |
| 81⁄2% Senior  Notes due 2008               |       | 251,865      | (1)        | 251,554     | (1)        |
| 8 3⁄4% Senior  Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       |
| 10% Senior  Subordinated Notes due 2011       |       | 347,871      | (2)        | 347,726     | (2)        |
| Total Debt  (excluding capital leases)        |       | $            | 739,736    |        | $          | 739,280 |   |

 

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(1)          Includes an unamortizedpremium balance of $5.0 million and $4.7 million as of December 31, 2004and March 31, 2005, respectively.

 

(2)          Includes unamortizedpremium balances of $3.6 million and $3.4 million as of December 31, 2004and March 31 2005, respectively.

 

**6.     Income Taxes**

 

The Company recorded a gain from the sale ofWTVO-TV for the three months ended March 31, 2005 of $11.2 million, net ofa provision 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 the adoption of the FASB issuedStatement No.142 , *Goodwill and OtherIntangible Assets* (SFAS 142) the Company no longer amortizes thebook basis in the indefinite-lived intangibles, but continues to amortize theseintangibles for tax purposes.  Beginningwith the first quarter of 2005 the Company is recording a deferred taxprovision for the excess of book basis over tax basis of intangible assets notexpected to reverse during the net operating loss carryforward period.

 

9

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Income tax expense for the three months endedMarch 31, 2005 primarily consists of deferred income taxes of $6.9 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 Company will have deferred tax liabilitiesthat will arise each quarter because the taxable temporary differences relatedto the amortization of these assets will not reverse prior to the expirationperiod of the Company s deductible temporary differences unless the relatedassets are sold or an impairment of the assets is recorded. The Company expectsthat it will record a total of approximately $10.6 million to increase deferredtax liabilities during the remaining nine months of 2005.

 

**7.     Employee Benefit Plans**

 

The Company’s defined benefit pension plan covers the IBEW Local 45 ofKRON-TV employees.

 

TheCompany expects to contribute approximately $341,000 to the benefit plan in2005**.**

 

Componentsof the net periodic benefit plan were as follows:

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| Service cost                                                     |       | $                                     | 95,136     |   | $ | 104,396 |   |
| Interest  cost                                                   |       | 151,466                               |       | 159,443 |   |
| Expected  return of plan assets                                  |       | (165,241                              | )          | (168,791 | ) |
| Amortization  of the unrecognized obligation or transition asset |       | (5,933                                | )          | (5,933 | ) |
| Recognized  losses                                               |       | 21,817                                |       | 39,947 |   |
| Recognized  prior service costs                                  |       | 14,044                                |       | 14,044 |   |
| Net periodic  cost                                               |       | $                                     | 111,289    |   | $ | 143,106 |   |

 

**8.     Earnings Per Share**

 

The weighted average number of sharesoutstanding during the period has been used to calculate earnings pershare.  The stock options outstandinghave not been included in the computation of earnings per share because theywould be anti-dilutive.

 

**9.     Subsequent Events**

 

On May 3, 2005, the Company (i) entered into an amended andrestated senior credit facility and (ii) accepted for payment, inconnection with a cash tender offer and consent solicitation commenced on April 11,2005, all of its $246,890,000 outstanding principal amount of 81⁄2% Senior NotesDue 2008.  The amended credit facilityprovides for a $300 million term loan and a $20 million revolving creditfacility.  On May 3, 2005, the fullamount of the term loan was borrowed. Approximately $278.0 million of the proceeds of such term loan borrowingwas used to pay fees and expenses related to the amended credit facility and tofinance the purchase of the Senior Notes in the tender offer, including thepayment of related premiums, accrued interest,

 

10

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fees and expenses.  The balanceof the term loan borrowing will be used for working capital.  The term loan will mature in 2012 and therevolving facility will mature in 2010.

 

In connection with the cash tender offer and consent solicitation, theCompany will record a loss on the extinguishment of debt in the second quarterof 2005, totaling approximately $18.5 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $5.0 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.6 million).  In addition, the Company plans to capitalizethe $5.6 million of estimated fees associated with the new term loan andrevolving credit facility.

 

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’s effective date is May 8, 2006 and expires on May 8,2008.  The Company will pay a fixedinterest of 4.34252% and the Company will receive interest from the commercialbank, based upon a three month LIBOR rate.

 

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 pay approximately $702,000.

 

11

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

**FORWARD LOOKING STATEMENTS ARE ALLSTATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THIS REPORT.THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS REPORT CONCERN, AMONG OTHERTHINGS, CERTAIN STATEMENTS UNDER “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.” FORWARD LOOKING STATEMENTSINVOLVE RISKS AND UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUSIMPORTANT FACTORS, INCLUDING THE IMPACT OF CHANGES IN NATIONAL AND REGIONALECONOMIES, PRICING FLUCTUATIONS IN LOCAL AND NATIONAL ADVERTISING, VOLATILITYIN PROGRAMMING COSTS AND GEOPOLITICAL FACTORS.**

 

**Introduction**

 

Management’s discussion and analysis of financial condition and resultsof operation (“MD&A”) is provided as a supplement to the accompanyingconsolidated financial statements and footnotes to help provide anunderstanding of the Company’s financial condition, changes in financialcondition and results of operations. MD&A is organized as follows:

 

***Overview of our Business****-*This section provides a general description of theCompany’s business, as well as recent developments that have occurred during2005 that the Company believes are important in understanding its results ofoperations and financial condition or to anticipate future trends.

 

***Results of Operations***-This section provides an analysis of the Company’s results of operationsfor the three months ended March 31, 2005 and 2004.  This analysis is presented on a consolidatedbasis.  In addition, a brief descriptionof significant transactions and events that impact the comparability of theresults being analyzed.

 

***Liquidity and Capital Resources***-******This section provides ananalysis of the Company’s cash flows for the three months ended March 31,2005 and 2004.  Included in thediscussion of outstanding debt is a discussion of the amount of financialcapacity available to fund the Company’s future commitments and obligations, aswell as a discussion of other financing arrangements.

 

**Overview of our Business**

 

The operating revenue of the Company’s stations is derived primarilyfrom advertising revenue and, to a much lesser extent, from compensation paidby the networks to its affiliated stations for broadcasting networkprogramming.

 

Advertising is sold for placement within and adjoining a station’snetwork and locally originated programming. Advertising is sold in time increments and is priced primarily on thebasis of a program’s popularity among the specific audience an advertiserdesires to reach, as measured principally by periodic audience surveys.  In addition, advertising rates are affectedby the number of advertisers competing for the available time, the size anddemographic makeup of the market served by the station and the availability ofalternative advertising media in the market area. Rates are highest during themost desirable viewing hours, with corresponding reductions

 

12

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during other hours.  The ratingsof a local station affiliated with a national television network can beaffected by ratings of network programming.

 

Most advertising contracts are short-term, and generally run only for afew weeks. Approximately 62% of the first quarter of 2005 gross revenue of theCompany’s stations was generated from local advertising, which is sold by astation’s sales staff directly to local accounts. The remainder of theadvertising revenue primarily represents national advertising, which is sold bythe Company’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 advertisers tend to be cyclical, reflecting overalleconomic conditions, as well as budgeting and buying patterns.  A decline in the economic prospects ofadvertisers or the economy in general could alter current or prospectiveadvertisers’ spending priorities.  Thiscould cause our revenues or operating results to decline significantly in anygiven period.

 

The advertising revenue of the Company’s stations are generally highestin the second and fourth quarters of each year, due in part to increases inconsumer advertising in the spring and retail advertising in the period leadingup to, and including, the holiday season. In addition, advertising revenue isgenerally higher during even numbered election years due to spending bypolitical candidates, which spending typically is heaviest during the fourthquarter.

 

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

 

**Recent Developments**

 

*Execution of Amended Credit Facility and Purchaseof Senior Notes.* On May 3, 2005, the Company (i) enteredinto an amended and restated senior credit facility and (ii) accepted forpayment, in connection with a cash tender offer and consent solicitationcommenced on April 11, 2005, all of its $246,890,000 outstanding principalamount of 81⁄2% Senior Notes Due 2008.  Theamended credit facility provides for a $300 million term loan and a $20 millionrevolving credit facility.  On May 3,2005, the full amount of the term loan was borrowed.  Approximately $278.0 million of the proceedsof such 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.

 

In connection with the cash tender offer and consent solicitation, theCompany will record a loss on the extinguishment of debt in the second quarterof 2005, totaling approximately $18.5 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $5.0 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.6 million).  In addition, the Company plans to capitalizethe $5.6 million of estimated fees associated with the new term loan andrevolving credit facility.

 

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’s effective date is May 8, 2006 and expires on May 8,2008.  The Company will pay a fixedinterest of 4.34252% and the Company will receive interest from the commercialbank, based upon a three month LIBOR rate.

 

13

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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 pay approximately $702,000.

 

*Network Affiliation Agreements*.  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 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 the first quarter of 2004 the Company received notice from ABCwith respect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV, that thenetwork would not renew the affiliation agreements then in place and that thenetworks wished to negotiate new agreements. The agreements with ABC expired on September 30, 2004.  Negotiations with ABC are ongoing.  The Company is operating under extensions ofthe ABC affiliation agreements that have been extended through May 20,2005.  While the Company is unable topredict the terms of the renewed ABC affiliation agreements, the Companybelieves that renewed affiliations will in place by June 1, 2005, but onterms that provide less network compensation to the stations than was providedunder the expired agreement.  In theevent of the Company’s inability to maintain its current affiliations under theagreements for the five ABC affiliated stations, the respective station may nolonger 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.

 

*Sale of WTVO-TV. *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. The agreement provided for thepurchase and sale of WTVO-TV assets to occur in two steps. On November 1,2004 the Company completed the first closing of the sale.  At the first closing, Mission paid theCompany $15.0 million (as adjusted) of the aggregate purchase price for thephysical assets of the station and the parties entered into a time barterarrangement, with respect to the sale of advertising to the station.  The completion of the second step of thistransaction was subject to Federal Communications Commissions review andapproval.  During this period, theCompany retained the FCC license, the programming assets (network agreements,syndication contracts, etc.) and certain other assets of the station. On January 4,2005, the second step of the transaction was completed and the remaining $5.75million of the purchase price was paid to the Company. 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 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.

 

*Digital Upgrades.*  The Company has completed the upgrade of itstelevision stations to enable them to broadcast with digital technology.  As of April 27, 2005, the FCC has notgranted the

 

14

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final digital construction permit for WTEN-TV (Albany) due to thefailure of the FCC and the Canadian government to resolve certain interferenceissues.  In August 2004, the FCCgranted WTEN-TV’s request for special temporary authority, to operate underreduced power pending final approval of the final DTV construction permit.

 

**Television Revenues**

 

Set forth below are the principal types of television revenue receivedby the Company’s stations for the periods indicated and the percentagecontribution of each to the Company’s total revenue, as well as agency andnational sales representative commissions. The results from continuing operations for all periods presented do notinclude the results of operations for WTVO-TV (which was sold in two steps – onNovember 1, 2004 and on January 4, 2005).  The results of WTVO-TV are reflected asdiscontinued operations.

 
| ** **       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **       | ** ** | **Amount**                            | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**            | ** ** |
| Revenues         |       |                                  |       |   |   |   |   |   |   |
| Local            |       | $                                     | 30,946     |   | 53.6 |   | $ | 32,812 |   | 61.9 |   |
| National         |       | 18,697                                |       | 32.4 |   | 17,549 |   | 33.1 |   |
| Network          |       | 2,343                                 |       | 4.1 |   | 338 |   | 0.7 |   |
| Political        |       | 3,847                                 |       | 6.7 |   | 384 |   | 0.7 |   |
| Production/Other |       | 1,876                                 |       | 3.2 |   | 1,908 |   | 3.6 |   |
| Total            |       | 57,709                                |       | 100.0 |   | 52,991 |   | 100.0 |   |
|             |       |                                  |       |   |   |   |   |   |   |
| Commissions      |       | (8,140                                | )          | (14.1 | ) | (7,482 | ) | (14.1 | ) |
|             |       |                                  |       |   |   |   |   |   |   |
| Net Revenue      |       | $                                     | 49,569     |   | 85.9 |   | $ | 45,509 |   | 85.9 |   |

 

15

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**Results of Operations**

 

***Three Months Ended March 31, 2005Compared to Three Months Ended March 31, 2004***

 

The following table sets forth the Company’s operating results for thethree months ended March 31, 2005 as compared to the three months ended March 31,2004.  The results from continuingoperations for the three months ended March 31, 2005 and 2004 do notinclude the results of operations for WTVO-TV. Results for WTVO-TV are reflected as discontinued operations.

 
| ** **                                                                                                  | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **(in thousands)**                            | ** ** |
| ** **                                                                                                  | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Net revenue                                                                                                 |       | $                                             | 49,569     |   | $ | 45,509 |   | $ | (4,060 | ) | (8.2 | )% |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Operating  expenses, including SG&A                                                                     |       | 33,013                                        |       | 35,434 |   | 2,421 |   | 7.3 |   |
| Amortization  of program license rights                                                                     |       | 4,689                                         |       | 5,335 |   | 646 |   | 13.8 |   |
| Depreciation  and amortization                                                                              |       | 6,325                                         |       | 6,392 |   | 67 |   | 1.1 |   |
| Corporate  overhead, excluding depreciation expense                                                         |       | 5,825                                         |       | 4,090 |   | (1,735 | ) | (29.8 | ) |
| Operating  loss                                                                                             |       | (283                                          | )          | (5,742 | ) | (5,459 | ) | (1929.0 | ) |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Interest  expense, net                                                                                      |       | (16,986                                       | )          | (15,824 | ) | 1,162 |   | 6.8 |   |
| Non-cash  change in market valuation of swaps                                                               |       | 1,262                                         |       | (1,823 | ) | (3,085 | ) | (244.5 | ) |
| Loss on  extinguishment of debt                                                                             |       | (5,323                                        | )          | — |   | 5,323 |   | 100.0 |   |
| Other  income/ (expense)                                                                                    |       | 49                                            |       | (155 | ) | (204 | ) | 416.3 |   |
|                                                                                                        |       | (20,998                                       | )          | (17,802 | ) | 3,196 |   | 15.2 |   |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Loss from  continuing operations before income taxes                                                        |       | (21,281                                       | )          | (23,544 | ) | (2,263 | ) | (10.6 | ) |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Income tax  expense                                                                                         |       | —                                        |       | (7,014 | ) | (7,014 | ) | (100.0 | ) |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Loss from  continuing operations                                                                            |       | (21,281                                       | )          | (30,558 | ) | (9,277 | ) | (43.6 | ) |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| (Loss) income  from discontinued operations, net of taxes (including gain on sale of 11.2  million in 2005) |       | (21                                           | )          | 11,207 |   | 11,228 |   | 53466.7 |   |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Net loss                                                                                                    |       | $                                             | (21,302    | ) | $ | (19,351 | ) | $ | 1,951 |   | 9.2 | % |
|                                                                                                        |       |                                          |       |   |   |   |   |   |   |
| Basic loss  from continuing operations per common share                                                     |       | $                                             | (1.07      | ) | $ | (1.53 | ) |   |   |   |   |
| Loss  (income) from discontinued operations, net                                                            |       | —                                        |       | 0.56 |   |   |   |   |   |
| Basic net  loss per common share                                                                            |       | $                                             | (1.07      | ) | $ | (0.97 | ) |   |   |   |   |
| Basic shares  used in earnings per share calculation                                                        |       | 19,843,990                                    |       | 19,955,286 |   |   |   |   |   |
|                                                                                                             |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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Net Revenue includes: (i) cash and barter advertising revenues,net of agency commissions; (ii) network compensation; and (iii) otherrevenues which represent less than 4% of total revenues.  Net revenue for the three months ended March 31,2005 was $45.5 million, as compared to $49.6 million, for the three monthsended March 31, 2004, a decrease of $4.1 million or 8.2%.  The major components of, and changes to, netrevenue were as follows:

 

•                  Grosspolitical revenue for the three months ended March 31, 2005 was $384,000,as compared to $3.8 million for the three months ended March 31, 2004, adecrease of approximately $3.4 million. Political revenue for the first quarter of 2004 was positively impactedby the 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.

•                  TheCompany’s gross local revenues for three months ended March 31, 2005increased by 6.0% compared to the three months ended March 31, 2004, andgross national revenues for the three months ended March 31, 2005 weredown 6.1% compared to the prior year. The increase in gross local revenues is partially attributable to newadvertisers in conjunction with new local sales initiatives.  Additionally, seven of the ten stationsincreased local revenues from various accounts, including hospitals, furniture,automotive and healthcare. The decrease in gross national revenues for thethree months ended March 31, 2005 was mainly due to decreased spending byvarious national accounts, including automotive and telecommunications accountsin five of the Company’s stations.

•                  Networkcompensation for the three months ended March 31, 2005 was $338,000, adecrease of $2.0 million, or 85.3%, compared to $2.3 million for the threemonths ended March 31, 2004.  Thedecrease in network compensation is primarily due to the changes in the newnetwork affiliation agreements with CBS and NBC and the pending renewal ofnetwork affiliation agreements with ABC (as discussed further in “*Liquidity and Capital Resources*”) whereby the Company willbe receiving significantly less network compensation over the term of theagreements, the amounts of which are recorded on a straight line basis over thelife of the agreements.  The Company iscurrently operating under extensions of the ABC affiliation agreements whichare set to expire on May 20, 2005. The Company received network compensation under the ABC affiliationagreements for the first quarter of 2005. The amounts of such network compensation were deferred because renewedaffiliation agreements had not been finalized by the end of the quarter. 

 

Operating expenses, including selling, general and administrativeexpenses, for the three months ended March 31, 2005 were $35.4 million ascompared to $33.0 million for the three months ended March 31, 2004, anincrease of $2.4 million, or 7.3%.  Themajor components and changes in operating expenses were as follows:

 

•                  Approximately$636,000 of the increase relates to the Company’s new local sales initiatives,which were not implemented until the fourth quarter of 2004.

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

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

•                  TheCompany incurred approximately $303,000 in severance costs relating to costcutting initiatives and anticipated headcount reduction.

•                  Approximately$400,000 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.

 

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•                  Includedin the selling, general and administrative expenses is non-cash compensationexpense of approximately $619,000 for the three months ended March 31,2005, of which approximately $285,000 relates to restricted and deferred stockawards.  The remaining $334,000 ofnon-cash compensation relates to the Company’s matching contributions toeligible employees under its defined contribution plan.  This compares to non-cash compensation of$312,000 for the three months ended March 31, 2004, relating to theCompany’s matching contributions for eligible employees under its definedcontribution plan.

 

Amortization of program license rights for the three months ended March 31,2005 was $5.3 million, compared to $4.7 million for the three months ended March 31,2004, an increase of $646,000, or 13.8%. The increase for the three months ended March 31, 2005 wasprimarily due to increased renewal costs of the *Dr. Phil*broadcast rights at one of the Company’s stations.

 

Depreciation of property and equipment and amortization of intangibleassets was $6.4 million for the three months ended March 31, 2005 ascompared to $6.3 million for the three months ended March 31, 2004, anincrease of $67,000 or 1.1%.

 

Corporate Overhead for the three months ended March 31, 2005 was$4.1 million as compared to $5.8 million for the three months ended March 31,2004, a decrease of $1.7 million, or 29.8%. 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 to the Company’s former president, who retired on March 31,2004.  Additionally, the former presidentwas replaced by an existing executive of the Company.

•                  Personnelcosts decreased by approximately $269,000, due to decreased headcount, which isprimarily due to the death of two of the Company’s officers during 2004.

•                  Offsettingthis decrease, was approximately $963,000 of additional professional andconsulting fees for the three months ended March 31, 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 three months ended March 31, 2005 was$15.8 million, compared to $17.0 million for the same period in 2004, adecrease of $1.2 million, or 6.8%.  TheCompany had higher debt levels for the first twenty two days of 2004 associatedwith the redemption on January 22, 2004 of its 9% senior subordinatednotes due 2006 and 8 3⁄4% senior subordinated notes due 2007.  The Company received a payment on itsinterest rate swaps of $245,000 and $427,000 for the three months ended March 31,2005 and 2004, respectively, which was recorded as a reduction of interestexpense.

 

The Company recorded a $1.8 million non-cash loss and $1.3 millionnon-cash gain in connection with the change in the market value of interestrate swaps for the three months ended March 31, 2005 and 2004,respectively.

 

The Company recorded a loss on extinguishment of debt resulting fromthe write-off of related unamortized deferred financing costs for the threemonths ended March 31, 2004 of $5.3 million relating to the redemption on January 22,2004 of its 9% senior subordinated notes due 2006 and 8 3⁄4% senior subordinatednotes dye 2007 (see “Liquidity and Capital Resources”).

 

The Company recorded an income tax provision of $7.0 million for thethree months ended March 31, 2005. This provision includes a deferred tax liability of $6.9 million for thetaxable temporary difference related to the amortization of the Company’sindefinite-lived intangible assets, which continues to be amortized for taxpurposes.  (see “Note 6”)

 

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On October 4, 2004, the Company entered into an agreement withMission Broadcasting, Inc. (“Mission”) to sell the assets of WTVO-TV, itsstation in Rockford, Illinois, for an aggregate cash purchase price ofapproximately $20.8 million. A gain of approximately $14.7 million, net ofapplicable taxes was recognized on the sale; $3.5 million of this gain, net ofa provision for income taxes of $300,000, was recognized in the fourth quarterof 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 Company recorded loss from discontinuedoperations of approximately $477 and $20,617 for the three months ended March 31,2005 and March 31, 2004, respectively.

 

As a result of the above-discussed factors, the net loss for theCompany was $19.4 million for the three months ended March 31, 2005,compared to a net loss of $21.3 million for the three months ended March 31,2004, a change of $2.0 million , or 9.2%.

 

**Liquidity and Capital Resources**

 

Current Financial Condition

 

The following tables present certain data that the Company believes ishelpful in evaluating the Company’s liquidity and capital resources (inthousands).

 
| ** **                                 | ** ** | **Three Months Ended 31,** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **2004**                   | ** ** | **2005** | ** ** |
| Net cash  provided by (used in):           |       |                       |       |   |   |
| Operating  activities                      |       | $                          | (14,341    | ) | $ | (18,496 | ) |
| Investing  activities                      |       | $                          | (3,599     | ) | $ | 4,442 |   |
| Financing  activities                      |       | $                          | (224,328   | ) | $ | (183 | ) |
| Net decrease  in cash and cash equivalents |       | $                          | (242,268   | ) | $ | (14,237 | ) |

 
| ** **                                 | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2004**              | ** ** | **2005**           | ** ** |
| Cash and  cash equivalents                 |       | $                     | 93,831     |               | $          | 79,594 |   |
| Long-term  debt, including current portion |       | $                     | 740,438    |               | $          | 739,800 |   |
| Available  under senior credit agreement   |       | $                     | 20,000     |               | $          | 20,000 |   |

 

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

 

The performance of KRON-TV has a large proportionate impact on theCompany’s operating results. Consequently, the Company is particularly susceptible to economicconditions in the San Francisco advertising market.  While revenues over the past two years havecontinued to be stronger than the preceding years, the continuing uncertainclimate in San Francisco makes the outlook unclear.

 

The Company has renewed its affiliations with CBS with respect toWLNS-TV and KLFY-TV for eight years to expire on September 30, 2012 andwith NBC with respect to KWQC-TV for ten years to expire 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.

 

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During the first quarter of 2004 the Company received notice from ABCwith respect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV, that thenetwork would not renew the affiliation agreements then in place and that thenetworks wished to negotiate new agreements. The agreements with ABC expired on September 30, 2004.  Negotiations with ABC are ongoing.  The Company is operating under extensions ofthe ABC affiliation agreements that have been extended through May 20,2005.  While the Company is unable topredict the terms of the renewed ABC affiliation agreements, the Companybelieves that renewed affiliations will in place by June 1, 2005, but onterms that provide less network compensation to the stations than was providedunder the expired agreement.  In theevent, however, of the Company’s inability to maintain their currentaffiliations under these agreements for any one or more of these stations, therespective station may no longer be able to carry programming of the relevantnetwork.  This loss in networkprogramming would require the Company to obtain replacement programming, whichmay involve higher costs and which may not be as attractive to audiences,resulting in reduced advertising revenues. Additionally, the Company would be required to write off the net bookvalue of its intangible assets associated with the network affiliationagreements.

 

The principal uses of cash that affect the Company’s liquidity positioninclude the following: the acquisition of and payments under programming rightsfor entertainment and sporting events, capital and operational expenditures andinterest payments on the Company’s debt. It should be noted that the Company does not have any scheduledprincipal payments on its debt until 2010.

 

**Sources and Uses of Cash**

 

*Operating Activities*

 

Net cash used in operating activities for the three months ended March 31,2005 and 2004 was $18.5 million and $14.3 million, respectively.  The reduction in operating cash flows wasprimarily due to the reduction in both our net revenue and operating income forthe three months ended March 31, 2005 as compared to the same period in2004.  The following changes in operatingactivities were noted:

 

•                  Prepaidexpenses decreased by approximately $1.3 million for the three months ended March 31,2005, of which approximately $1.1 million relates to prepaid corporateexpenses.  During the first quarter of2005, the Company expensed costs relating to a tax consulting project.

•                  Tradeaccounts payable decreased approximately $1.5 million, due mainly to timing ofpayments.  For cash flow purposes, thenon-cash change in barter program liability is eliminated from the tradeaccounts payable balance.  For the threemonths ended March 31, 2005, the change in barter programming liability,of approximately $2.7 million, related primarily to new barter programmingarrangements entered into at one of the Company’s stations.

•                  Accruedexpenses for the three months ended March 31, 2005 decreased byapproximately $9.3 million. Approximately $6.1 million of this decrease relates to an interestpayment made on the Company’s 8.75% Senior Subordinated Notes due 2014, whichwas accrued for at December 31, 2004. Additionally, the Company made bonus payments in the first quarter of2005, totaling approximately $3.8 million, which were accrued for at December 31,2004, and paid in the first quarter of 2005. This decrease was slightly offset by approximately $970,000 of bonusaccruals made during the first quarter of 2005.

 

The following item acted to offset these changes:

 

•                  Accountsreceivable decreased by approximately $5.2 million and $7.2 million for thethree months ended March 31, 2005 and 2004, respectively.  Historically, revenues are lower in the firstquarter of the year for television broadcasters compared to the fourth quarter,due in part to increases in retail advertising in the fourth quarter leading upto

 

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and including the holiday season and asubsequent decrease in accounts receivable balances in the first quarter of thesucceeding year.

 

*Investing Activities*

 

Cash provided for investing activities for the three months ended March 31,2005 was $4.4 million, compared to cash used in investing activities for thethree months ended March 31, 2004 of $3.6 million. The following changesin investing activities were noted:

 

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

 

•                  Capitalexpenditures for the three months ended March 31, 2005 of $1.2 million wassignificantly lower than capital expenditures of $3.2 million for the threemonths ended March 31, 2004.  Duringpart of 2004, the Company incurred significant capital expenditures forbuilding digital transmission facilities, as required by the FederalCommunications Commission regulations.

 

•                  Deposits and other assets for theCompany increased by approximately $152,000 for the three months ended March 31,2005 as compared to an increase of $374,000 for the three months ended March 31,2004.  The increase for the three monthsended March 31, 2005, is comprised of a premium payment of the SupplementalExecutive Retirement Plan for a retired employee of approximately $199,000,offset by the first quarter change in the cash surrender value of approximately$25,000.  Additionally, investments inunconsolidated subsidiaries increased by approximately $105,000 during thequarter.  These increases were partiallyoffset by a decrease in the executive deferred compensation plan ofapproximately $101,000, relating primarily to a cash payout of the executivedeferred compensation plan for a deceased executive.

 

*Financing Activities*

 

Cash used in financing activities for the three months ended March 31,2005 and 2004 was $183,000 and $224.3 million, respectively. On December 23,2003, the Company received the proceeds from the sale of the December 2003Notes (as defined below) of $140.0 million principal amount. On January 22,2004, the Company used the net proceeds of the December 2003 Notes ofapproximately $136.5 million to redeem the 83⁄4% Senior Subordinated Notes due2007, plus a redemption premium and accrued interest.  In addition, on December 23, 2003, theCompany received the proceeds from the sale of the Senior Notes Add-On (asdefined below) of $90.0 million principal amount and a premium of approximately$6.2 million. On January 22, 2004, the Company used all of the netproceeds of the Senior Notes Add-On of approximately $94.1 million to redeemall of the Company’s 9% Senior Subordinated Notes due 2006 plus accruedinterest. In connection with the December 2003 Notes and the Senior NotesAdd-On, the Company recorded approximately $642,000 of deferred debt financingcosts in 2004 that will be amortized over the term of the respective notes. In January 2004,upon the redemption of the 83⁄4% Senior Subordinated Notes due 2007 and the 9%Senior Subordinated Notes due 2006, the Company expensed all the remainingrelated deferred debt financing costs, net of accumulated amortization ofapproximately $1.3 million and recorded it as a loss on extinguishment of debt. The Company made payments under capitallease obligations of $183,000 and $154,000 for the three months ended March 31,2005 and 2004, respectively.

 

**Debt Instruments, Guarantees and RelatedCovenants**

 

Asof March 31, 2005, the Company was party to a senior credit facility thatconsisted of a revolving credit facility in the amount of $20.0 million, all ofwhich was available to the Company as of such date.  At March 31, 2005, the Company had nooutstanding borrowings under this credit facility and was in compliance withall of the covenants contained therein.

 

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OnMay 3, 2005, the Company amended and restated its senior credit facility(as amended, the “Senior Credit Facility”). The Senior Credit Facility consistsof (i) a term loan in the amount of $300.0 million that matures in 2012and (ii) a revolving credit facility in the amount of $20.0 million thatmatures in 2010. On May 3, 2005, the full $300 million of the term loanwas borrowed.  Approximately $278.0million of the proceeds of the term loan borrowing were used to finance thepurchase by the Company of all of its $246,890,000 outstanding principal amountof 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.

 

Inconnection with the cash tender offer and consent solicitation, the Companywill record a loss on the extinguishment of debt in the second quarter of 2005,totaling approximately $18.5 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $5.0 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.6 million).  In addition, the Company plans to capitalizethe $5.6 million of estimated fees associated with the new term loan andrevolving credit facility.

 

TheSenior Credit Facility provides, at the option of the Company, that borrowedfunds bear interest based upon the London Interbank Offered Rate (LIBOR), thecustomary “CD Rate” or “Base Rate.”  Inaddition to the index rate, the Company pays a fixed incremental percentage at1.25% with the Base Rate and 2.25% with LIBOR. Each of the Company’ssubsidiaries has guaranteed the Company’s obligations under the Senior Credit Facility.The Senior Credit Facility is secured by the pledge of all the stock of theCompany’s subsidiaries and a first priority lien on all of the assets of theCompany and its subsidiaries. The Senior Credit Facility requires the Companyto maintain a cash and short-term investment balance of at least $35.0 million.The other covenants contained in the Senior Credit Facility are substantiallysimilar to the covenants contained in the indentures governing the Company’sother material indebtedness.

 

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”). The Senior Notes Add-on were offered to qualifiedinstitutional 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 $94.1 million to redeem all of the Company’s 9%senior subordinated notes due 2006 plus accrued interest. On July 1, 2004,the Company exchanged the Senior Notes Add-On for notes of the Company withsubstantially identical terms of the Senior Notes Add-On, except the new notesdo not contain terms with respect to transfer restrictions.

 

On December 23, 2003, the Company completed a private offering of$140.0 million principal amount of its 83⁄4% Senior Subordinated Notes due 2014(the “December 2003 Notes”). The December 2003 Notes were offered toqualified institutional buyers under Rule 144A and to persons outside theUnited States under Regulation S. On January 22, 2004, the Company usedthe net proceeds of approximately $136.5 million to redeem all of the Company’s83⁄4% Senior Subordinated Notes due 2007, plus a redemption premium and accruedinterest. On July 1, 2004, the Company exchanged the December 2003Notes for notes of the Company with substantially identical terms of the December 2003Notes, except the new notes do not contain terms with respect to transferrestrictions.

 

The following is a summary of our outstandingindebtedness (in thousands) and related annualized interest payments that isrecorded during the period.  Debt amountsoutstanding at December 31, 2004 and March 31, 2005 were as follows:

 

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| ** **                                    | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**               | ** ** |
|-----------------------------------------------|------------|--------------|------------|-------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **12/31/04** | ** ** | **3/31/05** | ** ** | **Interest Payments****(1)** | ** ** |
| Senior  Credit Facility                       |       | $            | —     |        | $          | —                       |       | $ | — |   |
|                                          |       |         |       |        |       |                         |       |   |   |   |
| 81⁄2% Senior  Notes due 2008               |       | 251,865      | (2)        | 251,554     | (2)        | 20,986                       |       |
| 8 3⁄4% Senior  Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                       |       |
| 10% Senior  Subordinated Notes due 2011       |       | 347,871      | (3)        | 347,726     | (3)        | 34,430                       |       |
| Total Debt  (excluding capital leases)        |       | $            | 739,736    |        | $          | 739,280                      |       | $ | 67,666 |   |

 

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(1)          The annualized interestpayments are calculated based on the outstanding principal amounts at March 31,2005, multiplied by the interest rates of the related notes.

(2)          Includes an unamortizedpremium balance of $5.0 million and $4.7 million as of December 31, 2004and March 31, 2005, respectively.

(3)          Includes unamortizedpremium balances of $3.6 million and $3.4 million as of December 31, 2004and March 31, 2005, respectively.

 

The Company’s total debt at March 31, 2005 was approximately$739.8 million, consisting of $484.3 million of Senior Subordinated Notes,$246.9 million of Senior Notes, $8.1 million of bond premiums and $519,000 ofcapital leases. In addition, at March 31, 2005, the Company had anadditional $20.0 million of unused available borrowings under the Senior CreditFacility.

 

It is anticipated that the Company will be able to meet the workingcapital needs of its stations, scheduled principal and interest payments underthe Company’s Senior Notes and Senior Subordinated Notes and capitalexpenditures, from cash on hand, cash flows from operations and funds availableunder the Senior Credit Facility.

 

**Income Taxes**

 

The Company recorded a gain from the sale ofWTVO-TV for the three months ended March 31, 2005 of $11.2 million, net ofa provision 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 the adoption of SFAS 142, the Company no longer amortizes the bookbasis in the indefinite-lived intangibles, but continues to amortize theseintangibles for tax purposes.  Beginningwith the first quarter of 2005, theCompany is recording a deferred tax provision for the excess of book basis overtax basis of intangible assets not expected to reverse during the net operatingloss carryforward period.  Incometax expense for the three months ended March 31, 2005 primarily consistsof deferred income taxes of $6.9 million related to the increase in the Company’sdeferred tax liability for the tax effect of the difference between the bookand tax basis of the intangible assets not expected to reverse during the netoperating loss carryforward period.

 

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 Companys deductible temporary differences unless the related assets are sold or an impairmentof the assets is recorded. The Company expects that it will record a total ofapproximately $10.6 million to increase deferred tax liabilities during theremaining nine months of 2005.

 

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**Contractual Obligations and Other CommercialCommitments**

 

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

 

The following table summarizes separately the Company’s materialobligations and commitments at March 31, 2005 and the timing of paymentsrequired in connection therewith and the effect that such payments are expectedto have on the Company’s liquidity and cash flow in future periods.  The Company expects to fund their short termobligations with cash on hand, cash flow from operations and funds availableunder its Senior Credit Facility.

 
| ** **                             | ** ** | ** **                 | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Contractual Obligations**            | ** ** | **Total**                  | ** ** | **Less than  1 year**      | ** ** | **1 – 3 years** | ** ** | **4 – 5 years** | ** ** | **After 5  years** | ** ** |
| ** **                             | ** ** | **(dollars in thousands)** | ** ** |
| Long-Term  Debt (principal only)       |       | $                          | 731,189    |                       | —     |   | $ | 246,890 |   | — |   | $ | 484,299 |   |
| Cash  Interest Payments                |       | 405,435                    |       | 67,866                     |       | 202,672 |   | 90,491 |   | 44,406 |   |
| Capital  Lease Obligations             |       | 519                        |       | 471                        |       | 48 |   | — |   | — |   |
| Operating  Leases                      |       | 7,161                      |       | 1,787                      |       | 4,603 |   | 713 |   | 58 |   |
| Unconditional  Purchase Obligations(1) |       | 9,861                      |       | 9,542                      |       | 319 |   | — |   | — |   |
| Other  Long-Term Obligations(2)        |       | 111,286                    |       | 14,125                     |       | 75,657 |   | 15,623 |   | 5,881 |   |
| Total  Contractual Cash Obligations    |       | $                          | 1,265,451  |                       | $          | 93,791 |   | $ | 530,189 |   | $ | 106,827 |   | $ | 534,644 |   |
|                                        |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Unpaid program licenseliability reflected on the March 31, 2005 balance sheet.

(2)          Obligations forprogramming that has been contracted for, but not recorded on the March 31,2005 Balance Sheet because the programs were not currently available forairing.

 

**Impact of Recently Issued AccountingStandards**

 

On December 16, 2004, the FASB issued FASB Statement No. 123(revised 2004), *Share Based Payment,*which is arevision of FASB Statement No. 123, *Accounting for Stock BasedCompensation*.  Statement 123(R) supersedes APB No. 25, and amends FASB Statement No. 95, *Statement of Cash Flows. *Generallythe approach in Statement 123 (R) is similar to the approach described inStatement 123.  However, Statement 123(R) requires all share based payments to employees, including grants ofemployee stock options, to be recognized in the income statements based ontheir fair values.  Pro forma disclosureis no longer an alternative.

 

The SEC has amended the dates for mandatory initial adoption ofStatement No. 123 (R) as of the first interim or annual period of thefirst fiscal year beginning on or after June 15, 2005.  Accordingly, the Company expects to adoptStatement 123 (R) for the fiscal year beginning January 1, 2006.

 

Statement No. 123 (R) permits public companies to adopt itsrequirements using one of two methods:

 

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1.               A “modifiedprospective” method in which compensation cost is recognized beginning with theeffective date (a) based on the requirements of Statement 123 (R) 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 123 (R) that remain unvested on the effective date.

 

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

 

The Company plans to adopt Statement 123 using the modified prospectivemethod.

 

As permitted by SFAS 123, the Company currently accounts forshare-based payments to employees using APB 25’s intrinsic value method and, assuch, generally recognizes no compensation cost for employee stockoptions.  Accordingly, the adoption ofStatement 123 (R) will have a significant impact on our results fromoperations, although it will not impact our overall financial position.  The impact of adoption of Statement 123 (R)cannot be predicted at this time because it all depends on the levels ofshare-based payments granted in the future. However, had the Company adopted Statement 123 (R) in prior periods theimpact of that standard would have approximated the impact of Statement 123 asdescribed in the disclosure of pro forma net income and earnings per share.

 

In September 2004, the Emerging Issue Task Force (“EITF”) issuedTopic No. D-108 “Use of the Residual Method to Value Acquired Assets Otherthan Goodwill” (“Topic D-108”). Topic D-108 requires the direct value method,rather than the residual value method, be used to value intangible assets otherthan goodwill for such assets acquired in business combinations completed afterSeptember 29, 2004. Under the residual value method, the fair value of theintangible asset is determined to be the difference between the enterprisevalue and the fair value of separately identifiable assets; whereas, under thedirect value method all intangible assets are valued separately and directly.Topic D-108 also requires that registrants who have applied the residual methodto the valuation of intangible assets for purposes of impairment testing shallperform an impairment test using the direct value method on all intangibleassets no later than the beginning of fiscal years beginning after December 15,2004 though early adoption is permissible. Impairments resulting from theapplication of the direct value method and the related tax effects should bereported as a cumulative effect of a change in accounting principle. TheCompany adopted the provisions of Topic D-108 during the fourth quarter of 2004and noted that it did not affect the Company’s financial statements.

 

**Item 3**. ***Quantitative and Qualitative DisclosureAbout Market Risk.***

 

The Company’s Senior Credit Facility, with no amounts outstanding as ofMarch 31, 2005, bears interest at floating rates. Accordingly, to theextent there are amounts outstanding under the Senior Credit Facility, we areexposed to potential losses related to changes in interest rates.

 

The Company’s Senior Subordinated Notes of approximately $484.3 millionoutstanding principal as of March 31, 2005 are general unsecuredobligations of the Company and are subordinated in right of payment to allsenior debt, including all indebtedness of the Company under the Senior CreditFacility and the Senior Notes. The Senior Subordinated Notes have fixed ratesof interest ranging from 83⁄4% to 10% and are ten-year notes maturing in variousyears commencing 2011. The annualized interest expense on the outstanding SeniorSubordinated Notes is approximately $46.7 million.

 

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The Company’s Senior Notes of approximately $246.9 million outstandingprincipal as of March 31, 2005 have a fixed rate of interest of 81/2%and mature in 2008. The annualized interest expense on the outstanding SeniorNotes is approximately $21.0 million.

 

The Company does not enter into derivatives or other financialinstruments for trading or speculative purposes; however, in order to manageits exposure to interest rate risk, the Company entered into a derivativefinancial instrument in June 2001. The derivative financial instrument isan interest rate swap agreement that expires in 2011. The Company does notapply hedge accounting to this instrument.

 

**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 March 31,2005. 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 March 31, 2005that has 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.

 

**Item6.  *Exhibits***

 

*Exhibits.*

 
| **Exhibit** | ** ** | ** **                                                            |
|-------------|------------|-----------------------------------------------------------------------|
| **Number**  | ** ** | **Exhibit Description**                                          |
|        |       |                                                                  |
| 10          |       | Fourth  Amended and Restated Credit Agreement dated as of May 3, 2005 |
| 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:   May 6, 2005 | By:                     | /s/ Vincent  J. Young |   |
|                          |                    | Vincent J.  Young |
|                          |                    | Chairman |
|                          |                    |   |
|                          |                    |   |
| Date:   May 6, 2005 | By:                     | /s/ James A. Morgan |   |
|                          |                    | James A. Morgan |
|                          |                    | Executive Vice President and |
|                          |                    | Chief Financial Officer |
|                          |                    | (principal financial officer) |

 

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