**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:** |
|-------------------------------------|------------|------------------------------|
| **September 30,  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  No  o

 

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

 

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

 

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Number of shares of Common Stock outstandingas of October 24, 2005: 18,763,797 shares of Class A Common Stock and1,941,414 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 September 30, 2005                       |   |
|         |                  |                                                                                                        |   |
|         |                  | Consolidated Statements of Operations for  the Three and Nine Months Ended September 30, 2004 and 2005 |   |
|         |                  |                                                                                                        |   |
|         |                  | Consolidated Statements of Stockholders’  Equity for the Nine Months Ended September 30, 2005     |   |
|         |                  |                                                                                                        |   |
|         |                  | Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 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 5.               | Other Information                                                                                           |   |
|         |                  |                                                                                                        |   |
|         | Item 6.               | Exhibits                                                                                                    |   |
|         |                  |                                                                                                        |   |
| Signatures   |                  |                                                                                                        |

 

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**Part I  Financial Information**

**Item 1. *Financial Statements***

 

Young Broadcasting Inc. andSubsidiaries

ConsolidatedBalance Sheets

 
| ** **                                                                                                                                                 | ** ** | **December 31,** |        | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2004**              |        | **2005**               | ** ** |
| ** **                                                                                                                                                 | ** ** | ** **            |        | **(Unaudited)**        | ** ** |
| **Assets**                                                                                                                                                 | ** ** | ** **            |        | ** **             | ** ** |
| Current assets:                                                                                                                                            | ** ** | ** **            |        | ** **             | ** ** |
| Cash and cash equivalents                                                                                                                                  |       | $                     | 93,831,317  |                   | **$**      | **82,156,351** | ** ** |
| Trade accounts receivable, less allowance  for doubtful accounts of $1,062,000 in 2004 and $1,098,000 in 2005                                              |       | 40,099,229            |        | **37,647,064**         | ** ** |
| Current portion of program license rights                                                                                                                  |       | 14,892,686            |        | **28,477,759**         | ** ** |
| Prepaid expenses                                                                                                                                           |       | 4,034,408             |        | **2,362,802**          | ** ** |
| Other current assets                                                                                                                                       |       | 1,000,000             |        | **1,997,989**          | ** ** |
| Assets held for sale                                                                                                                                       |       | 1,459,370             |        | **—**             | ** ** |
| Total current assets                                                                                                                                       |       | $                     | 155,317,010 |                   | **$**      | **152,641,965** | ** ** |
| ** **                                                                                                                                                 | ** ** | ** **            |        | ** **             | ** ** |
| Property and equipment, less accumulated  depreciation and amortization of $169,309,245 in 2004 and $181,012,040 in  2005                                  |       | 84,703,428            |        | **76,132,108**         | ** ** |
| Program license rights, excluding current  portion                                                                                                         |       | 393,586               |        | **8,254,678**          | ** ** |
| Deposits and other assets                                                                                                                                  |       | 2,601,362             |        | **2,856,558**          | ** ** |
| Investments in unconsolidated subsidiaries                                                                                                                 |       | 3,947,270             |        | **4,634,018**          | ** ** |
| Unamortizable intangible assets                                                                                                                            |       | 475,928,822           |        | **475,928,822**        | ** ** |
| Amortizable intangible assets, less  accumulated amortization                                                                                              |       | 70,346,609            |        | **66,548,484**         | ** ** |
| Deferred charges, less accumulated  amortization                                                                                                           |       | 11,029,308            |        | **10,852,107**         | ** ** |
| **Total Assets**                                                                                                                                           |       | $                     | 804,267,395 |                   | **$**      | **797,848,740** | ** ** |
| ** **                                                                                                                                                 |       |                  |        | ** **             | ** ** |
| **Liabilities and stockholders’ deficit**                                                                                                             | ** ** | ** **            |        | ** **             | ** ** |
| Current liabilities:                                                                                                                                       | ** ** | ** **            |        | ** **             | ** ** |
| Trade accounts payable                                                                                                                                     |       | $                     | 6,384,045   |                   | **$**      | **10,660,136** | ** ** |
| Accrued interest                                                                                                                                           |       | 17,575,523            |        | **8,192,827**          | ** ** |
| Accrued expenses                                                                                                                                           |       | 17,746,443            |        | **16,762,411**         | ** ** |
| Current installments of program license  liability                                                                                                         |       | 14,375,405            |        | **23,084,994**         | ** ** |
| Current installment of long term debt                                                                                                                      |       | —                |        | **3,000,000**          | ** ** |
| Current installments of obligations under  capital leases                                                                                                  |       | 625,845               |        | **72,217**             | ** ** |
| Liabilities held for sale                                                                                                                                  |       | 7,636,284             |        | **—**             | ** ** |
| Total current liabilities                                                                                                                                  |       | 64,343,545            |        | **61,772,585**         | ** ** |
| Program license liability, excluding  current installments                                                                                                 |       | 523,771               |        | **10,007,507**         | ** ** |
| Long-term debt, excluding current  installments                                                                                                            |       | 739,736,233           |        | **783,686,594**        | ** ** |
| Deferred tax liability and other long-term  tax liabilities                                                                                                |       | 7,992,485             |        | **23,663,024**         | ** ** |
| Other liabilities                                                                                                                                          |       | 4,758,328             |        | **6,043,241**          | ** ** |
| Obligations under capital leases, excluding  current installments                                                                                          |       | 76,110                |        | **29,700**             | ** ** |
| **Total liabilities**                                                                                                                                      |       | 817,430,472           |        | **885,202,651**        | ** ** |
| Stockholders’ deficit*:*                                                                                                                              | ** ** | ** **            |        | ** **             | ** ** |
| Class A Common Stock, $.001 par value.  Authorized 40,000,000 shares; issued and outstanding 17,858,567 shares at  2004 and 18,676,741 shares at 2005 |       | 17,859                |        | **18,677**             | ** ** |
| Class B Common Stock, $.001 par value.  Authorized 20,000,000 shares; issued and outstanding 2,066,133 shares at 2004  and 1,941,414 shares at 2005   |       | 2,066                 |        | **1,941**              | ** ** |
| Additional paid-in capital                                                                                                                                 |       | 381,090,583           |        | **383,255,225**        | ** ** |
| Accumulated other comprehensive loss                                                                                                                       |       | (2,586,996            | )           | **(2,272,246**         | **)**      |
| Accumulated deficit                                                                                                                                        |       | (391,686,589          | )           | **(468,357,508**       | **)**      |
| Total stockholders’ deficit                                                                                                                           |       | (13,163,077           | )           | **(87,353,911**        | **)**      |
| **Total liabilities and stockholders’ deficit**                                                                                                       |       | $                     | 804,267,395 |                   | **$**      | **797,848,740** | ** ** |

 

*See accompanying notes to consolidatedfinancial statements*

 

2

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**Young Broadcasting Inc. andSubsidiaries**

**Consolidated Statements ofOperations**

(Unaudited)

 
| ** **                                                                                     | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                                                                     | ** ** | **September 30,** | ** **  | **September 30,** | ** ** |
| ** **                                                                                     | ** ** | **2004**               |        | **2005**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net operating revenue                                                                          |       | $                      | 54,063,835  |                   | **$**      | **47,480,775** | ** ** | $ | 161,084,271 |   | **$** | **143,855,438** | ** ** |
| ** **                                                                                     | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Operating expenses, excluding depreciation  expense                                            |       | 19,262,616             |        | **17,967,932**         | ** ** | 55,083,348 |   | **54,567,448** | ** ** |
| Amortization of program license rights                                                         |       | 4,765,045              |        | **6,290,784**          | ** ** | 13,873,744 |   | **16,896,803** | ** ** |
| Selling, general and administrative  expenses, excluding depreciation and amortization expense |       | 15,764,732             |        | **16,936,067**         | ** ** | 47,035,088 |   | **50,608,861** | ** ** |
| Depreciation and amortization                                                                  |       | 6,941,951              |        | **4,806,872**          | ** ** | 19,506,485 |   | **17,243,248** | ** ** |
| Corporate overhead, excluding depreciation  expense                                            |       | 4,294,547              |        | **2,728,574**          | ** ** | 13,913,039 |   | **9,882,600** | ** ** |
| Operating income (loss)                                                                        |       | 3,034,944              |        | **(1,249,454**         | **)**      | 11,672,567 |   | **(5,343,522** | **)** |
| ** **                                                                                     | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Interest expense, net                                                                          |       | (15,960,137            | )           | **(15,445,738**        | **)**      | (48,816,932 | ) | **(46,682,749** | **)** |
| Non-cash change on market valuation of  swaps                                                  |       | 1,215,173              |        | **(881,986**           | **)**      | (61,467 | ) | **(1,540,493** | **)** |
| Loss on extinguishment of debt                                                                 |       | —                 |        | **—**             | ** ** | (5,323,375 | ) | **(18,625,706** | **)** |
| Other expense, net                                                                             |       | (407,860               | )           | **(148,233**           | **)**      | (565,433 | ) | **(448,688** | **)** |
|                                                                                           | ** ** | (15,152,824            | )           | **(16,475,957**        | **)**      | (54,767,207 | ) | **(67,297,636** | **)** |
| ** **                                                                                     | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Loss from continuing operations before  provision for income tax                               |       | (12,117,880            | )           | **(17,725,411**        | **)**      | (43,094,640 | ) | **(72,641,158** | **)** |
| Income tax expense                                                                             |       | —                 |        | **(3,440,108**         | **)**      | — |   | **(15,233,645** | **)** |
| Loss from continuing operations                                                                |       | (12,117,880            | )           | **(21,165,519**        | **)**      | (43,094,640 | ) | **(87,874,803** | **)** |
| (Loss) income from discontinued operations,  net of taxes                                      |       | (13,851                | )           | **—**             | ** ** | 96,525 |   | **11,203,884** | ** ** |
| Net loss                                                                                       |       | $                      | (12,131,731 | )                      | **$**      | **(21,165,519** | **)** | $ | (42,998,115 | ) | **$** | **(76,670,919** | **)** |
| ** **                                                                                     | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Basic and diluted net loss per common  share:                                                  | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Loss from continuing operations                                                                |       | $                      | (0.61       | )                      | **$**      | **(1.03** | **)** | $ | (2.16 | ) | **$** | **(4.33** | **)** |
| (Loss) income from discontinued operations                                                     |       | —                 |        | **—**             | ** ** | — |   | **0.55** | ** ** |
| Net loss per common share                                                                      |       | $                      | (0.61       | )                      | **$**      | **(1.03** | **)** | $ | (2.16 | ) | **$** | **(3.78** | **)** |
| ** **                                                                                     | ** ** | ** **             |        | ** **             | ** ** |   |   | ** ** | ** ** |
| Weighted average shares – Basic and  dilutive                                             |       | 19,998,186             |        | **20,606,089**         | ** ** | 19,924,151 |   | **20,263,163** | ** ** |

 

*See accompanying notes to consolidatedfinancial statements.*

 

3

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Young Broadcasting Inc. andSubsidiaries

 

Consolidated Statements of Stockholders’ Equity 

(Unaudited)

 
| ** **                                                            | ** ** | ** **        | ** ** | ** **       | ** ** | **Additional**  | ** **  | ** **        | ** **  | **Accumulated**   | ** ** | **Total**              | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------|-------------|-------------------|-------------|-------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                            | ** ** | **Common  Stock** | ** ** | **Paid-In**      | ** ** | **Accumulated** | ** **  | **Comprehensive** | ** **  | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                            | ** ** | **Class A**  | ** ** | **Class B** | ** ** | **Capital**     | ** **  | **Deficit**       | ** **  | **Loss**          | ** ** | **Loss**               | ** ** | **Equity**  | ** ** |
| 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 |       | 134               |       |             |       | 880,651         |        |              |        |              |       |                   |       | 880,785     |       |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Conversion of  Class B Common Stock to Class A Common Stock |       | 125               |       | (125             | )          |            |        |              |        |              |       |                   |       |        |       |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Restricted stock  issued                                              |       | 527               |       |             |       | 1,080,378       |        |              |        |              |       |                   |       | 1,080,905   |       |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Employee stock  purchase plan                                         |       | 32                |       |             |       | 203,613         |        |              |        |              |       |                   |       | 203,645     |       |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Net loss for the  nine months ended September 30, 2005                |       |              |       |             |       |            |        | (76,670,919       | )           |              |       | (76,670,919            | )          | (76,670,919 | )          |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Unrealized gain  on derivative instrument                             |       |              |       |             |       |            |        |              |        | 314,750           |       | 314,750                |       | 314,750     |       |
| Total  comprehensive loss                                             |       |              |       |             |       |            |        |              |        |              |       |                   |       | (76,356,169 | )          |
|                                                                  |       |              |       |             |       |            |        |              |        |              |       |                   |       |        |       |
| Balance at  September 30, 2005                                   |       | $                 | 18,677     |             | $          | 1,941           |        | $                 | 383,255,225 |              | $          | (468,357,508           | )          | (2,272,246  | )          |   |   | $ | (87,353,911 | ) |
|                                                                       |            |                   |            |                  |            |                 |             |                   |             |                   |            |                        |            |             |            |  |  |  |  |  |  |

 

*See accompanying notes to consolidatedfinancial statements*

 

4

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**YoungBroadcasting Inc. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2004**                                 |        | **2005** | ** ** |
| **Operating activities**                                                                   | ** ** | ** **                               |        | ** ** | ** ** |
| Net loss                                                                                   |       | $                                        | (42,998,115 | ) | **$** | **(76,670,919** | **)** |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: | ** ** | ** **                               |        | ** ** | ** ** |
| Gain on the sale of station, net of taxes                                                  |       | —                                   |        | **(11,204,230** | **)** |
| Depreciation and amortization of property  and equipment                                   |       | 14,335,997                               |        | **12,631,487** | ** ** |
| Provision for uncollectible accounts                                                       |       | 636,389                                  |        | **224,734** | ** ** |
| Amortization of program license rights                                                     |       | 14,087,027                               |        | **16,896,803** | ** ** |
| Amortization of intangibles and deferred  charges                                          |       | 5,690,212                                |        | **4,611,761** | ** ** |
| Non-cash compensation                                                                      |       | 1,709,520                                |        | **935,987** | ** ** |
| Restricted Stock Awarded                                                                   |       | 616,135                                  |        | **1,158,217** | ** ** |
| Non-cash change on market valuation of swap                                                |       | 61,467                                   |        | **1,540,493** | ** ** |
| Provision for income taxes                                                                 |       | —                                   |        | **15,233,645** | ** ** |
| Loss on extinguishment of debt                                                             |       | 1,305,790                                |        | **388,757** | ** ** |
| Non-cash curtailment charge                                                                |       | —                                   |        | **542,223** | ** ** |
| Loss (gain) on sale of fixed assets                                                        |       | 13,055                                   |        | **(12,254** | **)** |
| Payments on programming license liabilities                                                |       | (13,987,954                              | )           | **(16,730,569** | **)** |
| Changes in assets and liabilities                                                          | ** ** | ** **                               |        | ** ** | ** ** |
| Decrease in trade accounts receivable                                                      |       | 3,297,190                                |        | **2,188,836** | ** ** |
| (Increase) decrease in prepaid expenses                                                    |       | (19,796                                  | )           | **1,671,606** | ** ** |
| (Decrease) increase in trade accounts  payable                                             |       | (385,241                                 | )           | **1,093,689** | ** ** |
| Decrease in accrued expenses and other  liabilities                                        |       | (6,610,937                               | )           | **(11,675,992** | **)** |
| Increase in other assets                                                                   |       | (165,202                                 | )           | **(1,182,916** | **)** |
| Net cash used in operating activities                                                      |       | (22,414,463                              | )           | **(58,358,642** | **)** |
| ** **                                                                                 | ** ** | ** **                               |        | ** ** | ** ** |
| **Investing activities**                                                                   | ** ** | ** **                               |        | ** ** | ** ** |
| Capital expenditures                                                                       |       | (10,248,446                              | )           | **(4,634,983** | **)** |
| Net proceeds from the sale of WTVO-TV                                                      |       | —                                   |        | **5,802,243** | ** ** |
| Proceeds from the disposal of fixed assets                                                 |       | 79,951                                   |        | **54,877** | ** ** |
| Decrease (increase) in deposits and other  assets                                          |       | 208,904                                  |        | **(153,486** | **)** |
| Net cash (used in) provided by investing  activities                                       |       | (9,959,591                               | )           | **1,068,651** | ** ** |
| ** **                                                                                 | ** ** | ** **                               |        | ** ** | ** ** |
| **Financing activities**                                                                   | ** ** | ** **                               |        | ** ** | ** ** |
| Principal borrowings on long-term debt                                                     |       | —                                   |        | **300,000,000** | ** ** |
| Principal payment on Credit Facility                                                       |       | —                                   |        | **(750,000** | **)** |
| Redemption of senior subordinated notes                                                    |       | (223,811,000                             | )           | **—** | ** ** |
| Repurchase of senior notes                                                                 |       | —                                   |        | **(246,890,000** | **)** |
| Deferred debt financing costs incurred                                                     |       | (640,291                                 | )           | **(6,144,937** | **)** |
| Principal payments under capital lease  obligations                                        |       | (486,665                                 | )           | **(600,038** | **)** |
| Proceeds from exercise of stock options                                                    |       | 69,897                                   |        | **—** | ** ** |
| Net cash (used in) provided by financing  activities                                       |       | (224,868,059                             | )           | **45,615,025** | ** ** |
| ** **                                                                                 | ** ** | ** **                               |        | ** ** | ** ** |
| **Net decrease in cash**                                                                   |       | (257,242,113                             | )           | **(11,674,966** | **)** |
| Cash and cash equivalents at beginning of  year                                            |       | 331,150,335                              |        | **93,831,317** | ** ** |
| **Cash and cash equivalents at  September 30**                                        |       | $                                        | 73,908,222  |   | **$** | **82,156,351** | ** ** |
| ** **                                                                                 | ** ** | ** **                               |        | ** ** | ** ** |
| **Supplemental disclosure of cash flow  information**                                      | ** ** | ** **                               |        | ** ** | ** ** |
| Interest paid                                                                              |       | $                                        | 55,428,979  |   | **$** | **58,449,707** | ** ** |
| Income tax payments                                                                        |       | $                                        | —      |   | **$** | **—** | ** ** |

 

*See accompanying notes to consolidatedfinancial statements.*

 

5

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**Young Broadcasting 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 statements of operations of theCompany.  The Company recorded its shareof losses of approximately $103,000 and its share of earnings of approximately$506,000 for the nine months ended September 30, 2004 and 2005,respectively, and its share of losses of approximately $34,000 and its share ofearnings of approximately $42,000 for the three months ended September 30,2004 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**

 

*Restricted Stock*

 

In June 2005 and May 2004, the Company awarded 432,600 and102,954 shares, respectively, of restricted stock to certain officers and othereligible key employees under the 2004 Equity Incentive Plan, with market valuesat the date of grant of approximately $2.0 million and $1.7 million,respectively.  The restricted shares vestratably in three equal annual installments beginning one year from the date ofthe grant.  During the vesting period,the participants have voting rights and the right to receive all dividends paidwith respect to such shares. Additionally, granted but unvested shares are forfeited upon terminationof employment, unless for reasons of death or disability.

 

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The fair value of the restricted shares on the date of the grant isamortized ratably over the vesting period and charged to the income statementas non-cash compensation expense included in the selling, general andadministrative expenses.  For the threeand nine months ended September 30, 2005, the Company recorded non-cashcompensation expense for the restricted stock of approximately $296,000 and545,000, respectively.

 

*Deferred Stock*

 

In June 2005 and May 2004, the Company awarded 443,500 and109,100 deferred stock units, respectively, to executive officers of theCompany under the 2004 Equity Incentive Plan, with market values at the date ofgrant of approximately $2.0 million and $1.8 million, respectively.  The June 2005 award of deferred stockunits is subject to and conditioned upon there being available for grant underthe 2004 Equity Incentive Plan a number of additional shares of common stockequal to the aggregate number of deferred stock units awarded.  Deferred stock awards are a right to receiveshares at the end of specified deferral periods. The deferred stock awards vestratably in three equal annual installments beginning one year from the date ofthe grant and upon vesting the recipients will be credited with unitsequivalent to shares.  During thedeferral period, the participants have no voting or other rights associatedwith stock ownership unless and until the shares are actually delivered at theend of the deferral period. The end of the deferral period for the deferredstock awards will occur after the termination of employment.  Additionally, granted but unvested shares areforfeited upon termination of employment, unless for reasons of death ordisability.

 

The fair value of the deferred stock awards on the date of the grant isamortized ratably over the vesting period and charged to the income statementas non-cash compensation expense included in the selling, general andadministrative expenses.  For the threeand nine months ended September 30, 2005, the Company recorded non-cashcompensation expense for the deferred stock of approximately $318,000 and613,000, respectively.

 

*Stock Options*

 

The Company follows the provisions of FASBStatement No. 123, *Accounting forStock-Based**Compensation*(“SFAS 123”). The provisions of SFAS 123 allow companies to either expense theestimated fair value of stock options or to continue to follow the intrinsicvalue 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. For awards that generate compensationexpense as defined under APB 25, the Company calculates the amount ofcompensation expense and recognized the expense over the vesting period of theaward.

 

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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 SFAS123.

 
| ** **                                                                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(dollars in thousands, except  per share data)**                                                                                        | ** ** | **2004**               | ** ** | **2005**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net loss-as reported                                                                                                                      |       | $                      | (12,132    | )                      | $          | (21,166 | ) | $ | (42,998 | ) | $ | (76,671 | ) |
| Add stock based employee compensation  expense included in reported net loss                                                              |       | 489                    |       | 614                    |       | 1,319 |   | 1,158 |   |
| Deduct total stock-based employee  compensation expense determined under fair value based method, including  employee stock purchase plan |       | (1,434                 | )          | (1,264                 | )          | (3,306 | ) | (3,293 | ) |
| Net loss-pro forma                                                                                                                        |       | $                      | (13,077    | )                      | $          | (21,816 | ) | $ | (44,985 | ) | $ | (78,806 | ) |
| Net loss per basic common share-as reported                                                                                               |       | $                      | (0.61      | )                      | $          | (1.03 | ) | $ | (2.16 | ) | $ | (3.78 | ) |
| Net loss per basic common share-pro forma                                                                                                 |       | $                      | (0.65      | )                      | $          | (1.06 | ) | $ | (2.26 | ) | $ | (3.89 | ) |

 

In December 2004, the FASB issued Statement No. 123R, *Share-Based Payment*(“SFAS 123R”), which requirescompanies to measure and recognize compensation expense for all stock-basedpayments at fair value. Companies are required to implement SFAS 123R atthe beginning of their next fiscal year that begins on or after June 15,2005.  Accordingly, the Company willadopt SFAS 123R for the fiscal year beginning January 1, 2006.

 

The adoption of SFAS 123R will have a significant impact on the Company’sresults from operations, although it will not impact the Company’s overallfinancial position.  The impact ofadoption of SFAS 123R cannot be predicted at this time because it all dependson the levels of share-based payments granted in the future.  However, had the Company adopted SFAS 123R inprior periods the impact of that standard would have approximated the impact ofSFAS 123R as described in the disclosure of pro forma net income and earningsper share.

 

**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 and other definite-livedintangible assets are amortized over periods up to 25 years.

 

The following table sets forth the additional disclosures related tointangible assets required under FASB Statement 142 *Goodwill and Other Intangible*(“SFAS 142”):

 

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| ** **                          | ** ** | **As of December 31, 2004** | ** ** | **As of September 30, 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 |   | (30,196 | ) | 60,968 |   |
| Other intangible assets             |       | 13,989                           |       | (6,761                            | )          | 7,228 |   | 13,447 |   | (7,865 | ) | 5,582 |   |
|                                |       | $                                | 105,153    |                              | $          | (34,806 | ) | $ | 70,347 |   | $ | 104,611 |   | $ | (38,061 | ) | $ | 66,550 |   |
|                                     |            |                                  |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Aggregate amortization expense for the nine months ended September 30,2004 and 2005 was $4.0 million and $3.3 million, respectively.  Aggregate amortization expense for the threemonths ended September 30, 2004 and 2005 was $1.8 million and $1.1million, respectively.

 

It is the Company’s policy to account for Network Affiliations andother definite-lived intangible assets at the lower of amortized cost or estimatedfair value. As part of an ongoing review of the valuation and amortization ofother intangible assets of the Company and its subsidiaries, managementassesses the carrying value of Network Affiliations and other definite-livedintangible assets if facts and circumstances suggest that there may beimpairment. If this review indicates that Network Affiliations and 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.

 

In June 2001, the FASB issued Statement of Financial AccountingStandards No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”). To assist the Company in evaluating its intangible assets, the Companyutilized the service of an independent valuation consulting firm.  FCC licenses are valued using a “Greenfield”income approach.  Under this approach,the FCC license is valued by analyzing the estimated after-tax discountedfuture cash flows of the station.  Theassumptions used in the discounted cash flow models reflect historical stationperformance, industry standards and trends in the respective markets.  An analysis of the financial multiples forpublicly-traded broadcasting companies, as well as a comparable sales analysisof television station sales, was also utilized to confirm the results of theincome approach.  The Company adoptedthis methodology to value broadcast licenses as the Company believes thismethodology has, in recent years, become the methodology generally used withinthe broadcast industry to value FCC licenses.

 

If these estimates or related assumptions materially change in thefuture, the Company may be required to record impairment charges not previouslyrecorded for these assets.  The Companywill perform its annual impairment test in the fourth quarter of 2005 anddetermine if the fair value of its indefinite-lived assets are in excess oftheir carrying 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

 

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the aggregate purchase price for the physicalassets of the station and the parties entered into a time barter arrangement,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 and ninemonths ended September 30, 2004 and 2005.

 

The Company recorded income from discontinuedoperations related to WTVO-TV of $97,000 for the nine months ended September 30,2004 as compared to a loss from discontinued operations of $346 for the ninemonths ended September 30, 2005. For the three months ended September 30, 2004, the Company recordedincome from discontinued operations of $14,000. Net revenue of WTVO-TV for the nine months ended September 30, 2004,was $4.2 million and net revenue for the three months ended September 30,2004 was $1.4 million. Since this agreement met all of the criteria for aqualifying plan of sale, the long-lived assets to be disposed of by this salewere 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      |   |

 

**5. Long -Term Debt**

 

On May 3, 2005, the Company (i) entered into an amended andrestated senior credit facility and (ii) accepted for payment and paidfor, in connection with a cash tender offer and consent solicitation commencedon April 11, 2005, all of its $246,890,000 outstanding principal amount of81⁄2% Senior Notes Due 2008.  The amendedcredit facility provides for a $300 million term loan and a $20 millionrevolving credit facility.  The creditfacility bears various floating interest rates, based upon LIBOR, ranging from5.4% to 6.3%.  On May 3, 2005, thefull amount of the term loan was borrowed. Approximately $278 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,

 

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accrued interest, fees and expenses. The balance of the term loan borrowing will be used for workingcapital.  The term loan will mature in2012 and the revolving facility will mature in 2010.  TheCompany capitalized approximately $6.0 million of fees associated with the newterm loan and revolving credit facility.

 

In connection with the cash tender offer and consent solicitation, theCompany recorded a loss on the extinguishment of debt in the second quarter of2005, totaling approximately $18.6 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $4.9 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.5 million), plusvarious other administrative expenses (approximately $200,000).

 

On May 3, 2005, the Company entered into an interest rate swapagreement for a notional amount of $71.0 million with a commercial bank who isalso a lender under the senior credit facility. The swap will become effective on May 8, 2006 and expires on May 8,2008.  The Company will pay a fixedinterest of 4.3425% and the Company will receive interest from the commercialbank, based upon a three month LIBOR rate. It is the Company’s intention to ensure the interest rate reset dates ofthe swap and the term loan will match over the term of the swap, and thereforethe changes in the fair value of the interest-rate swap are expected tosignificantly offset changes in the cash flows of the floating rate debt.  The Company accounts for this agreement as acash flow hedge under FASB Statement Number 133, *Accountingfor Derivative Instruments and Hedging Activities,* and as such, thechange in the fair value of the interest rate swap is reported as a componentof other comprehensive income (loss). For the three and nine months ended September 30, 2005 a gain ofapproximately $706,000 and $315,000, respectively, was recorded in othercomprehensive income (loss).  This amountwill be reclassified commencing in May 2006 into interest expense as ayield adjustment in the same period in which the related interest on thefloating-rate debt obligations affects earnings (losses).

 

On May 5, 2005, the Company entered into a partial terminationagreement with Deutsche Bank to terminate one third of its original notionalamount of $63.2 million interest rate swap, or approximately $21.1million.  In consideration of thetermination, the Company was required to make a net payment of approximately$702,000, reduced by the Company’s accrued interest income from the lastpayment date of March 1, 2005 through the termination date of May 5,2005 (approximately $35,000).  Inaccordance with the termination, the swap liability was reduced by the fairmarket value of the one third portion of the swap as of the termination date(approximately $728,000).  The differencebetween the payment and the fair market value of the partially terminated swapwas recorded as interest expense for the period (approximately $9,000).

 

During the fourth quarter of 2005 Deutsche Bank indicated that theyintend to exercise their right to unwind the remaining $42.1 million notionalamount interest rate swap.  The Companyis currently evaluating its options. Deutsche Bank has informed the Company that if they exercise their rightto unwind this swap the Company would be required to pay approximately $2.3million.  This unwind would be recordedas a reduction of the fair market value of the remaining swap as of thetermination date.  Any difference betweenthe payment and the fair market value of the terminated swap will be recordedas interest expense.

 

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

 

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| ** **                                            | ** ** | **12/31/04**       | ** ** | **9/30/05** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Senior Credit Facility                                |       | $                  | —     |        | $          | 299,250 |   |
| 81⁄2% Senior Notes due 2008                        |       | 251,865            | (1)        | —      |       |
| 8 3⁄4% Senior Subordinated Notes due 2014          |       | 140,000            |       | 140,000     |       |
| 10% Senior Subordinated Notes due 2011                |       | 347,871            | (2)        | 347,437     | (2)        |
| Total Long Term Debt                                  |       | $                  | 739,736    |        | $          | 786,687 |   |
| Less:                                                 |       |               |       |        |       |
| Scheduled current maturities                          |       | —             |       | (3,000      | )          |
| Long term debt excluding all current  installments(3) |       | $                  | 739,736    |        | $          | 783,687 |   |

 

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(1) Includesan unamortized premium balance of $5.0 million as of December 31, 2004.

(2) Includesunamortized premium balances of $3.6 million and $3.1 million as of December 31,2004 and September 30, 2005.

(3) Excludescapital leases.

 

The Company’s Senior Subordinated Notes aregeneral unsecured obligations of the Company and subordinated in right ofpayment to all senior debt, including all indebtedness of the Company under theSenior Credit Facility. The Senior Subordinated Notes are guaranteed, fully andunconditionally, and are guaranteed jointly and severally, on a seniorsubordinated unsecured basis by all of the Company’s wholly ownedsubsidiaries.  The Company has noindependent assets or operations, other than the equity in its subsidiaries.

 

**6. Income Taxes**

 

The Company recorded a gain from the sale ofWTVO-TV for the nine months ended September 30, 2005 of $11.2 million, netof a provision for state income taxes of $450,000.    At December 31, 2004, the Company hadnet operating loss (“NOL”) carryforwards for tax purposes of approximately$242.7 million expiring at various dates through 2024, for which a fullvaluation allowance has been provided.

 

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 (broadcast license), butcontinues to amortize these intangibles for tax purposes. Beginning with thefirst quarter of 2005, the Company is recording a deferred tax provision forthe excess of book basis over tax basis of intangible assets not expected toreverse during the net operating loss carryforward period.  Income tax expense for the three and ninemonths ended September 30, 2005 primarily consists of deferred income taxes of $3.3million and $14.8 million related to the increase in the Company’s deferred taxliability for the tax effect of the difference between the book and tax basisof the intangible assets not expected to reverse during the net operating losscarryforward period.

 

The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these assets will not reverse priorto the expiration period of the Company’s deductible temporary differencesunless the related assets are sold or an impairment of the assets is recorded.The Company expects that it will record a total of

 

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approximately $2.7 million to increasedeferred tax liabilities during the remaining three months of 2005.

 

**7. Employee Benefit Plans**

 

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

 

In accordance with theAgreement to Amend and Extend between Young Broadcasting San Francisco, Inc andIBEW Local 45,  dated August 8,2005, the Company amended the KRON/IBEW Local 45 Pension Plan to freeze benefitaccruals effective October 15, 2005. All accrued benefits under the defined benefit plan at the date of thefreeze will be preserved.  However,commencing on October 15, 2005, there will be no additional benefit accruals.  All employees who have earned seven fullyears of vested service as of October 14, 2005, will be 100% vested in thepension benefits earned.  If an employeehas not yet earned seven full years of vested service, they will be partiallyvested and during their employment with the Company will continue to earncredit for years of service vested.

 

As a result the Companyrecorded a curtailment charge of approximately $542,000 for the nine monthsended September 30, 2005, in accordance with FASB Statement Number 88, *Employer’s**Accounting for Settlementsand Curtailments of Defined Benefit Pension Plans and for Terminated Benefits,*in connection with the Pension Plan freeze.  This charge represents the unamortized prior service costs.

 

The Company expects tocontribute approximately $341,000 to the benefit plan in 2005.  For the nine months ended September 30,2005 approximately $260,000 has been contributed.

 

Componentsof the net periodic benefit (cost) were as follows:

 
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                       | ** ** | **2004**               | ** ** | **2005**               | ** ** | **2004** | ** ** | **2005** | ** ** |
| Service cost                                                     |       | $                      | 95,136     |                   | $          | 38,020 |   | $ | 285,408 |   | $ | 205,542 |   |
| Interest cost                                                    |       | 151,466                |       | 153,769                |       | 454,397 |   | 465,107 |   |
| Expected return of plan assets                                   |       | (165,241               | )          | (168,934               | )          | (495,724 | ) | (506,801 | ) |
| Amortization of the unrecognized obligation  or transition asset |       | (5,933                 | )          | (5,933                 | )          | (17,798 | ) | (17,798 | ) |
| Recognized (gains) or loss                                       |       | 21,817                 |       | 27,942                 |       | 65,450 |   | 95,930 |   |
| Recognized prior service costs                                   |       | 14,044                 |       | 5,267                  |       | 42,132 |   | 33,355 |   |
| Curtailment Loss                                                 |       | —                 |       | 542,223                |       | — |   | $ | 542,223 |   |
| Net periodic cost                                                |       | $                      | 111,289    |                   | $          | 592,354 |   | $ | 333,865 |   | $ | 817,558 |   |

 

**8. Commitments and Contingencies**

 

*Network Affiliation Agreements*

 

In September 2005, the Company renewed its affiliations with ABC withrespect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV. The renewed ABCaffiliations expire on December 31, 2009. The Company has renewed its affiliations with CBS with respect toWLNS-TV and KLFY-TV and with NBC with respect to KWQC-TV. The renewed CBS affiliationsexpire on September 30, 2012 and the renewed NBC affiliation expires on January1, 2015.  Under the renewed ABC, CBS andNBC affiliations, the Company will be receiving significantly less networkcompensation than it received from ABC, CBS and NBC under the expiredagreements.  For the year ended December31, 2005, the Company anticipates network compensation will be approximately22% of historical annual network compensation.

 

*Contract Claims Settlement*

 

During the third quarter of 2005 the Company received certain amountsin connection with the settlement of contract claims that it had broughtagainst a third party. Approximately $420,000 of the settlement amount receivedwas recorded as a reduction of previously expensed legal fees. Also, during thethird quarter, in connection with the settlement, the Company recognizedapproximately $1.2 million of revenue in respect of the period from the quarterended June 30, 2001 to the quarter ended June 30, 2005.

 

**9. Earnings Per Share**

 

The weighted average numberof shares outstanding during the period has been used to calculate earnings pershare.   The outstanding stock optionsand restricted and deferred stock units have not been included in thecomputation of earnings per share because they would be anti-dilutive.

 

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For the three and ninemonths ended September 30, 2005, common stock equivalents, consisting of110,000 and 53,791 shares, of common stock underlying outstanding deferredstock, have been excluded in the computation as they are anti-dilutive on theloss per share. For the three and nine months ended September 30, 2004,common share equivalents, consisting of 21,820 and 11,945 shares, of deferredstock, have been excluded in the computation as they are anti-dilutive on theloss per share. Shares underlying outstanding stock options have been excludedfrom common stock equivalents and from all per share calculations, because allpreviously granted stock options are currently “out of the money.”

 

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**Item 2. *Management’s Discussionand Analysis of Financial 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 STATEMENTS INVOLVERISKS AND UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANTFACTORS, INCLUDING THE IMPACT OF CHANGES IN NATIONAL AND REGIONAL ECONOMIES,PRICING FLUCTUATIONS IN LOCAL AND NATIONAL ADVERTISING, VOLATILITY INPROGRAMMING 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 an understandingof the Company’s financial condition, changes in financial condition andresults of operations.  MD&A isorganized 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 and nine months ended September 30, 2005 and 2004.  This analysis is presented on a consolidatedbasis.  In addition, this section providesa brief description of significant transactions and events that impact thecomparability of the results being analyzed.

 

***Liquidity and Capital Resources***–******This section provides ananalysis of the Company’s cash flows for the nine months ended September 30,2005 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

 

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area. Rates are highest during the most desirable viewing hours, withcorresponding reductions during other hours. The ratings of a local station affiliated with a national televisionnetwork can be affected by ratings of network programming.

 

Most advertising contracts are short-term, and generally run only for afew weeks. Approximately 58% of the gross revenue of the Company’s stationsduring the quarter ended September 30, 2005 was generated from localadvertising, which is sold by a station’s sales staff directly to localaccounts. The remainder of the gross revenue is primarily comprised of revenuesfrom national advertising, which is sold by the Company’s wholly ownedsubsidiary, Adam Young Inc. (“AYI”), a national advertising sales representative.The stations generally pay commissions to advertising 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**

 

*Network Affiliation Agreements*.  In September 2005, the Company renewedits affiliations with ABC with respect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TVand WBAY-TV.  The renewed ABCaffiliations expire on December 31, 2009.  The Company has renewed its affiliations with CBS with respect toWLNS-TV and KLFY-TV and with NBC with respect to KWQC-TV.  The renewed CBS affiliations expire on September 30,2012 and the renewed NBC affiliation expires on January 1, 2015.  Under the renewed ABC, CBS and NBCaffiliations, the Company will be receiving significantly less networkcompensation than it received from ABC, CBS and NBC under the expiredagreements.  For the year ended December 31,2005, the Company anticipates network compensation will be approximately 22% ofhistorical annual network compensation.

 

*Contract Claims Settlement.  *During the third quarterof 2005 the Company received certain amounts in connection with the settlementof contract claims that it had brought against a third party. Approximately$420,000 of the settlement amount received was recorded as a reduction ofpreviously expensed legal fees.  Also,during the third quarter, in connection with the settlement, the Companyrecognized approximately $1.2 million of revenue in respect of the period from thequarter ended June 30, 2001 to the quarter ended June 30, 2005.

 

*Execution of Amended Credit Facility andPurchase of Senior Notes.* On May 3, 2005, theCompany (i) entered into an amended and restated senior credit facilityand (ii) accepted for payment and paid for, in connection with a cashtender offer and consent solicitation commenced on April 11, 2005, all ofits $246,890,000 outstanding principal amount of 81⁄2% Senior Notes Due2008.  The amended credit facilityprovides for a $300 million term loan and a $20 million revolving creditfacility.  May 3, 2005, the fullamount of the term loan was borrowed. Approximately $278 million of the proceeds of such term loan borrowingwas used to pay fees

 

16

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and expenses related to the amended credit facility and to finance thepurchase of the Senior Notes in the tender offer, including the payment ofrelated premiums, accrued interest, fees and expenses.  The balance of the term loan borrowing willbe used for working capital.

 

*Digital Upgrades.*  The Company has completed the upgrade of itstelevision stations to enable them to broadcast with digital technology.  During the third quarter of 2005 the FCCgranted a construction permit to WTEN-TV. WTEN-TV is currently operating under a special temporary authority,which allows the station to operate under reduced power pending final approvalof the final digital upgrades.  Once theupgrade at WTEN-TV is completed, the special temporary authority will convertto a license.

 

**Television Revenues**

 

Set forth below are the principal types of television revenues receivedby the Company’s stations, excluding WTVO-TV for the periods indicated, and thepercentage contribution of each to the Company’s total revenue, as well asagency and national sales representative commissions:

 
| ** **       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **       | ** ** | **2004**                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **       | ** ** | **Amount**                                | ** ** | **%**                                    | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**                | ** ** |
| Revenues         |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Local            |       | 30,709                                    |       | 49.3                                     |       | 32,221 |   | 58.4 |   | 93,822 |   | 50.4 |   | 99,133 |   | 59.3 |   |
| National         |       | 18,506                                    |       | 29.7                                     |       | 17,500 |   | 31.7 |   | 59,650 |   | 32.1 |   | 53,880 |   | 32.2 |   |
| Network          |       | 2,162                                     |       | 3.5                                      |       | 1,342 |   | 2.5 |   | 6,878 |   | 3.7 |   | 2,080 |   | 1.3 |   |
| Political        |       | 7,654                                     |       | 12.3                                     |       | 1,263 |   | 2.3 |   | 16,088 |   | 8.6 |   | 2,491 |   | 1.5 |   |
| Barter           |       | 2,148                                     |       | 3.4                                      |       | 227 |   | 0.4 |   | 5,629 |   | 3.0 |   | 3,644 |   | 2.2 |   |
| Production/Other |       | 1,158                                     |       | 1.8                                      |       | 2,592 |   | 4.7 |   | 4,131 |   | 2.2 |   | 5,880 |   | 3.5 |   |
| Total            |       | 62,337                                    |       | 100.0                                    |       | 55,145 |   | 100.0 |   | 186,198 |   | 100.0 |   | 167,108 |   | 100.0 |   |
|             |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |       | (8,273                                    | )          | (13.3                                    | )          | (7,664 | ) | (13.9 | ) | (25,114 | ) | (13.5 | ) | (23,253 | ) | (13.9 | ) |
|             |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue      |       | $                                         | 54,064     |                                     | 86.7       |   | $ | 47,481 |   | 86.1 |   | $ | 161,084 |   | 86.5 |   | $ | 143,855 |   | 86.1 |   |
|                  |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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**Results of Operations**

 

***Three Months Ended September 30, 2005Compared to Three Months Ended September  30, 2004***

 

The following table sets forth the Company’s operating results for thethree months ended September 30, 2005 as compared to the three months endedSeptember 30, 2004.  The resultsfrom continuing operations for the three months ended September 30, 2005and 2004 do not include the results of operations for WTVO-TV.  Results for WTVO-TV are reflected asdiscontinued operations.  

 
| ** **                                                | ** ** | **For the three months ended  September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **(in thousands, except per share data)**          | ** ** | **%**      | ** ** |
| ** **                                                | ** ** | **2004**                                           | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Net revenue                                               |       | $                                                  | 54,064     |       | $          | 47,481 |   | $ | (6,583 | ) | (12.2 | %) |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Operating expenses, including SG&A                    |       | 35,028                                             |       | 34,904     |       | (124 | ) | (0.4 | ) |
| Amortization of program license rights                    |       | 4,765                                              |       | 6,291      |       | 1,526 |   | 32.0 |   |
| Depreciation and amortization                             |       | 6,942                                              |       | 4,807      |       | (2,135 | ) | 30.8 |   |
| Corporate overhead, excluding depreciation  expense       |       | 4,294                                              |       | 2,728      |       | (1,566 | ) | (36.5 | ) |
| Operating income                                          |       | 3,035                                              |       | (1,249     | )          | (4,284 | ) | (141.2 | ) |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Interest expense, net                                     |       | (15,960                                            | )          | (15,446    | )          | 514 |   | 3.2 |   |
| Non-cash change in market valuation of  swaps             |       | 1,215                                              |       | (882       | )          | (2,097 | ) | (172.6 | ) |
| Other income/ (expense)                                   |       | (408                                               | )          | (148       | )          | 260 |   | 63.7 |   |
|                                                      |       | (15,153                                            | )          | (16,476    | )          | (1,323 | ) | (8.7 | ) |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Loss from continuing operations before  income taxes      |       | (12,118                                            | )          | (17,725    | )          | (5,607 | ) | 46.3 |   |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Income tax expense                                        |       | —                                             |       | (3,440     | )          | (3,440 | ) | 100.0 |   |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Loss from continuing operations                           |       | (12,118                                            | )          | (21,165    | )          | (9,047 | ) | 74.7 |   |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| (Loss) income from discontinued operations,  net of taxes |       | (14                                                | )          | —     |       | 14 |   | 100.0 |   |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Net loss                                                  |       | $                                                  | (12,132    | )          | $          | (21,165 | ) | $ | (9,033 | ) | (74.5 | %) |
|                                                      |       |                                               |       |       |       |   |   |   |   |
| Basic loss from continuing operations per  common share   |       | $                                                  | (0.61      | )          | $          | (1.03 | ) |   |   |   |   |
| Loss (income) from discontinued operations,  net          |       | —                                             |       | —     |       |   |   |   |   |
| Basic net loss per common share                           |       | $                                                  | (0.61      | )          | $          | (1.03 | ) |   |   |   |   |
| Basic shares used in earnings per share  calculation      |       | 19,998,186                                         |       | 20,606,089 |       |   |   |   |   |

 

Net Revenue includes: (i) cash and barter advertising revenues,net of agency commissions; (ii) network compensation; and (iii) otherrevenues which represent less than 5% of total net revenue.

 

18

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Net revenue for the three months ended September 30, 2005 was$47.5 million, as compared to $54.1 million for the three months ended September 30,2004, a decrease of $6.6 million or 12.2%. The major components of, and changes to, net revenue were as follows:

 

•                  Grosspolitical revenue for the three months ended September 30, 2005 was $1.3million as compared to $7.7 million for the three months ended September 30,2004, a decrease of $6.4 million. Political revenue for the third quarter of 2004 was positively impactedby the strongly contested local races in Iowa, California and South Dakota, aswell as significant spending on the presidential campaign.  The Company anticipates political revenue tocontinue to decrease significantly for the remainder of 2005, as there will notbe a presidential campaign and the Company anticipates that there will be nosignificant local races in the markets that it serves.

 

•                  TheCompany’s gross local revenues for three months ended September 30, 2005increased by 4.9% compared to the three months ended September 30, 2004,and gross national revenues for the three months ended September 30, 2005were down 5.4% compared to the prior year. The increase in gross local revenues is partially attributable to newadvertisers in conjunction with new local sales initiatives.  Eight of the ten stations increased localrevenues from various accounts, including restaurants, hospitals, furniture,automotive and healthcare. Additionally, two of the ten stations increased localrevenue as a result of pre-season football games. The decrease in grossnational revenues for the three months ended September 30, 2005 was mainlydue to decreased spending by various national accounts, including automotiveaccounts at three of the Company’s stations.

 

•                  Networkcompensation for the three months ended September 30, 2005 was $1.3million, a decrease of approximately $820,000, or 37.9%, compared to $2.2million for the three months ended September 30, 2004.   The decrease in network compensation isprimarily due to the changes in the new network affiliation agreements withABC, CBS and NBC (as discussed further in “*Liquidity and CapitalResources*”) whereby the Company is receiving significantly lessnetwork compensation over the term of the new agreements.  The amounts of network compensation arerecorded on a straight line basis over the life of the new agreements.  The Company renewed the ABC affiliations atthe end of September 2005, and the renewals were retroactive to October 1,2004.  As a result, for the three monthsended September 30, 2005, the Company recognized approximately $1.1million of revenue relating to the period October 1, 2004 through September 30,2005.  All amounts received prior to thefinalization of the ABC agreement had been recorded as deferred revenue.    Forthe year ended December 31, 2005, the Company anticipates networkcompensation will be approximately 22% of historical annual networkcompensation.

 

•                  Barterrevenue decreased approximately $1.9 million for the three months ended September 30,2005 due primarily to a revaluation of barter programming at one of the Company’sstations.

 

•                  Includedin Production/Other revenue for the three months ended September 30, 2005is $1.2 million of revenue in respect of the period from the quarter ended June 30,2001 through the quarter ended June 30, 2005.  This revenue was recognized in connectionwith the contract claims settlement discussed under “Recent Developments”.

 

Operating expenses, including selling, general and administrativeexpenses, for the three months ended September 30, 2005 were $34.9 millionas compared to $35.0 million for the three months ended September 30,2004.  The major components of, andchanges to, operating expenses were as follows:

 

•                  Forthe three months ended September 30, 2005 the Company recorded a non-cashcurtailment charge of approximately $542,000 as a result of the pension planfreeze effective October 15, 2005 (discussed further in Note 7 to theFinancial Statements).

 

•                  TheCompany incurred approximately $74,000 of increased expenses associated withthe Company’s new local sales initiatives

 

19

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•                  Duringthe third quarter of 2005, the Company incurred approximately $461,000 inseverance costs relating to cost cutting initiatives and anticipated headcountreduction.

 

•                  TheCompany incurred approximately $349,000 of additional promotional expenses fora kickoff promotional of *Sex and the City*at one of the Company’s stations.

 

•                  Localsales commissions increased approximately $142,000 for the quarter, as a resultof the above mentioned increase in local sales.

 

•                  Utilitiesexpense increased by approximately $133,000 throughout the Company, mainly dueto stations broadcasting using their digital spectrum and increased utilities.

 

•                  Includedin the selling, general and administrative expenses is non-cash compensationexpense of approximately $918,000 for the three months ended September 30,2005, of which approximately $614,000 relates to restricted and deferred stockawards.  The remaining $304,000 ofnon-cash compensation relates to the Company’s matching contributions toeligible employees under its defined contribution plan.  This compares to non-cash compensation of$783,000 for the three months ended September 30, 2004, of which approximately$489,000 related to restricted and deferred stock awards and the remaining$294,000 related to the Company’s matching contributions for eligible employeesunder its defined contribution plan.

 

•                  Offsettingthese increases to operating expense was a decrease in barter expense ofapproximately $1.8 million, due primarily to a revaluation of barterprogramming at one of the Company’s stations.

 

Amortization of program license rights for the three months ended September 30,2005 was $6.3 million, compared to $4.8 million for the three months ended September 30,2004, an increase of $1.5 million, or 32%. The increase for the three months ended September 30, 2005 was dueto the combination of increased renewal costs of programming as well as the additionof *Sex and the City* at one of the Company’sstations.

 

Depreciation of property and equipment and amortization of intangibleassets was $4.8 million for the three months ended September 30, 2005 ascompared to $6.9 million for the three months ended September 30, 2004, adecrease of approximately $2.1 million or 30.8%.  Approximately $1.2 million of this decreaseis the result of various furniture, fixtures and computers at one of theCompany’s stations becoming fully depreciated in June 2005. In addition,another $750,000 relates to certain intangible assets becoming fully amortizedby the end of the second quarter of 2005. Lastly, approximately $108,000 of this decrease is due to loweramortization expense on debt issuance costs associated with the May 3,2005 debt refinancing transaction (see “*Liquidity and CapitalResources”*).

 

Corporate Overhead for the three months ended September 30, 2005was $2.7 million, compared to $4.3 million for the three months ended September 30,2004, a decrease of $1.6 million, or 36.5%. The major components and changes in corporate expenses were as follows:

 

•                  Professionaland consulting fees decreased approximately $873,000.  During the third quarter of 2004, the Companyincurred approximately $227,000 of professional fees relating to special taxservices, with no such similar fees during the third quarter of 2005.  Furthermore, during the quarter, the Company receivedcertain amounts in connection with the contract claims settlement discussedunder “*Recent Developments.*”  Approximately $420,000 of the settlement amountreceived was recorded as a reduction of previously expensed legal fees.

 

•                  Personnelcosts decreased approximately $374,000 for the three months ended September 30,2005, due in part to decreased headcount, resulting from the death of two ofthe Company’s officers during 2004.

 

20

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•                  Travelexpenses decreased by approximately $191,000, due to various corporate trainingand other initiatives that took place in the third quarter of 2004, which didnot occur in the three months ended September 30, 2005.

 

•                  Additionally,business insurance decreased approximately $114,000 for the quarter, dueprimarily to renewed policy premiums, which were negotiated at lower rates.

 

Interest expense for the three months ended September 30, 2005 was$15.4 million, compared to $16.0 million for the same period in 2004, adecrease of $514,000, or 3.2%.  Pursuantto the refinancing transaction completed on May 3, 2005 the Company usedborrowings under its new $300.0 million senior credit facility to purchase allof its $246,890,000 principal amount of 81⁄2% Senior Notes due 2008.  The credit facility bears various floatinginterest rates, based upon LIBOR, ranging from 5.5% to 6.3%, thus reducinginterest expense for the third quarter of 2005. The Company received a payment on its interest rate swaps of $147,000and $860,000 for the three months ended September 30, 2005 and 2004,respectively, which was recorded as a reduction of interest expense.

 

The Company recorded an $882,000 non-cash loss and $1.2 millionnon-cash gain in connection with the change in the market value of interestrate swaps for the three months ended September 30, 2005 and 2004,respectively.  Since the Company receivesinterest at a fixed rate and pays interest at a floating rate, the Company’sexposure declines or improves when interest rates rise or fall.  During the three months ended September 30,2005, the interest rates rose, thus reducing leading to a non-cash loss.

 

The Company recorded an income tax provision of $3.4 million for thethree months ended September 30, 2005. This provision relates primarily to the deferred tax liability for thetaxable temporary difference related to the amortization of the Company’sindefinite-lived intangible assets, which continues to be amortized for taxpurposes (see “Income Taxes”).

 

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 $14,000 for the three months ended September 30,2004.

 

As a result of the above-discussed factors, the net loss for theCompany was $21.2 million for the three months ended September 30, 2005,compared to a net loss of $12.1 million for the three months ended September 30,2004, a change of $9.0 million, or 74.5%.

 

21

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***Nine Months Ended September 30, 2005Compared to Nine Months Ended September  30, 2004***

 

The following table sets forth the Company’s operating results for thenine months ended September 30, 2005 as compared to the nine months ended September 30,2004.  The results from continuingoperations for the nine months ended September 30, 2005 and 2004 do notinclude the results of operations for WTVO-TV. Results for WTVO-TV are reflected as discontinued operations.

 
| ** **                                                                                                  | ** ** | **For the nine months ended September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                                                                  | ** ** | **(in thousands, except per share data)**        | ** ** | **%**      | ** ** |
| ** **                                                                                                  | ** ** | **2004**                                         | ** ** | **2005**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Net revenue                                                                                                 |       | $                                                | 161,084    |       | $          | 143,855 |   | $ | (17,229 | ) | (10.7 | )% |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Operating expenses, including SG&A                                                                      |       | 102,119                                          |       | 105,176    |       | 3,057 |   | 3.0 |   |
| Amortization of program license rights                                                                      |       | 13,874                                           |       | 16,897     |       | 3,023 |   | 21.8 |   |
| Depreciation and amortization                                                                               |       | 19,506                                           |       | 17,243     |       | (2,263 | ) | (11.6 | ) |
| Corporate overhead, excluding depreciation  expense                                                         |       | 13,913                                           |       | 9,882      |       | (4,031 | ) | 29.0 |   |
| Operating income (loss)                                                                                     |       | 11,672                                           |       | (5,343     | )          | (17,015 | ) | 145.8 |   |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Interest expense, net                                                                                       |       | (48,817                                          | )          | (46,683    | )          | 2,134 |   | 4.4 |   |
| Non-cash change in market valuation of  swaps                                                               |       | (62                                              | )          | (1,540     | )          | (1,478 | ) | (2383.9 | ) |
| Loss on extinguishment of debt                                                                              |       | (5,323                                           | )          | (18,626    | )          | (13,303 | ) | (249.9 | ) |
| Other income/ (expense)                                                                                     |       | (565                                             | )          | (449       | )          | 116 |   | 20.5 |   |
|                                                                                                        |       | (54,767                                          | )          | (67,298    | )          | (12,531 | ) | (22.9 | ) |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Loss from continuing operations before  income taxes                                                        |       | (43,095                                          | )          | (72,641    | )          | (29,546 | ) | (68.6 | ) |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Income tax expense                                                                                          |       | —                                           |       | (15,234    | )          | (15,234 | ) | (100.0 | ) |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Loss from continuing operations                                                                             |       | (43,095                                          | )          | (87,875    | )          | (44,780 | ) | (103.9 | ) |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| (Loss) income from discontinued operations,  net of taxes (including gain on sale of $11.2 million in 2005) |       | 97                                               |       | 11,204     |       | 11,107 |   | 11450.5 |   |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Net loss                                                                                                    |       | $                                                | (42,998    | )          | $          | (76,671 | ) | $ | (33,673 | ) | (78.3 | )% |
|                                                                                                        |       |                                             |       |       |       |   |   |   |   |
| Basic loss from continuing operations per  common share                                                     |       | $                                                | (2.16      | )          | $          | (4.33 | ) |   |   |   |   |
| Loss (income) from discontinued operations,  net                                                            |       | —                                           |       | 0.55       |       |   |   |   |   |
| Basic net loss per common share                                                                             |       | $                                                | (2.16      | )          | $          | (3.78 | ) |   |   |   |   |
| Basic shares used in earnings per share  calculation                                                        |       | 19,924,151                                       |       | 20,263,163 |       |   |   |   |   |

 

22

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Net revenue for the nine months ended September 30, 2005 was$143.9 million, as compared to $161.1 million for the nine months ended September 30,2004, a decrease of $17.2 million or 10.7%. The major components of, and changes to, net revenue were as follows:

 

•                  Grosspolitical revenue for the nine months ended September 30, 2005 was $2.5million, as compared to $16.1 million for the nine months ended September 30,2004, a decrease of approximately $13.6 million.  Political revenue for the nine months of 2004was positively impacted by the national democratic primaries, as well as thestrongly contested local races in Iowa, California and South Dakota.  The Company anticipates political revenue tocontinue to decrease significantly over the remainder of 2005, as there willnot be a presidential campaign and the Company anticipates that there will beno significant local races in the markets that it serves.

 

•                  TheCompany’s gross local revenues for nine months ended September 30, 2005increased by 5.7% compared to the nine months ended September 30, 2004,and gross national revenues for the nine months ended September 30, 2005were down 9.7% compared to the prior year. The increase in gross local revenues is partially attributable to new advertisersin conjunction with new local sales initiatives.  Furthermore, eight of the ten stationsincreased local revenues from various accounts, including hospitals, furniture,automotive and healthcare. Additionally, two of the ten stations increased localrevenue as a result of pre-season football games.  The decrease in gross national revenues forthe nine months ended September 30, 2005 was mainly due to decreasedspending by various national accounts, including automotive andtelecommunications accounts at six of the Company’s stations.

 

•                  Networkcompensation for the nine months ended September 30, 2005 was $2.1million, a decrease of $4.8 million, or 69.8%, compared to $6.9 million for thenine months ended September 30, 2004. The decrease in network compensation is primarily due to the changes inthe new network affiliation agreements with ABC, CBS and NBC whereby theCompany is receiving significantly less network compensation over the term ofthe new agreements. The amounts of network compensation are recorded on astraight line basis over the life of the new agreements.  The Company renewed the ABC affiliations atthe end of September 2005, and the renewals were retroactive to October 1,2004.  As a result, during the ninemonths ended September 30, 2005, the Company recognized approximately $1.1million of revenue relating to the period October 1, 2004 through September 30,2005.  All amounts received prior to thefinalization of the ABC agreement had been recorded as deferred revenue.  For the year ended December 31, 2005,the Company anticipates network compensation will be approximately 22% ofhistorical annual network compensation.

 

•                  Barterrevenue decreased approximately $2.0 million for the nine months ended September 30,2005 due primarily to a change in value of barter programming at one of theCompany’s stations.

 

•                  Includedin Production/Other revenue for the nine months ended September 30, 2005is $1.2 million of revenue in respect of the period from the quarter ended June 30,2001 through the quarter ended June 30, 2005.  This revenue was recognized in connectionwith the contract claims settlement discussed under “Recent Developments.”

 

Operating expenses, including selling, general and administrativeexpenses, for the nine months ended September 30, 2005 were $105.2 millionas compared to $102.1 million for the nine months ended September 30,2004, an increase of $3.1 million, or 3.0%. The major components of, and changes to operating expenses were asfollows:

 

•                  Approximately$636,000 of the increase relates to increased expenses associated with theCompany’s new local sales initiatives.

 

23

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•                  Duringthe first nine months of 2005, the Company recorded an additional pensionbenefit obligation approximating $426,000 for a retired general manager at oneof the Company’s stations.  Additionally,the Company recorded a non-cash curtailment charge of approximately $542,000 asa result of the pension plan freeze effective October 15, 2005 (discussedfurther in Note 7 to the Financial Statements).

 

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

 

•                  TheCompany incurred approximately $1.1 million in severance costs relating to costcutting initiatives and anticipated headcount reduction.

 

•                  Approximately$772,000 of the increase is attributable to the increase in local sales commissionspaid to employees of the Company’s network affiliated stations due to theincrease in local revenues, as noted above.

 

•                  Approximately$592,000 of the increase is attributable to increases in media spending at oneof the Company’s stations during the nine months ended 2005.

 

•                  Includedin the selling, general and administrative expenses is non-cash compensationexpense of approximately $2.1 million for the nine months ended September 30,2005, of which approximately $1.2 million relates to restricted and deferredstock awards.  The remaining $936,000 ofnon-cash compensation relates to the Company’s matching contributions toeligible employees under its defined contribution plan.  This compares to non-cash compensation of$1.4 million for the six months ended September 30, 2004, of whichapproximately $489,000 related to restricted and deferred stock awards and theremaining $879,000 related to the Company’s matching contributions for eligibleemployees under its defined contribution plan.

 

The following items acted to offset these changes:

 

•                  Baddebt expense decreased by approximately $388,000, which is consistent with thereduced net revenues for the nine months ended September 30, 2005.

 

•                  Musiclicensing fees were down approximately $452,000, due to new music contracts(ASCAP, BMI and SESAC) at various stations, which are at lower rates than theprevious agreements.

 

Amortization of program license rights for the nine months ended September 30,2005 was $16.9 million, compared to $13.9 million for the nine months ended September 30,2004, an increase of approximately $3.0 million, or 21.8%.  The increase for the nine months ended September 30,2005 was due to the combination of increased renewal costs of programming aswell as the addition of *Sex and the City*at one of the Company’s stations.

 

Depreciation of property and equipment and amortization of intangibleassets was $17.2 million for the nine months ended September 30, 2005 ascompared to $19.5 million for the nine months ended September 30, 2004, adecrease of approximately $2.3 million, or 11.6%.  This decrease is due to the following:

 

•                  Approximately$1.2 million of this decrease is the result of various furniture, fixtures andcomputers at one of the Company’s stations becoming fully depreciated in June 2005.

 

•                  Approximately$679,000 relates to certain intangible assets becoming fully amortized by theend of the second quarter of 2005. Several of the Company’s stations had capital leases which became fullyamortized in 2005, leading to an additional decrease of approximately $390,000.

 

•                  Lastly,approximately $242,000 of this decrease is due to lower amortization expense ondebt issuance costs associated with the May 3, 2005 debt refinancingtransaction.

 

Corporate Overhead for the nine months ended September 30, 2005was $9.9 million as compared to $13.9 million for the nine months ended September 30,2004, a decrease of

 

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approximately $4.0 million, or 29.0%. The major components and changes in corporate expenses were as follows:

 

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

 

•                  Personnelcosts decreased by approximately $1.1 million for the nine months ended September 30,2005, due in part to decreased headcount, resulting from the death of two ofthe Company’s officers during 2004.

 

•                  Travelexpenses decreased by approximately $446,000, due to various corporate trainingand other initiative which took place in 2004, which did not occur for in thenine months ended September 30, 2005.

 

•      TheCompany received certain amounts in connection with the contract claims settlementdiscussed under “*Recent Developments*.”  Approximately $420,000 of this settlement wasrecorded as a reduction of previously expensed legal fees.

 

•                  Additionally,business insurance decreased approximately $162,000 for the nine months ended September 30,2005, due primarily to renewed policy premiums, which were negotiated at lowerrates.

 

Interest expense for the nine months ended September 30, 2005 was$46.7 million, compared to $48.8 million for the same period in 2004, adecrease of $2.1 million, or 4.4%.  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.  Furthermore, pursuant to the refinancingtransaction completed on May 3, 2005, the Company used borrowings underits new $300.0 million senior credit facility to purchase all of its$246,890,000 principal amount of 81⁄2% Senior Notes due 2008.  The credit facility bears various floatinginterest rates, based upon LIBOR, ranging from 5.4% to 6.3% thus reducinginterest expense for 150 days of 2005. The Company received a payment on its interest rate swaps of $819,000and $1.7 million for the nine months ended September 30, 2005 and 2004,respectively, which was recorded as a reduction of interest expense.

 

The Company recorded a $1.5 million non-cash loss and $62,000 millionnon-cash loss in connection with the change in the market value of interestrate swaps for the nine months ended September 30, 2005 and 2004,respectively.  Since the Company receivesinterest at a fixed rate and pays interest at a floating rate, the Company’sexposure declines or improves when interest rates rise or fall.  The interest rates rose year over year,leading to declined exposure, and therefore a larger non-cash loss.

 

For the nine months ended September 30, 2005 the Company recordeda loss on extinguishment of debt totaling approximately $18.6 million inconnection with the cash tender offer and consent solicitation completed May 3,2005.   This loss is comprised of the cost of theconsent solicitations (approximately $18.1 million), plus the write-off of thedeferred financing costs (approximately $4.9 million), less the unamortizedportion of the bond premium relating to the 81⁄2% Senior Notes (approximately$4.5 million), plus various other administrative expenses (approximately$200,000).  This compares to a loss on extinguishment ofdebt from the write-off of related unamortized deferred financing costsfor the nine months ended September 30, 2004 of $5.3 million relating tothe redemption on January 22, 2004 of its 9% senior subordinated notes due2006 and 8 3⁄4% senior subordinated notes due 2007.

 

The Company recorded an income tax provision of $15.2 million for thenine months ended September 30, 2005. This provision includes a deferred tax liability of $14.8 million forthe taxable temporary difference related to the amortization of the Company’sindefinite-lived intangible assets, which continues to be amortized for taxpurposes (see “Income Taxes”).

 

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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 $11.2 million and income from discontinuedoperations of $97,000 for the nine months ended September 30, 2005 and September 30,2004, respectively.

 

As a result of the above-discussed factors, the net loss for theCompany was $76.7 million for the nine months ended September 30, 2005,compared to a net loss of $43.0 million for the nine months ended September 30,2004, a change of $33.7 million, or 78.3%.

 

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**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 (dollars inthousands).

 
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| Net cash provided by (used in):           |       |                                     |       |   |   |
| Operating activities                      |       | $                                        | (22,414    | ) | $ | (58,359 | ) |
| Investing activities                      |       | (9,960                                   | )          | 1,069 |   |
| Financing activities                      |       | (224,868                                 | )          | 45,615 |   |
| Net decrease in cash and cash equivalents |       | $                                        | (257,242   | ) | $ | (11,675 | ) |

 
| ** **                                | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2005**               | ** ** |
| Cash and cash equivalents                 |       | $                     | 93,831     |                   | $          | 82,156 |   |
| Long-term debt, including current portion |       | $                     | 740,438    |                   | $          | 786,789 |   |
| 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 significant impact on the Company’soperating results.  Consequently, theCompany is particularly susceptible to economic conditions in the San Franciscoadvertising market. The Company's operating results have been adversely affectedby a slower than expected recovery in the San Francisco market.

 

In September 2005, the Company renewed its affiliations with ABCwith respect to WKRN-TV, WTEN-TV, WRIC-TV, WATE-TV and WBAY-TV.  The renewed ABC affiliations expire on December 31,2009.   The Company has renewed itsaffiliations with CBS with respect to WLNS-TV and KLFY-TV and with NBC withrespect to KWQC-TV.  The renewed CBSaffiliations expire on September 30, 2012 and the renewed NBC affiliationexpires on January 1, 2015.  Underthe renewed ABC, CBS and NBC affiliations, the Company is receivingsignificantly less network compensation than it received from ABC, CBS and NBCunder the expired agreements.  For theyear ended December 31, 2005, the Company anticipates network compensationwill be approximately 22% of historical annual network compensation.

 

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 commencing on September 30, 2005, theCompany was required to make scheduled principal payments under the term loanportion of the senior credit agreement, on a quarterly basis, equal to 0.25% ofits outstanding principal balance.

 

**Sources and Uses of Cash**

 

*Operating Activities*

 

Net cash used in operating activities for the nine months ended September 30,2005 and 2004 was $58.4 million and $22.4 million, respectively.  The increase in net cash used for operating

 

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activities was primarily due to the reduction in both the Company’s netrevenue and operating income for the nine months ended September 30, 2005as compared to the same period in 2004. The following changes in operating activities were noted:

 

•                  TheCompany made approximately $16.7 million of payments on its programmingliabilities for the nine months ended September 30, 2005.

 

•                  Inconnection with the cash tender offer and consent solicitation completed May 3,2005, the Company made consent payments, a tender consideration premium andother fees totaling approximately $18.1 million.

 

•                  Accruedexpenses and other liabilities decreased approximately $11.7 million for thenine months ended September 30, 2005. This decrease is primarily due to an interest payment made in September 2005on the Company’s 10% Senior Subordinated Notes. Additionally, the Company madebonus payments in the first quarter of 2005, totaling approximately $3.8million, which were accrued for at December 31, 2004, and paid in thefirst quarter of 2005.  This decrease waspartially offset by approximately $1.7 million of bonus accruals made duringthe first nine months of 2005.

 

•                  Otherassets increased approximately $1.2 million, of which approximately $1.0million of the increase relates to a cash investment in U.S. Treasury Bondswith a maturity that extends greater than three months.

 

The following items acted to offset these changes:

 

•                  Prepaidexpenses decreased approximately $1.7 million for the nine months ended September 30,2005, of which approximately $1.4 million relates to prepaid corporateexpenses.  During the first nine monthsof the year, the Company expensed approximately $2.9 million of insurancecosts, of which approximately $2.4 million was allocated to each of the tenstations, representing prepaid insurance premiums which were expensed duringthe first nine months of 2005.  Thisdecrease was offset by approximately $2.3 million of prepaid insurance premiumsfor the first nine months of 2005.

 

•                  Accountsreceivable decreased by approximately $2.2 million for the nine months ended September 30,2005.  This decrease is consistent withthe reduced revenues as discussed further in *Results ofOperations*section*.*

 

•                  Tradeaccounts payable increased by approximately $1.1 million due primarily tovarious expenditures relating to large projects at one of the Company’sstations.  These projects primarilyrelate to a news production system and Video Journalist camera packages.

 

*Investing Activities*

 

Cash provided by investing activities for the nine months ended September 30,2005 was $1.1 million, compared to cash (used in) investing activities for thenine months ended September 30, 2004 of $(10.0) million. The followingchanges in investing activities were noted:

 

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

 

•                  Capitalexpenditures for the nine months ended September 30, 2005 of $4.6 millionwas significantly lower than capital expenditures of $10.2 million for the ninemonths ended September 30, 2004. During part of 2004, the Company incurred significant capitalexpenditures for building digital transmission facilities, as required byFederal Communications Commission regulations.

 

•                  Depositsand other assets for the Company increased by approximately $153,000 for thenine months ended September 30, 2005 as compared to a decrease of $209,000for the nine months ended September 30, 2004.  Included in the deposits and other assets forthe nine months ended September 30, 2005, is an increase in investments inunconsolidated subsidiaries of approximately $150,000 during the first ninemonths of 2005.

 

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*Financing Activities*

 

Cash provided by financing activities for the nine months ended September 30,2005 was approximately $45.6 million as compared to cash used in financingactivities of approximately $(224.9) million for the nine months ended September 30,2004.  On May 3, 2005, the Company amended andrestated its senior credit facility (as amended, the “Senior Credit Facility”).See below for further details on the Senior Credit Facility.

 

TheCompany made a principal repayment of $750,000 on its Senior Credit Facility onSeptember 30, 2005.

 

On December 23, 2003, the Company completed a private add-onoffering of $90.0 million principal amount of its 81⁄2% Senior Notes due 2008(the “Senior Notes Add-On”) and a private offering of $140.0 million principalamount of its 83⁄4% Senior Subordinated Notes due 2014 (the “December 2003Notes”).  In connection with the December 2003Notes and the Senior Notes Add-On, the Company recorded approximately $640,000of deferred financing costs in 2004 that was to be amortized over the term ofthe respective notes.  On May 3,2005, in connection with the cash tender offer and consent solicitationcommenced April 11, 2005, the Company repurchased all of its outstanding 81⁄2% Senior Notes due 2008, including the Senior Notes Add-On.

 

The Company made payments under capital leaseobligations of $600,000 and $487,000 for the nine months ended September 30,2005 and 2004, respectively.

 

**Debt Instruments, Guarantees and RelatedCovenants**

 

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. The credit facility bears various floating interestrates, based upon LIBOR, ranging from 5.4% to 6.3%.   OnMay 3, 2005, the full $300 million of the term loan was borrowed.  Approximately $278.0 million of the proceedsof the term loan borrowing were used to finance the purchase by the Company ofall of its $246,890,000 outstanding principal amount of 81⁄2% Senior Notes due2008 pursuant to the cash tender offer and consent solicitation commenced on April 11,2005.  The balance of the term loanborrowing will be used for working capital. The Company pays an annual commitment fee at the rate of 0.5% per annumof the unused available borrowings under the revolving credit portion of theSenior Credit Facility.  The Companycapitalized approximately $6.0 million of fees associated with the new termloan and revolving credit facility.  At September 30,2005, approximately $299.3 million was outstanding under the term loan and thefull $20.0 million was available under the revolving facility.

 

The Company recorded a loss on extinguishment of debt totalingapproximately $18.6 million in connection with the cash tender offer andconsent solicitation completed May 3, 2005.   This loss is comprised of the cost of the consent solicitation(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $4.9 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.5 million), plusvarious other administrative expenses (approximately $200,000).

 

TheSenior Credit Facility provides, at the option of the Company, that borrowedfunds bear interest based upon the London Interbank Offered Rate (“LIBOR”)” or “BaseRate.”  In addition to the index rate,the Company pays a fixed incremental percentage at 1.25% with the Base Rate and2.25% with LIBOR. Each of the Company’s subsidiaries has guaranteed the Company’sobligations under the Senior Credit Facility. The Senior Credit Facility issecured by the pledge of all the capital stock of the Company’s subsidiariesand a first priority lien on all of the assets of the Company and itssubsidiaries. The Senior Credit Facility requires the Company to maintain a

 

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cashand short-term investment balance of at least $35.0 million. The othercovenants contained in the Senior Credit Facility are substantially similar tothe covenants contained in the indentures governing the Company’s seniorsubordinated notes.

 

On May 3, 2005, the Company entered into an interest rate swapagreement for a notional amount of $71.0 million with a commercial bank who isalso a lender under the Senior Credit Facility. The swap will become effective on May 8, 2006 and expires on May 8,2008.  Upon effectiveness, the Companywill pay a fixed interest of 4.3425% and the Company will receive interest fromthe commercial bank, based upon a three month LIBOR rate.  It is the Company’s intention to ensure theinterest rate reset dates of the swap and the term loan will match over the termof the swap, and therefore the changes in the fair value of the interest-rateswap are expected to significantly offset changes in the cash flows of thefloating rate debt.  The Company accountsfor this agreement as a cash flow hedge under FASB Statement Number 133 and assuch the change in the fair value of the interest rate swap is reported as acomponent of other comprehensive income (loss). For the three months ended September 30, 2005 a gain ofapproximately $706,000 was recorded in other comprehensive income (loss).  This amount will be reclassified commencing May 2006into interest expense as a yield adjustment in the same period in which therelated interest on the floating-rate debt obligations affects earnings(losses).

 

On May 5, 2005, the Company entered into a partial terminationagreement with Deutsche Bank to terminate one third of its original notionalamount of $63.2 million interest rate swap, or approximately $21.1million.  In consideration of thetermination, the Company was required to make a net payment of approximately$702,000, reduced by the Company’s accrued interest income from the lastpayment date of March 1, 2005 through the termination date of May 5,2005 (approximately $35,000).  Inaccordance with the termination, the swap liability was reduced by the fairmarket value of the one third portion of the swap as of the termination date(approximately $728,000).  The differencebetween the payment and the fair market value of the partially terminated swapwas recorded as an interest expense for the period (approximately $9,000).

 

During the fourth quarter of 2005 Deutsche Bank indicated that theyintend to exercise their right to unwind the remaining notional amount $42.1million interest rate swap.  The Companyis currently evaluating its options.  Deutsche Bank has informed the Company that ifthey exercise their right to unwind this swap, the Company would be required topay approximately $2.3 million.  Thisunwind would be recorded as a reduction of the fair market value of theremaining swap as of the termination date. Any difference between the payment and the fair market value of theterminated swap will be recorded as interest expense.

 

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

 
| ** **                                   | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**               | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **12/31/04** | ** ** | **9/30/05** | ** ** | **Interest Payments****(1)** | ** ** |
| Senior Credit Facility                       |       | $            | —     |        | $          | 299,250                      |       | $ | 17,203 |   |
| 81⁄2% Senior Notes due 2008               |       | 251,865      | (2)        | —      |       | —                       |       |
| 8 3⁄4% Senior Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                       |       |
| 10% Senior Subordinated Notes due 2011       |       | 347,871      | (3)        | 347,437     | (3)        | 34,430                       |       |
| Total Debt (excluding capital leases)        |       | $            | 739,736    |        | $          | 786,687                      |       | $ | 63,883 |   |

 

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(1) The annualizedinterest payments are calculated based on the outstanding principal amounts at September 30,2005, multiplied by the interest rates of the related debt instruments.  The annualized interest on the Senior CreditFacility takes into account the quarterly principal payments of $750,000.

(2)   Includesan unamortized premium balance of $5.0 million as of December 31, 2004.

(3)   Includesunamortized premium balances of $3.6 million and $3.1 million as of December 31,2004 and September 30, 2005, respectively.

 

The Company’s total debt at September 30, 2005 was approximately$786.8 million, consisting of approximately $299.3 million under the term loanportion of the Senior Credit Facility, $484.3 million of Senior SubordinatedNotes, $3.1 million of bond premiums and $102,000 of capital leases. Inaddition, at September 30, 2005, the Company had an additional $20.0million of unused available borrowings under the Senior Credit Facility.

 

At September 30, 2005 the Company was in compliance with allapplicable covenants contained in the Senior Credit Facility and the indenturesgoverning the Senior Subordinated Notes.

 

The Company’s Senior Subordinated Notes aregeneral unsecured obligations of the Company and subordinated in right ofpayment to all senior debt, including all indebtedness of the Company under theSenior Credit Facility. The Senior Subordinated Notes are guaranteed, fully andunconditionally, and are guaranteed jointly and severally, on a seniorsubordinated unsecured basis by all of the Company’s wholly ownedsubsidiaries.  The Company has noindependent assets or operations, other than the equity in its subsidiaries.

 

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

 

**Income Taxes**

 

The Company recorded a gain from the sale ofWTVO-TV for the nine months ended September 30, 2005 of $11.2 million, netof a provision for state income taxes of $450,000.    At December 31, 2004, the Company hadnet operating loss (“NOL”) carryforwards for tax purposes of approximately$242.7 million expiring at various dates through 2024, for which a fullvaluation allowance has been provided.

 

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. Beginning with the first quarter of 2005, theCompany is recording a deferred tax provision for the excess of book basis overtax

 

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basis of intangible assets not expected toreverse during the net operating loss carryforward period.  Income tax expense for the three and ninemonths ended September 30, 2005 primarily consists of deferred income taxes of $3.3million and $14.8 million related to the increase in the Company’s deferred taxliability for the tax effect of the difference between the book and tax basisof the intangible assets not expected to reverse during the net operating losscarryforward period.

 

The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these assets will not reverse priorto the expiration period of the Company’s deductible temporary differencesunless the related assets are sold or an impairment of the assets is recorded.The Company expects that it will record a total of approximately $2.7 millionto increase deferred tax liabilities during the remaining three months of 2005.

 

**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 September 30, 2005, the timing of paymentsrequired in connection therewith and the effect that such payments are expectedto have on the Company’s liquidity and cash flow in future periods.  The Company expects to fund its short termobligations with cash on hand, cash flow from operations and funds availableunder its Senior Credit Facility.

 
| ** **                                        | ** ** | ** **                 | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Contractual Obligations**                       | ** ** | **Total**                  | ** ** | **Less than  1 year**      | ** ** | **1 – 2 years** | ** ** | **3 – 4 years** | ** ** | **After 5  years** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Long-Term Debt (principal only)                   |       | $                          | 783,549    |                       | $          | 3,000 |   | $ | 6,000 |   | $ | 6,000 |   | $ | 768,549 |   |
| Cash Interest Payments (1)                        |       | $                          | 298,735    |                       | $          | 46,780 |   | $ | 93,560 |   | $ | 93,518 |   | $ | 64,877 |   |
| Capital Lease Obligations                         |       | $                          | 102        |                       | 72         |   | 30 |   |   |   |   |   |
| Operating Leases (net of sublease rental  income) |       | $                          | 6,051      |                       | $          | 1,621 |   | $ | 2,810 |   | $ | 1,301 |   | $ | 319 |   |
| Unconditional Purchase Obligations(2)             |       | $                          | 33,093     |                       | $          | 23,085 |   | $ | 6,839 |   | $ | 3,169 |   |   |   |
| Other Long-Term Obligations(3)                    |       | $                          | 88,144     |                       | $          | 3,453 |   | $ | 48,056 |   | $ | 34,336 |   | $ | 2,299 |   |
| Total Contractual Cash Obligations                |       | $                          | 1,209,674  |                       | $          | 78,011 |   | $ | 157,295 |   | $ | 138,324 |   | $ | 836,044 |   |

 

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(1) Onlyincludes interest on fixed rate debt. The $300 million Senior Credit Facility, which matures on November 3,2010 bears interest at various floating rates based on LIBOR.  The various September 30, 2005 LIBORrates were used to compute a weighted average LIBOR rate to calculate futurecash interest payments.  Based on thisweighted average rate, total interest over the term of the facilityapproximates $118.3 million.

(2) Unpaidprogram license liability reflected on the September 30, 2005 balancesheet.

 

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(3) Obligationsfor programming that has been contracted for, but not recorded on the September 30,2005 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*.  SFAS 123Rsupersedes APB No. 25, and amends FASB Statement No. 95, *Statement of Cash Flows. *Generallythe approach in SFAS 123R is similar to the approach described in SFAS123.  However, SFAS 123R requires allshare based payments to employees, including grants of employee stock options,to be recognized in the income statements based on their fair values.  Pro forma disclosure is no longer analternative.

 

Companies are required to implement SFAS 123R at the beginning oftheir next fiscal year that begins on or after June 15, 2005.  Accordingly, the Company expects to adoptSFAS 123R for the fiscal year beginning January 1, 2006.

 

SFAS No. 123 R permits public companies to adopt its requirementsusing one of two methods:

 

1.               A “modified prospective”method in which compensation cost is recognized beginning with the effectivedate (a) based on the requirements of SFAS 123R for all share-basedpayments granted after the effective date and (b) based on requirements ofSFAS 123 for all awards granted to employees prior to the effective date ofSFAS 123R 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 SFAS 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

 

The Company plans to adopt SFAS 123 R 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 ofSFAS 123R will have a significant impact on the Company’s results fromoperations, although it will not impact the Company’s overall financialposition.  The impact of adoption of SFAS123R 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 SFAS 123R in prior periods the impactof that standard would have approximated the impact of SFAS 123 as described inthe disclosure of pro forma net income and earnings per share.

 

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

 

The Company’s Senior Credit Facility, with approximately $299.3 millionoutstanding as of September 30, 2005, bears interest at floating ratesbased on LIBOR. Accordingly, the Company is exposed to potential losses relatedto changes in interest rates.  TheCompany has entered into an interest rate derivative agreement to reduce theimpact of changing interest rates on its floating debt rate.

 

The Company’s Senior Subordinated Notes of approximately $484.3 millionoutstanding principal amount as of September 30, 2005 are generalunsecured obligations of the Company and are subordinated in right of paymentto all senior debt, including all indebtedness of the

 

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Company under the Senior CreditFacility. The 83⁄4% Senior Subordinated Notes, $140.0 million of which isoutstanding, mature in 2014.  The 10%Senior Subordinated Notes, $344.3 million of which is outstanding, mature in 2011.The annualized interest expense on the outstanding Senior Subordinated Notes isapproximately $46.7 million.

 

The Company does not enter into derivatives or other financialinstruments for trading or speculative purposes; however, in order to manage itsexposure to interest rate risk, the Company enters into derivative financialinstruments.  The Company has enteredinto two derivative financial instruments. In 2001, the Company entered into an interest rate swap for a notionalamount of $63.2 million, which expires in 2011. This swap was partially terminated on May 5, 2005.  The Company does not apply hedge accountingto this instrument.  Additionally, on May 3,2005 the Company entered into an interest rate swap agreement for a notionalamount of $71.0 million.  The swap willbe effective on May 8, 2006 and expires on May 8, 2008.  The Company accounts for this agreement usinghedge accounting under FAS 133, and as such the change in the fair value of theinterest rate swap is reported as a component of other comprehensive income(loss).

 

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

 

Our management carried out an evaluation, under thedirection of our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of September 30,2005. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that (i) our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in reports that we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and Exchange Commissionand (ii) our disclosure controls and procedures were designed to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.

 

There has not been any change in our internalcontrol over financial reporting in connection with the evaluation required by Rule 13a-15(d) underthe Exchange Act that occurred during the quarter ended September 30, 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.

 

**Item 5.  *Other Information.***

 

In accordance with the outside director compensationpolicy adopted by the Board of Directors in October 2003, each of thenon-employee directors of the Company is entitled to receive an annual retainerof $60,000, with half of such retainer being payable in cash and the other halfbeing payable in deferred stock units.  In addition, under thiscompensation policy, the Chairman of the Audit Committee and the Chairman ofthe Compensation Committee are each entitled to receive an additional annualretainer of $10,000 and $5,000, respectively, paid one half in cash and onehalf in deferred stock units.

 

Accordingly, on October 3, 2005, for theirservice on the Company’s Board of Directors during the twelve months beginning October 1,2005, each of the five non-employee directors of the Company (Alfred J. Hickey,David C. Lee, Leif Lomo, Richard Lowe and Reid Murray) was paid $30,000 in cashand was granted an award of 8,264.46 deferred stock units.  Such number ofdeferred stock units was determined by dividing $30,000 by $3.63 (the closingselling price per share of the Company’s Class A common stock on theNasdaq National Market on October 3, 2005). In addition, on October 3,2005, Mr. Lomo (as Chairman of the Audit Committee) and Mr. Lee (asChairman of the Compensation Committee) were paid $5,000 and $2,500 in cash,respectively, and were granted awards of 1,377.41 and 688.71 deferred stockunits, respectively.

 

The deferred stock units represent the rightto receive a like number of shares of the Company’s common stock on the 180thday following the date the director ceases to serve as a board member (or, ifsuch 180th day is not a business day, the first business day immediatelysucceeding such 180th day), to the extent the units have vested as of suchdate.  The deferred stock units will vest in equal installments on thefirst and second anniversaries of the date of award. If a director voluntarilyleaves the Board or is removed for cause, any unvested deferred stock unitswill be forfeited. If a director ceases to be a Board member for any otherreason, any unvested units will automatically vest in full.

 

**Item6.  *Exhibits***

 
| **Exhibit** | ** ** | ** **                                                                                                                                                    |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Exhibit Description**                                                                                                                                  |
|        |       |                                                                                                                                                          |
| 10.1        |       | Affiliation Agreement, dated as of March  16, 2005, between Young Broadcasting Inc. and The NBC TV Network, relating to  KWQC*                                |
| 10.2        |       | Affiliation Agreement, dated as of  September 26, 2005, between Young Broadcasting Inc. and The ABC TV Network,  relating to WKRN, WTEN, WRIC, WATE and WBAY* |
| 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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* Portions have been omittedpursuant to a request for confidential treatment.

 

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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:  | November 9, 2005 | By:                                  |  /s/ Vincent J. Young |   |   |
|   |                  | Vincent J. Young                     |                       |
|   |                  | Chairman and Chief Executive Officer |                       |
|   |                  |                                 |                       |
|   |                  |                                 |                       |
| Date:  | November 9, 2005 | By:                                  |  /s/ James A. Morgan  |   |   |
|   |                  | James A. Morgan                      |                       |
|   |                  | Executive Vice President and         |                       |
|   |                  | Chief Financial Officer              |                       |
|   |                  | (principal financial officer)        |                       |

 

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