**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,  D.C. 20549**

 

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**FORM 10-Q**

 

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** **

**QuarterlyReport Pursuant to Section 13 or 15 (d) of the**

**SecuritiesExchange Act of 1934**

 

| **For the  quarterly period ended** | ** ** | **Commission  file number:** |
|-------------------------------------|------------|------------------------------|
| **March  31, 2006**                 | ** ** | **0-25042**                  |

 

**YOUNGBROADCASTING INC.**

(Exact name ofregistrant as specified in its charter)

 

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

** **

**599Lexington Avenue**

**NewYork,  New York 10022**

(Address ofprincipal executive offices)

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definitions of “accelerated file and largeaccelerated filer” in Rule 12b-2 of the Exchange Act).

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

 

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

 

Number of shares ofCommon Stock outstanding as of April 20, 2006: 19,145,095 shares of Class ACommon Stock, and 1,941,414 shares of Class B Common Stock.

** **

** **

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**YOUNGBROADCASTING INC.**

 

**FORM 10-Q**

 

**Table ofContents**

 
| ** ** | ** **                                                                                      | **Page**                                                                                    |
|------------|-------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| Part I     | Financial Information                                                                           |                                                                                        |
|       |                                                                                            |                                                                                        |
|       | Item 1.                                                                                         | Financial Statements (unaudited)                                                            |   |
|       |                                                                                            |                                                                                        |
|       | Consolidated Balance Sheets as of  December 31, 2005 and March 31, 2006                         | 2                                                                                           |
|       |                                                                                            |                                                                                        |
|       | Consolidated Statements of  Operations for the Three Months Ended March 31, 2005 and 2006       | 3                                                                                           |
|       |                                                                                            |                                                                                        |
|       | Consolidated Statement of  Stockholders’ Deficit for the Three Months Ended March 31, 2006 | 4                                                                                           |
|       |                                                                                            |                                                                                        |
|       | Consolidated Statements of  Cash Flows for the Three Months Ended March 31, 2005 and 2006       | 5                                                                                           |
|       |                                                                                            |                                                                                        |
|       | Notes to Consolidated  Financial Statements                                                     | 6                                                                                           |
|       |                                                                                            |                                                                                        |
|       | Item 2.                                                                                         | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 14 |
|       |                                                                                            |                                                                                        |   |
|       | Item 3.                                                                                         | Quantitative and Qualitative  Disclosures About Market Risk                                 | 25 |
|       |                                                                                            |                                                                                        |   |
|       | Item 4.                                                                                         | Controls and Procedures                                                                     | 26 |
|       |                                                                                            |                                                                                        |   |
| Part II    | Other Items                                                                                     | 27                                                                                          |
|       |                                                                                            |                                                                                        |   |
|       | Item 1.                                                                                         | Legal Proceedings                                                                           | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 1A.                                                                                        | Risk Factors                                                                                | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 2                                                                                          | Unregistered Sales of Equity  Securities and Use of Proceeds                                | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 3.                                                                                         | Defaults Upon Senior  Securities                                                            | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 4.                                                                                         | Submission of Matters to a  Vote of Security Holders                                        | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 5.                                                                                         | Other Information                                                                           | 27 |
|       |                                                                                            |                                                                                        |   |
|       | Item 6.                                                                                         | Exhibits                                                                                    | 27 |
|       |                                                                                            |                                                                                        |
| Signatures | 28                                                                                              |
|            |                                                                                                 |                                                                                             |  |  |

 

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**Part I FinancialInformation**

**Item 1. *Financial Statements***

 

Young BroadcastingInc. and Subsidiaries

Consolidated Balance Sheets

 
| ** **                                                                                                                                            | ** ** | **December 31,** | ** **  | **March 31,**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**         | ** **  | **2006**         | ** ** |
| ** **                                                                                                                                            | ** ** | ** **       | ** **  | **(Unaudited)**  | ** ** |
| **Assets**                                                                                                                                            | ** ** | ** **       | ** **  | ** **       | ** ** |
| Current assets:                                                                                                                                       | ** ** | ** **       | ** **  | ** **       | ** ** |
| Cash and cash  equivalents                                                                                                                            |       | $                | 78,099,123  | ** **       | **$**      | **55,843,990** | ** ** |
| Trade accounts  receivable, less allowance for doubtful accounts of $1,050,000 in 2005 and  $1,210,000 in 2006                                        |       | 40,768,181       | ** **  | **34,826,212**   | ** ** |
| Current portion  of program license rights                                                                                                            |       | 21,763,650       | ** **  | **16,205,527**   | ** ** |
| Prepaid expenses                                                                                                                                      |       | 2,785,369        | ** **  | **2,759,576**    | ** ** |
| Other current  assets                                                                                                                                 |       | 1,979,314        | ** **  | **1,980,564**    | ** ** |
| Total current assets                                                                                                                                  |       | 145,395,637      | ** **  | **111,615,869**  | ** ** |
|                                                                                                                                                  |       |             |        |             |       |
| Property and  equipment, less accumulated depreciation and amortization of $184,348,672 in  2005 and $187,656,533 in 2006                             |       | 75,328,016       | ** **  | **72,906,147**   | ** ** |
| Program license rights, excluding current portion                                                                                                     |       | 7,018,090        | ** **  | **6,278,384**    | ** ** |
| Deposits and other assets                                                                                                                             |       | 3,575,404        | ** **  | **4,288,771**    | ** ** |
| Investments in unconsolidated subsidiaries                                                                                                            |       | 4,451,831        | ** **  | **3,265,333**    | ** ** |
| Unamortizable intangible assets                                                                                                                       |       | 475,928,822      | ** **  | **475,928,822**  | ** ** |
| Amortizable intangible assets                                                                                                                         |       | 65,454,167       | ** **  | **64,402,900**   | ** ** |
| Deferred  charges, less accumulated amortization of $3,285,390 in 2005 and $3,668,419  in 2006                                                        |       | 10,395,399       | ** **  | **10,012,370**   | ** ** |
| **Total Assets**                                                                                                                                      |       | $                | 787,547,366 | ** **       | **$**      | **748,698,596** | ** ** |
| ** **                                                                                                                                            |       |             |        | ** **       | ** ** | ** ** | ** ** |
| **Liabilities and stockholders’ deficit**                                                                                                        |       |             |        |             |       |
| Current liabilities:                                                                                                                                  |       |             |        |             |       |
| Trade accounts  payable                                                                                                                               |       | $                | 8,933,428   | ** **       | **$**      | **6,630,482** | ** ** |
| Accrued interest                                                                                                                                      |       | 18,954,497       | ** **  | **7,292,468**    | ** ** |
| Accrued expenses                                                                                                                                      |       | 17,187,952       | ** **  | **15,120,551**   | ** ** |
| Current  installments of program license liability                                                                                                    |       | 17,282,456       | ** **  | **12,666,357**   | ** ** |
| Current  installments of long term debt                                                                                                               |       | 3,000,000        | ** **  | **3,000,000**    | ** ** |
| Current  installments of obligations under capital leases                                                                                             |       | 45,445           | ** **  | **35,030**       | ** ** |
| Total current liabilities                                                                                                                             |       | 65,403,778       | ** **  | **44,744,888**   | ** ** |
| Program license liability, excluding current  installments                                                                                            |       | 9,119,940        | ** **  | **8,292,823**    | ** ** |
| Long-term debt, excluding current installments                                                                                                        |       | 782,791,781      | ** **  | **781,896,968**  | ** ** |
| Deferred tax liability and other long-term tax liabilities                                                                                            |       | 26,684,273       | ** **  | **39,553,707**   | ** ** |
| Other liabilities                                                                                                                                     |       | 4,847,411        | ** **  | **4,697,741**    | ** ** |
| Obligations under capital leases, excluding current  installments                                                                                     |       | 20,546           | ** **  | **14,125**       | ** ** |
| **Total liabilities**                                                                                                                                 | ** ** | **888,867,729**  | ** **  | **879,200,252**  | ** ** |
| Stockholders’ deficit:                                                                                                                           |       |             |        |             |       |
| Class A Common  Stock, $.001 par value. Authorized 40,000,000 shares; issued and outstanding  18,907,651 shares at 2005 and 19,017,455 shares at 2006 |       | 18,908           | ** **  | **19,017**       | ** ** |
| Class B Common  Stock, $.001 par value. Authorized 20,000,000 shares; issued and outstanding  1,941,414 shares at 2005 and 2006                       |       | 1,941            | ** **  | **1,941**        | ** ** |
| Additional  paid-in capital                                                                                                                           |       | 384,173,020      | ** **  | **385,068,548**  | ** ** |
| Accumulated  other comprehensive loss                                                                                                                 |       | (2,481,117       | )           | **(1,922,719**   | **)**      |
| Accumulated  deficit                                                                                                                                  |       | (483,033,115     | )           | **(513,668,443** | **)**      |
| Total stockholders’ deficit                                                                                                                      |       | (101,320,363     | )           | **(130,501,656** | **)**      |
| **Total liabilities and stockholders’ deficit**                                                                                                  |       | $                | 787,547,366 | ** **       | **$**      | **748,698,596** | ** ** |

 

*See accompanying notes to consolidated financialstatements *

 

2

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**Young Broadcasting Inc. andSubsidiaries**

**Consolidated Statements ofOperations**

(Unaudited)

 
| ** **                                                                                          | ** ** | **Three Months Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                                          | ** ** | **2005**                                             | ** **  | **2006** | ** ** |
| Net operating revenue                                                                               | ** ** | **$**                                                | 45,509,130  | ** ** | **$** | **48,386,469** | ** ** |
|                                                                                                |       |                                                 |        |   |   |
| Operating expenses, excluding depreciation expense                                                  |       | 17,828,133                                           | ** **  | **17,070,679** | ** ** |
| Amortization of program license rights                                                              |       | 5,334,949                                            | ** **  | **6,855,817** | ** ** |
| Selling, general and administrative expenses,  excluding depreciation expense                       |       | 17,606,221                                           | ** **  | **16,848,275** | ** ** |
| Depreciation and amortization                                                                       |       | 6,392,209                                            | ** **  | **4,792,818** | ** ** |
| Corporate overhead, excluding depreciation expense                                                  |       | 4,089,931                                            | ** **  | **3,626,051** | ** ** |
| Operating loss                                                                                      |       | (5,742,313                                           | )           | **(807,171** | **)** |
|                                                                                                |       |                                                 |        |   |   |
| Interest expense, net                                                                               |       | (15,823,516                                          | )           | **(15,859,246** | **)** |
| Non-cash change on market valuation of swaps                                                        |       | (1,823,079                                           | )           | **—** | ** ** |
| Other expense, net                                                                                  |       | (154,933                                             | )           | **(1,228,232** | **)** |
|                                                                                                |       | (17,801,528                                          | )           | **(17,087,478** | **)** |
|                                                                                                |       |                                                 |        |   |   |
| Loss from continuing operations before expense for  income taxes                                    |       | (23,543,841                                          | )           | **(17,894,649** | **)** |
| Income tax expense                                                                                  |       | (7,014,853                                           | )           | **(12,740,679** | **)** |
| Loss from continuing operations                                                                     |       | (30,558,694                                          | )           | **(30,635,328** | **)** |
| Income from  discontinued operations, net of tax, including gain on sale of $11.2 million  for 2005 |       | 11,207,626                                           |        | **—** | ** ** |
| Net loss                                                                                            |       | $                                                    | (19,351,068 | ) | **$** | **(30,635,328** | **)** |
|                                                                                                |       |                                                 |        | ** ** | ** ** |
| Basic and diluted net loss per common share:                                                        |       |                                                 |        |   |   |
| Loss from  continuing operations                                                                    |       | $                                                    | (1.52       | ) | **$** | **(1.46** | **)** |
| Income from  discontinued operations                                                                |       | 0.56                                                 |        | — | ** ** |
| Net loss per  common share                                                                          |       | $                                                    | (0.96       | ) | **$** | **(1.46** | **)** |
|                                                                                                |       |                                                 |        |   |   |
| Weighted average shares — Basic and dilutive                                                   |       | 20,055,996                                           |        | **20,937,995** | ** ** |
|                                                                                                     |            |                                                      |             |  |  |  |  |  |

 

*See accompanying notes toconsolidated financial statements.*

 

3

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Young BroadcastingInc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Deficit

(Unaudited)

 
| ** **                                                            | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** ** | ** **        | ** **  | **Accumulated**   | ** **   | **Total**              | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|-------------------|-------------|-------------------|--------------|------------------------|------------|-------------|------------|
| ** **                                                            | ** ** | **Common Stock** | ** ** | **Paid-In**      | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** **  | **Comprehensive** | ** **   | **Stockholders’** | ** ** |
| ** **                                                            | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Capital**     | ** ** | **Loss**          | ** **  | **Loss**          | ** **   | **Loss**               | ** ** | **Deficit** | ** ** |
| Balance at December 31, 2005                                          |       | $                     | 18,908     |             | $          | 1,941           |       | $                 | 384,173,020 |              | $            | (483,033,115           | )          | $           | (2,481,117 | ) |   |   | $ | (101,320,363 | ) |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Contribution of  shares into Company’s defined contribution plan |       | 109                   |       |             |       | 285,453         |       |              |        |              |         |                   |       | 285,562     |       |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Non-cash stock  compensation                                          |       |                  |       |             |       | 582,491         |       |              |        |              |         |                   |       | 582,491     |       |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Cancellations of  shares under the equity incentive plan.             |       | (11                   | )          |             |       | 11              |       |              |        |              |         |                   |       | —      |       |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Employee stock  purchase plan                                         |       | 11                    |       |             |       | 27,573          |       |              |        |              |         |                   |       | 27,584      |       |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Net loss for the  three months ended March 31, 2006                   |       |                  |       |             |       |            |       | (30,635,328       | )           |              |         | (30,635,328            | )          | (30,635,328 | )          |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Unrealized gain  on derivative instrument                             |       |                  |       |             |       |            |       |              |        | 558,398           |         | 558,398                |       | 558,398     |       |
| Total Comprehensive Loss                                              |       |                  |       |             |       |            |       |              |        |              |         |                   |       | (30,076,930 | )          |
|                                                                  |       |                  |       |             |       |            |       |              |        |              |         |                   |       |        |       |
| Balance at March 31, 2006                                             |       | 19,017                |       | $                | 1,941      |            | $          | 385,068,548       |        | $                 | (513,668,443 | )                      | $          | (1,922,719  | )          |   |   | $ | (130,501,656 | ) |
|                                                                       |            |                       |            |                  |            |                 |            |                   |             |                   |              |                        |            |             |            |  |  |  |  |  |  |

 

*See accompanying notes toconsolidated financial statements*

 

4

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**YoungBroadcasting Inc. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** **  |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                                             | ** **  | **2006** | ** ** |
| **Operating activities**                                                     | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| Net loss                                                                     |       | $                                                    | (19,351,068 | ) | $ | (30,635,328 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                 |        |   |   |
| Gain on sale of  station, net of taxes                                       |       | (11,207,149                                          | )           | — |   |
| Depreciation and  amortization of property and equipment                     |       | 4,748,781                                            |        | 3,358,523 |   |
| Provision for  uncollectible accounts                                        |       | 212,226                                              |        | 147,440 |   |
| Amortization of  program license rights                                      |       | 5,334,949                                            |        | 6,855,817 |   |
| Amortization of  intangibles and deferred charges                            |       | 1,643,428                                            |        | 1,434,295 |   |
| Non-cash compensation                                                        |       | 618,862                                              |        | 1,016,467 |   |
| Non-cash change  on market valuation of swap                                 |       | 1,823,079                                            |        | — |   |
| Income (loss) on  unconsolidated subsidiaries, net of dividend               |       | (180,645                                             | )           | 1,186,498 |   |
| Provision for  income taxes                                                  |       | 7,282,747                                            |        | 12,740,679 |   |
| (Gain) loss on  sale of fixed assets                                         |       | (8,892                                               | )           | 1,135 |   |
| Payments on  programming license liabilities                                 |       | (5,452,022                                           | )           | (6,699,300 | ) |
| Decrease in  trade accounts receivable                                       |       | 5,233,451                                            |        | 5,794,529 |   |
| Decrease in  prepaid expenses                                                |       | 1,329,961                                            |        | 25,793 |   |
| Decrease in  trade accounts payable                                          |       | (1,543,328                                           | )           | (1,604,850 | ) |
| Decrease in  accrued expenses and other liabilities                          |       | (9,060,129                                           | )           | (14,116,287 | ) |
| Increase in  other assets                                                    |       | (144,707                                             | )           | (55,918 | ) |
| Net cash used in operating activities                                        |       | (18,648,456                                          | )           | (20,550,507 | ) |
| ** **                                                                   | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| **Investing activities**                                                     | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| ** **                                                                   | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| Capital expenditures                                                         |       | (1,227,205                                           | )           | (938,345 | ) |
| Net proceeds from the sale of WTVO-TV                                        |       | 5,802,243                                            |        | — |   |
| Proceeds from disposal of fixed assets                                       |       | 19,245                                               |        | 555 |   |
| Net cash provided by investing activities                                    |       | 4,594,283                                            |        | (937,790 | ) |
| ** **                                                                   | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| **Financing activities**                                                     |       |                                                 |        |   |   |
| Principal payments under capital lease obligations                           |       | (182,724                                             | )           | (16,836 | ) |
| Principal payments on Credit Facility                                        |       | —                                               |        | (750,000 | ) |
| Net cash used in financing activities                                        |       | (182,724                                             | )           | (766,836 | ) |
|                                                                         |       |                                                 |        |   |   |
| **Net decrease in cash**                                                     |       | (14,236,897                                          | )           | (22,255,133 | ) |
| Cash and cash equivalents at beginning of year                               |       | 93,831,317                                           |        | 78,099,123 |   |
| **Cash and cash equivalents at March 31**                                    |       | $                                                    | 79,594,420  |   | 55,843,990 |   |
| ** **                                                                   | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| **Supplemental disclosure of cash flow information**                         | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| Interest paid                                                                |       | $                                                    | 22,804,040  |   | $ | 28,436,462 |   |

 

*See accompanying notes toconsolidated financial statements.*

 

5

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**YoungBroadcasting Inc. and SubsidiariesNotes to Consolidated Financial Statements**

 

**1. Basis of Presentation**

 

The business operationsof Young Broadcasting Inc. and subsidiaries (the “Company”) consist of ninenetwork affiliated stations (five with ABC, three with CBS, and one with NBC)and one independent commercial television broadcasting station. The marketsserved are located in Lansing, Michigan, Green Bay, Wisconsin, Lafayette,Louisiana, Nashville and Knoxville, Tennessee, Albany, New York, Richmond,Virginia, Davenport, Iowa, Sioux Falls, South Dakota and San Francisco,California. In addition, the accompanying condensed consolidated financialstatements include the Company’s wholly owned national television salesrepresentation firm. Significant intercompany transactions and accounts havebeen eliminated.

 

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

 

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

 

For investments in whichthe Company owns 20% to 50% of voting shares and has significant influence overoperating and financial policies, the equity method of accounting is used. Fourof the Company’s stations are party to equity investments in third parties fortower agreements which are accounted for under the equity method. Accordingly,the Company’s share of earnings and losses of these companies are included inother income (expense), net in the accompanying consolidated statement ofoperations of the Company. The Company recorded its share of earnings ofapproximately $382,000 and its share of losses of approximately $1.2 million forthe three months ended March 31, 2005 and 2006, respectively.

 

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

 

**2. Stock-BasedCompensation**

 

On May 4, 2004, theshareholders of the Company approved the 2004 Equity Incentive Plan (“2004 Plan”).The 2004 Plan is a continuation of the 1995 Stock Option Plan and supplants the1995 Stock Option Plan, under which no further awards will be granted. The 2004Plan has the same number of shares that were authorized under the 1995 StockOption Plan, which is 4,550,000. The Plan is administered by the CompensationCommittee of the Board of Directors.

 

In June 2005 and May2004, the Company awarded 438,500 and 109,100 deferred stock units,respectively, to executive officers of the Company under the 2004 Plan, with aggregatemarket values at the date of grant of approximately $2.0 million and $1.8million, respectively. Deferred stock awards have the right to receive sharesof Class B common stock at the end of specified deferral periods. The deferredstock awards vest ratably in three equal annual installments beginning one yearfrom the date of the grant and, as they vest, are charged to the incomestatement as non cash compensation expense included in the selling, general andadministrative expenses. Upon vesting the recipients will be credited withunits equivalent to shares. During the deferral period, the participants haveno voting or other rights associated with stock ownership unless and until theshares are actually delivered at the end of the deferral period. The end of thedeferral period for the deferred stock awards will occur after the terminationof

 

6

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employment. Additionally,granted but unvested deferred stock units are forfeited upon termination of employment,unless for reasons of death or disability.

 

The June 2005 awards ofdeferred stock units were subject to the consummation of a transaction thatresulted in there being available for grant under the 2004 Plan a number ofadditional shares of common stock equal to the aggregate number of deferredunits conditionally awarded to such executive officers. These conditionalawards became effective on November 29, 2005, when the Company entered into anexchange agreement with each of its executive officers (collectively, the “ExchangeAgreements”). Pursuant to the Exchange Agreements, options to purchase anaggregate of 2,198,375 shares of common stock of the Company, representing allof the outstanding and unexercised options held by such executive officers,were cancelled and, in exchange for such cancelled options (which had a fairmarket value of approximately $182,000), the executive officers were awarded anaggregate of 318,791 deferred stock units (which had an aggregate value ofapproximately $602,000) under the 2004 Plan. The compensation expenseassociated with these exchanges is the difference between the fair market valueof the stock options ($182,000) and the fair market value of the deferred stockunits ($602,000), which approximates $420,000, and will be recognized ratablyover the three year vesting period.

 

In June 2005 and May2004, the Company awarded 432,600 and 102,954 shares, respectively, ofrestricted stock to certain officers and other eligible key employees under the2004 Equity Incentive Plan, with market values at the date of grant ofapproximately $2.0 million and $1.7 million, respectively. The restrictedshares vest ratably in three equal annual installments beginning one year fromthe date of the grant and, as they vest, are charged to the income statement asnon cash compensation expense included in the selling, general andadministrative expenses. During the vesting period, the participants havevoting rights and the right to receive all dividends paid with respect to suchshares. Upon vesting, the restricted stock recipients will receive shares ofunrestricted Class A Common Stock. Additionally, granted but unvested sharesare forfeited upon termination of employment, unless for reasons of death ordisability.

 

On November 30, 2005, theCompany commenced an offer to all eligible employees to exchange all of theiroutstanding stock options. Under the terms of this offer, participatingemployees had the ability to exchange their outstanding options with anexercise price of less than $30.44 per share for new restricted shares thatvest over a period of three years. The number of restricted shares to bereceived was based upon certain exchange ratios. In order to participate inthis offer, employees were required to tender all of their options, regardlessof when granted or the exercise price. Pursuant to the terms of the offer,tendered options with exercise prices of $30.44 or above were to be cancelledupon expiration of the offer, without the payment of any consideration. Options to purchase an aggregate of 949,776 shares of common stock wereeligible for participation in the offer. The offer expired on December 30,2005, at which time the Company accepted for exchange and cancelled options topurchase a total of 945,776 shares of Common Stock with a fair market value ofapproximately $181,000, and issued an aggregate of 158,992 restricted shares ofClass A common stock, under 2004 Plan, for an aggregate value of approximately$401,000. The compensation expense is the difference between the fair marketvalue of the stock options exchanged or cancelled ($181,000) and the fairmarket value of the restricted stock issued ($401,000), which approximates$220,000, and will be recognized ratably over the three year vesting period.

 

*Stock Options*

As a result of theabove-discussed exchange agreement and exchange offer, the Company had anaggregate of 900 outstanding stock options that were unvested as of March 31,2006 which were fully expensed during the first quarter of 2006, in the amountof approximately $5,000.

 

*Restricted Shares and DeferredStock Units*

The fair value ofnonvested shares of the Company’s Class A common stock is determined based onthe closing trading price of the Company’s Class A common stock on the grantdate. For the three months ended March 31, 2005 and 2006, the Company recordednon-cash compensation expense in connection with the issuance of the restrictedshares and deferred stock units of approximately $285,000 and $582,000,respectively.

 

There were 1,477,363 and1,465,989 shares of unvested outstanding restricted and deferred stock unitswith a weighted average share price of $4.89 and $4.88 as of December 31, 2005and March 31, 2006, respectively.  

 

The Company estimatesrecording additional compensation expense relating to previously issuedrestricted shares and deferred stock units of approximately $2.0 million forthe remainder of 2006 and approximately $1.9 million and $876,000 during 2007and 2008, respectively.

 

Duringthe first quarter of 2006, the Company adopted FASB Statement No. 123 (R), *Share-Based Payment* (“SFAS 123R”), which requirescompanies to measure and recognize compensation expense for all stock-basedpayments at fair value. The Company adopted SFAS 123R using the modifiedprospective method, and consequently has not retroactively adjusted resultsfrom prior periods.

 

The Company does notcurrently recognize tax benefits resulting from tax deductions in excess of thecompensation costs recognized because of the federal and state net operatingloss carryforwards available to offset future federal and state taxableincome.  Accordingly, the adoption ofSFAS 123R did not have any impact on the Company’s consolidated statements ofcash flows.  

 

Priorto January 1, 2006, the Company had accounted for its share-based payments toemployees under FASB Statement No. 123, *Accounting for Stock BasedCompensation* (SFAS “123”) which allowed companies to either expensethe estimated fair value of stock options or to follow the intrinsic value

 

7

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methodset forth in Account Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”), but disclose the pro formanet income (loss) had the fair value of the options been expensed.

 

For stock options grantedprior to the adoption of SFAS 123(R), the effect on net income and earnings pershare if the Company had applied the fair value recognition provisions of SFAS123(R) to its stock option plans would have been as follows for the three monthsended March 31, 2005:

 
| ** **                                                                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **March 31,**               | ** ** |
| **(dollars in thousands, except per share data)**                   | ** ** | **2005**                         | ** ** |
| Net loss-as  reported                                                                             | ** ** | $                                | (19,351)   | ** ** |
| Add stock based  employee compensation expense  included in reported net loss                     | ** ** | 285                              | ** ** |
| Deduct total  stock-based employee compensation  expense determined under fair value based method | ** ** | (1,143                           | )          |
| Net loss-pro  forma                                                                               | ** ** | $                                | (20,209    | ) |
| Net loss per  basic and diluted common share-as reported                                          |       | $                                | (0.96      | ) |
| Net loss per  basic and diluted common share-pro forma                                            |       | $                                | (1.01      | ) |

 

**3. Intangible Assets**

 

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

 

8

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The following table setsforth the summarized disclosures related to intangible assets:

 
| ** **                          | ** ** | **As of December 31, 2005** | ** ** | **As of March 31, 2006** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)**            | ** ** |
| ** **                          | ** ** | **Gross  Carrying  Amount**                     | ** ** | **Accumulated  Amortization**                | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Indefinite-lived intangible assets: |       |                                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Broadcast licenses                  |       | $                                               | 475,929    |                                         | —     |   | $ | 475,929 |   | $ | 475,929 |   | — |   | $ | 475,929 |   |
|                                |       |                                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Definite-lived intangible assets:   |       |                                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Network Affiliations                |       | $                                               | 91,164     |                                         | $          | (30,914 | ) | $ | 60,250 |   | $ | 91,164 |   | $ | (31,631 | ) | $ | 59,533 |   |
| Other intangible assets             |       | $                                               | 13,401     |                                         | $          | (8,197 | ) | $ | 5,204 |   | $ | 13,401 |   | $ | (8,531 | ) | $ | 4,870 |   |
|                                |       | $                                               | 104,565    |                                         | $          | (39,111 | ) | $ | 65,454 |   | $ | 104,565 |   | $ | 40,162 |   | $ | 64,403 |   |

 

Aggregate amortizationexpense for the three months ended March 31, 2005 and 2006 was $1.1 million.

 

It is the Company’spolicy to account for Network Affiliations and other definite-lived intangibleassets at the lower of amortized cost or estimated fair value. As part of anongoing review of the valuation and amortization of other intangible assets ofthe Company and its subsidiaries, management assesses the carrying value ofNetwork Affiliations and other definite-lived intangible assets if facts and circumstancessuggest that there may be impairment. If this review indicates that NetworkAffiliations and other definite-lived intangible assets will not be recoverableas determined by a non-discounted cash flow analysis of the operating assetsover the remaining amortization period, the carrying value of other intangibleassets would be reduced to estimated fair value.

 

In June 2001, the FASBissued Statement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets*(“SFAS142”). To assist the Company in evaluating its intangible assets, the Companyutilized the service of an independent valuation consulting firm. FCC licensesare valued using a “Greenfield” income approach. Under this approach, the FCClicense is valued by analyzing the estimated after-tax discounted future cashflows of the station. The assumptions used in the discounted cash flow modelsreflect historical station performance, industry standards and trends in therespective markets. An analysis of the financial multiples for publicly-tradedbroadcasting companies, as well as a comparable sales analysis of televisionstation sales, was also utilized to confirm the results of the income approach.The Company adopted this methodology to value broadcast licenses as the Companybelieves this methodology has, in recent years, become the methodologygenerally used within the broadcast industry to value FCC licenses.

 

If these estimates orrelated assumptions materially change in the future, the Company may berequired to record impairment charges not previously recorded for these assets.

 

**4. Sale of Station**

 

OnOctober 4, 2004, the Company entered into an agreement with MissionBroadcasting, Inc. (“Mission”) to sell the assets of WTVO-TV, its station inRockford, Illinois, for an aggregate cash purchase price of approximately $20.8million. The agreement provided for the purchase and sale of WTVO assets tooccur in two steps. On November 1, 2004, the Company completed the firstclosing of the sale. At the first closing, Mission paid the Company $15.0million (as adjusted) of the aggregate purchase price for the physical assetsof the station and the parties entered into a time barter arrangement, withrespect to the sale of advertising to the station. The completion of the secondstep of this transaction was subject to Federal Communications Commissionsreview and approval. During this period, the Company retained the FCC license,the programming assets (network agreements, syndication contracts, etc.) andcertain other assets of the station. On January 4, 2005, the second step of thetransaction was completed and the remaining $5.75 million of the purchase pricewas paid to the Company. 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 2004 andapproximately $11.2 million, net of a

9

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provision for incometaxes of $450,000, was recognized in the first quarter of 2005. The gain allocation was determined based onthe relative fair value of the assets sold, at each closing date.

 

TheCompany applied Statement 144, *Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,*to this transaction, and as such the operating results of WTVO-TV arenot included in the Company’s consolidated results from continuing operationsfor the three months ended March 31, 2005.

 

TheCompany recorded a loss from discontinued operations related to WTVO-TV of $477for the three months ended March 31, 2005. Net revenue of WTVO-TV for the threemonths ended March 31, 2005, was $1,285.

 

**5. Long -Term Debt**

 

On May 3, 2005, theCompany (i) entered into an amended and restated senior credit facility and(ii) accepted for payment and paid for, in connection with a cash tender offerand consent solicitation commenced on April 11, 2005, all of its $246,890,000outstanding principal amount of 81⁄2% Senior Notes Due 2008. The amended creditfacility provides for a $300 million term loan and a $20 million revolvingcredit facility. The credit facility bears various floating interest rates,based upon LIBOR, ranging from 7.0% to 7.25% at March 31, 2006. On May 3, 2005,the full amount of the term loan was borrowed. Approximately $278 million ofthe proceeds of such term loan borrowing was used to pay fees and expensesrelated to the amended credit facility and to finance the purchase of theSenior Notes in the tender offer, including the payment of related premiums,accrued interest, fees and expenses. The balance of the term loan borrowingwill be used for working capital. The term loan will mature in 2012 and therevolving facility will mature in 2010. The Company capitalized approximately $6.0 million of fees associatedwith the new term loan and revolving credit facility.

 

In connection with thecash tender offer and consent solicitation, the Company recorded a loss on theextinguishment of debt in the second quarter of 2005, totaling approximately$18.6 million. This loss is comprised of the cost of the consent solicitations(approximately $18.1 million), plus the write-off of the deferred financingcosts (approximately $4.9 million), less the unamortized portion of the bondpremium relating to the 81⁄2% Senior Notes (approximately $4.6 million), plusvarious other administrative expenses (approximately $200,000).

 

On May 3, 2005, theCompany entered into an interest rate swap agreement for a notional amount of$71.0 million with a commercial bank who is also a lender under the seniorcredit facility. The swap will become effective on May 8, 2006 and expires onMay 8, 2008. Upon effectiveness, the Company will pay a fixed interest of4.3425% and the Company will receive interest from the commercial bank, basedupon a three month LIBOR rate. It is the Company’s intention to ensure theinterest rate reset dates of the swap and the term loan will match over theterm of the swap, and therefore the changes in the fair value of theinterest-rate swap are expected to significantly offset changes in the cashflows of the floating rate debt. The Company accounts for this agreement as acash flow hedge under FASB Statement No. 133, *Accountingfor Derivative Instruments and Hedging Activities,* and as such, thechange in the fair value of the interest rate swap is reported as a componentof other comprehensive income (loss). For the three months ended March 31, 2006a gain of approximately $558,000, was recorded in other comprehensive income(loss). This amount will be reclassified commencing in May 2006 into interestexpense as a yield adjustment in the same period in which the related intereston the floating-rate debt obligations affects earnings (losses).

 

On May 5, 2005, theCompany entered into a partial termination agreement with Deutsche Bank toterminate one third of its original notional amount of $63.2 million interestrate swap, or approximately $21.1 million. In consideration of the termination,the Company was required to make a net payment of approximately $702,000,reduced by the Company’s accrued interest income from the last payment date ofMarch 1, 2005 through the termination date of May 5, 2005 (approximately$35,000). In accordance with the termination, the swap liability was reduced bythe fair market value of the one third portion of

 

10

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the swap as of thetermination date (approximately $728,000). The difference between the paymentand the fair market value of the partially terminated swap was recorded as interestexpense for the period (approximately $9,000).

 

On November 17, 2005, theCompany entered into a partial termination agreement with Deutsche Bank toterminate one half of its remaining notional amount $42.1 million interest rateswap. Further, on November 23, 2005, the Company entered into a finaltermination agreement with Deustche Bank to terminate the remaining notionalamount $21.1 million interest rate swap. In connection with the terminatedinterest rate swap agreement, the Company made net interest payments of$997,500 and $992,000, which includes the Company’s accrued interest on theswap from the last payment date of September 1, 2005 through the terminationdates of November 17, 2005 and November 23, 2005. In accordance with thetermination, the swap liability was reduced by the fair market value of theswap as of the termination dates (approximately $2.0 million on both November17, 2005 and November 23, 2005). The difference between the two payments andthe fair market value of the terminated swap was recorded as interest expenseduring the period (approximately $19,000).

 

Long-term debt atDecember 31, 2005 and March 31, 2006 consisted of the following:

 
| ** **                                           | ** ** | **12/31/05**            | ** ** | **3/31/06** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| Senior Credit Facility                               |       | $                       | 298,500    |        | $          | 297,750 |   |
| 8 3⁄4% Senior Subordinated Notes due 2014         |       | 140,000                 |       | 140,000     |       |
| 10% Senior Subordinated Notes due 2011               |       | 347,292                 | (1)        | 347,147     | (1)        |
| Total Long Term Debt                                 |       | $                       | 785,792    |        | $          | 784,897 |   |
| Less:                                                |       |                    |       |        |       |
| Scheduled  current maturities                        |       | (3,000                  | )          | (3,000      | )          |
| Long term debt excluding all current installments(2) |       | $                       | 782,792    |        | $          | 781,897 |   |

 

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(1) Includes unamortizedpremium balances of $3.0 million and $2.8 million as of December 31, 2005 andMarch 31, 2006.

(2) Excludescapital leases.

 

TheCompany’s Senior Subordinated Notes are general unsecured obligations of theCompany and subordinated in right of payment to all senior debt, including allindebtedness of the Company under the Senior Credit Facility. The SeniorSubordinated Notes are guaranteed, fully and unconditionally, and areguaranteed jointly and severally, on a senior subordinated unsecured basis byall of the Company’s wholly owned subsidiaries. The Company has no independentassets or operations, other than the equity in its subsidiaries.

 

**6. Income Taxes**

AtDecember 31, 2005, the Company had net operating loss (“NOL”) carryforwards fortax purposes of approximately $340.8 million expiring at various dates through2025, for which a full valuation allowance has been provided.

 

Withthe adoption of the FASB issued Statement No.142 , *Goodwill andOther Intangible Assets* (SFAS 142) the Company no longer amortizesthe book basis in the indefinite-lived intangibles, but continues to amortizethese intangibles for tax purposes. Beginning with the first quarter of 2005,the Company started recording a deferred tax provision for the excess of bookbasis over tax basis of intangible assets, not expected to reverse during thenet operating loss carryforward period. Income tax expense for the three monthsended March 31, 2006 primarilyconsists of deferred income taxes of $12.6 million related to the increase inthe Company’s deferred tax liability for the tax effect of the differencebetween the book and tax basis of the intangible assets not expected to reverseduring the net operating loss carryforward period.

 

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TheCompany will have deferred tax liabilities that will arise each quarter becausethe taxable temporary differences related to the amortization of these assetswill not reverse prior to the expiration period of the Company’s deductibletemporary differences unless the related assets are sold or an impairment ofthe assets is recorded. The Company expects that it will record a total ofapproximately $6.6 million to increase deferred tax liabilities during theremaining nine months of 2006.

 

**7. Employee Benefit Plans**

 

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

 

The Company expects tocontribute approximately $352,000 to the benefit plan in 2006**.**For the threemonths ended March 31, 2006 approximately $45,000 has been contributed.

 

Components of the netperiodic benefit plan were as follows:

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **2005**                         | ** ** | **2006** | ** ** |
|                                                             |       |                             |       |   |   |
| Service cost                                                     |       | $                                | 68,514     |   | $ | 10,500 |   |
| Interest cost                                                    |       | 155,036                          |       | 150,000 |   |
| Expected return of plan assets                                   |       | (168,463                         | )          | (169,000 | ) |
| Amortization of the unrecognized obligation or  transition asset |       | (5,933                           | )          | (3,500 | ) |
| Recognized losses                                                |       | 33,269                           |       | 36,500 |   |
| Recognized prior service costs                                   |       | 11,118                           |       | — |   |
| Curtailments Loss                                                |       | 135,556                          |       | — |   |
| Net periodic cost                                                |       | $                                | 229,097    |   | $ | 24,500 |   |

 

**8. Commitments and Contingencies**

 

*Network Affiliation Agreements*

 

In September 2005, theCompany renewed its affiliations with ABC with respect to WKRN-TV, WTEN-TV,WRIC-TV, WATE-TV and WBAY-TV. The renewed ABC affiliations expire on December31, 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 CBSaffiliations expire on September 30, 2012 and the renewed NBC affiliationexpires on January 1, 2015. Under the renewed ABC, CBS and NBC affiliations,the Company will be receiving significantly less network compensation than itreceived from ABC, CBS and NBC under the expired agreements. The Companyreceived notice from CBS with respect to KELO that the network will not renewthe current affiliation agreement currently in place and that the networkwishes to negotiate a new agreement. This agreement with CBS expires on October2, 2006. While the Company is unable to predict the terms of a new affiliationagreement, the Company believes the station will have a network affiliation inplace at the expiration of the current affiliation.

 

On March 16, 2006, KRON-TV,our only independent station, entered into an affiliation agreement withMyNetworkTV. Additionally, on March 28, 2006, KELO-DT, KDLO-DT and KPLO-DTentered into an affiliation agreement MyNetworkTV. MyNetworkTV has stated thatthe new network will be launched on September 5, 2006.

 

**9. Earnings Per Share**

 

The weighted averagenumber of shares outstanding during the period has been used to calculateearnings per share. The outstanding stock options and deferred stock units havenot been included in the computation of earnings per share because they wouldbe anti-dilutive.

12

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For the three monthsended March 31, 2006, common stock equivalents, consisting of 165,729 shares ofcommon stock underlying outstanding deferred stock units, have been excluded fromthe computation as they are anti-dilutive on the loss per share. For the threemonths ended March 31, 2005, common stock equivalents, consisting of 21,300 sharesof common stock underlying outstanding deferred stock units, have been excludedin the computation as they are anti-dilutive on the loss per share. For thethree months ended March 31, 2006, there are no shares underlying outstandingstock options, since the exercise price of all previously granted stock optionswas greater than the average market price of the common shares.

 

**10. Subsequent Events**

 

On April 26, 2006, theCompany announced its intention to access a $50.0 million incremental Term Loanunder its existing Senior Credit Facility. The Company also announced that itintends to seek the consent of the required lenders to make certain amendmentsto the Senior Credit Facility, including the reduction of the minimum cashrequirement from $35.0 million to $10.0 million. The Company intends to use thefunds available under the incremental term loan for working capital purposes. Whilethe Company expects to execute definitive documentation relating to theincremental term loan in the near future, closing of the incremental term loanwill be subject to customary conditions and there can be no assurance that theclosing of the incremental term loan will occur. 

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

**FORWARD LOOKING STATEMENTS AREALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN THISREPORT. THE FORWARD LOOKING STATEMENTS CONTAINED IN THIS REPORT CONCERN, AMONGOTHER THINGS, CERTAIN STATEMENTS UNDER “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.” FORWARD LOOKING STATEMENTSINVOLVE RISKS AND UNCERTAINTIES, AND ARE SUBJECT TO CHANGE BASED ON VARIOUSIMPORTANT FACTORS, INCLUDING THE IMPACT OF CHANGES IN NATIONAL AND REGIONALECONOMIES, PRICING FLUCTUATIONS IN LOCAL AND NATIONAL ADVERTISING, VOLATILITYIN PROGRAMMING COSTS AND THE OTHER RISKS AND UNCERTAINTIES DISCUSSED IN OURANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005.**

 

**Introduction**

 

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

 

***Overviewof our Business****-*This sectionprovides a general description of the Company’s business, as well as recentdevelopments that have occurred since December 31, 2005 that the Companybelieves are important in understanding the results of operations and financialcondition or to anticipate future trends.

 

***Resultsof Operations***- This section provides an analysis of theCompany’s results of operations for the three months ended March 31, 2006 and2005. This analysis is presented on a consolidated basis. In addition, itprovides a brief description of significant transactions and events that impactthe comparability of the results being analyzed.

 

***Liquidityand Capital Resources***-******Thissection provides an analysis of the Company’s cash flows for the three monthsended March 31, 2006 and 2005. Included in the discussion of outstanding debtis a discussion of the amount of financial capacity available to fund theCompany’s future commitments, as well as a discussion of other financingarrangements.

 

**Overview of our Business**

 

The operating revenue ofthe Company’s stations is derived primarily from advertising revenue and, to amuch lesser extent, from retransmission revenues from cable and satellite operatorsand compensation paid by the networks to its affiliated stations forbroadcasting network programming.

 

Advertising is sold forplacement within and adjoining a station’s network and locally originatedprogramming. Advertising is sold in time increments and is priced primarily onthe basis of a program’s popularity among the specific audience an advertiserdesires to reach, as measured principally by periodic audience surveys. Inaddition, advertising rates are affected by the number of advertisers competingfor the available time, the size and demographic makeup of the market served bythe station and the availability of alternative advertising media in the marketarea. Rates are highest during the most desirable viewing hours, withcorresponding reductions during other hours. The ratings of a local stationaffiliated with a national television network can be affected by ratings ofnetwork programming.

 

Most advertisingcontracts are short-term, and generally run only for a few weeks. Approximately58% of the gross revenue of the Company’s stations for the three months endedMarch 31, 2006 was generated from local advertising, which is sold by a station’ssales staff directly to local accounts. The remainder of the advertisingrevenue primarily represents national advertising, which is sold by the Company’swholly owned subsidiary, Adam Young

 

14

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Inc. (“AYI”), a nationaladvertising sales representative. The stations generally pay commissions toadvertising agencies on local, regional and national advertising.

 

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

 

The advertising revenueof the Company’s stations are generally highest in the second and fourthquarters of each year, due in part to increases in consumer advertising in thespring and retail advertising in the period leading up to, and including, theholiday season. In addition, advertising revenue is generally higher duringeven numbered election years due to spending by political candidates, whichspending typically is heaviest during the fourth quarter.

 

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

 

**Recent Developments**

 

*Incremental Term Loan.*On April 26, 2006, the Company announced its intentionto access a $50.0 million incremental term loan under its existing SeniorCredit Facility. The Company also announced that it intends to seek the consentof the required lenders to make certain amendments to the Senior CreditFacility, including the reduction of the minimum cash requirement from $35.0million to $10.0 million. The Company intends to use the funds available underthe incremental term loan for working capital purposes. While the Companyexpects to execute definitive documentation relating to the incremental termloan in the near future, closing of the incremental term loan will be subjectto customary conditions and there can be no assurance that the closing of theincremental term loan will occur.

 

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

 

*Joint Operations Agreement*. In January2006, the Company entered into a three year shared sales and servicesarrangement between its Lansing, Michigan station (WLNS-TV) and Spartan TV,L.L.C.’s WHTV-TV (a UPN affiliate licensed to Jackson/Lansing, Michigan). Thearrangement covers all advertising sales, traffic and engineering functionsincluding operation of master control for WHTV-TV.

 

15

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**Television Revenues**

 

Set forth below are theprincipal types of television revenue received by the Company’s stations forthe periods indicated and the percentage contribution of each to the Company’stotal revenue, as well as agency and national sales representative commissions.The results from continuing operations for all periods presented do not includethe results of operations for WTVO-TV (which was sold in two steps – onNovember 1, 2004 and on January 4, 2005). The results of WTVO-TV are reflectedas discontinued operations.

 
| ** **       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------|------------|------------------------------------------------------|------------|
| ** **       | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Amount**                                           | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**                 | ** ** |
| Revenues         |       |                                                 |       |   |   |   |   |   |   |
| Local            |       | 31,068                                               |       | 58.6 |   | 32,591 |   | 58.0 |   |
| National         |       | 17,549                                               |       | 33.1 |   | 17,515 |   | 31.2 |   |
| Network          |       | 338                                                  |       | 0.7 |   | 583 |   | 1.0 |   |
| Political        |       | 384                                                  |       | 0.7 |   | 1,242 |   | 2.2 |   |
| Barter           |       | 1,744                                                |       | 3.3 |   | 1,746 |   | 3.1 |   |
| Production/Other |       | 1,908                                                |       | 3.6 |   | 2,513 |   | 4.5 |   |
| Total            |       | 52,991                                               |       | 100.0 |   | 56,190 |   | 100.0 |   |
|             |       |                                                 |       |   |   |   |   |   |   |
| Commissions      |       | (7,482                                               | )          | (14.1 | ) | (7,804 | ) | (13.9 | ) |
|             |       |                                                 |       |   |   |   |   |   |   |
| Net Revenue      |       | 45,509                                               |       | 85.9 |   | 48,386 |   | 86.1 |   |

 

16

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**Results of Operations**

 

***ThreeMonths Ended March 31, 2006 Compared to Three Months Ended March 31, 2005***

 

The following table setsforth the Company’s operating results for the three months ended March 31, 2006as compared to the three months ended March 31, 2005. The results fromcontinuing operations for the three months ended March 31, 2005 do not includethe results of operations for WTVO-TV. Results for WTVO-TV are reflected asdiscontinued operations.

 
| ** **                                                                                            | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                            | ** ** | **(in thousands)**                       | ** ** |
| ** **                                                                                            | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **Change** | ** ** | **%  Change** | ** ** |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Net revenue                                                                                           |       | $                                        | 45,509     |   | $ | 48,386 |   | $ | 2,877 |   | 6.3 | % |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Operating  expenses, including SG&A                                                               |       | 35,434                                   |       | 33,919 |   | (1,515 | ) | (4.3 | ) |
| Amortization of  program license rights                                                               |       | 5,335                                    |       | 6,855 |   | 1,520 |   | 28.5 |   |
| Depreciation and  amortization                                                                        |       | 6,392                                    |       | 4,793 |   | (1,599 | ) | (25.0 | ) |
| Corporate  overhead, excluding depreciation expense                                                   |       | 4,090                                    |       | 3,626 |   | (464 | ) | (11.3 | ) |
| Operating loss                                                                                        |       | (5,742                                   | )          | (807 | ) | 4,935 |   | 86.0 |   |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Interest  expense, net                                                                                |       | (15,824                                  | )          | (15,859 | ) | (35 | ) | (0.2 | ) |
| Non-cash change  in market valuation of swaps                                                         |       | (1,823                                   | )          | — |   | 1,823 |   | 100.0 |   |
| Other expense                                                                                         |       | (155                                     | )          | (1,228 | ) | (1,073 | ) | (692.0 | ) |
|                                                                                                  |       | (17,802                                  | )          | (17,087 | ) | (715 | ) | (4.0% | ) |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Loss from  continuing operations before income taxes                                                  |       | (23,544                                  | )          | (17,894 | ) | 5,650 |   | 24.0 |   |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Income tax  expense                                                                                   |       | (7,014                                   | )          | (12,741 | ) | (5,727 | ) | (81.6 | ) |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Loss from  continuing operations                                                                      |       | (30,558                                  | )          | (30,635 | ) | (77 | ) | (0.3 | ) |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of taxes (including gain on sale of $11.2  million in 2005) |       | 11,207                                   |       | — |   | (11,207 | ) | (100.0 | ) |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Net loss                                                                                              |       | $                                        | (19,351    | ) | $ | (30,635 | ) | $ | (11,284 | ) | (58.3 | )% |
|                                                                                                  |       |                                     |       |   |   |   |   |   |   |
| Basic loss from  continuing operations per common share                                               |       | $                                        | (1.52      | ) | $ | (1.46 | ) |   |   |   |   |
| Income from  discontinued operations, net                                                             |       | 0.56                                     |       | 0.00 |   |   |   |   |   |
| Basic net loss  per common share                                                                      |       | $                                        | (0.96      | ) | $ | (1.46 | ) |   |   |   |   |
| Basic shares  used in earnings per share calculation                                                  |       | 20,055,996                               |       | 20,937,995 |   |   |   |   |   |
|                                                                                                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Net Revenue includes: (i)cash and barter advertising revenues, net of agency commissions; (ii) networkcompensation; and (iii) other revenues which represent less than 4.5% of totalrevenues. Net revenue for the three

 

17

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months ended March 31,2006 was $48.4 million, as compared to $45.5 million for the three months endedMarch 31, 2006, an increase of $2.9 million or 6.3%. The major components of,and changes to, net revenue were as follows:

 

•      The Company’sgross local revenues for three months ended March 31, 2006 increased by 4.9%compared to the three months ended March 31, 2005, and gross national revenuesfor the three months ended March 31, 2006 were down 0.2% compared to the prioryear. The increase in gross local revenues is partially attributable to newadvertisers in conjunction with new local sales initiatives. Additionally, eightof the ten stations increased local revenues from various accounts, includinghospitals, furniture, automotive and healthcare. While gross national revenueswere down slightly year over year, national revenues were up at five of the tenstations for the three months ended March 31, 2006 due to increased spending byvarious national accounts, including automotive and telecommunications accounts.

 

•      Gross politicalrevenue for the three months ended March 31, 2006 was $1.2 million, as comparedto $384,000 for the three months ended March 31, 2005, an increase ofapproximately $858,000. This increase is due to various local races in 2006 atsix of the ten stations, the most significant of which were noted in Michigan,Iowa, South Dakota and San Francisco, with no such races during the 2005.

 

•      Networkcompensation for the three months ended March 31, 2006 was $583,000, anincrease of $245,000 or 72.5%, compared to $338,000 for the three months endedMarch 31, 2005. The majority of this increase relates to the ABC affiliation agreementswhich were renewed in September 2005 and were retroactive to October 1, 2004. TheABC affiliates had deferred all compensation received during the first quarterof 2005, since the contract was not renewed at that point.

 

•      Other revenueincreased approximately $605,000, due primarily to increased retransmissionconsent revenue, which represents consideration received from some satelliteand cable providers in return for consent to retransmission of the signals ofthe Company’s television stations. In some cases, the consideration is based onthe number of subscribers receiving the signals.

 

Operating expenses,including selling, general and administrative expenses, for the three monthsended March 31, 2006 were $33.9 million as compared to $35.4 million for thethree months ended March 31, 2005, a decrease of $1.5 million, or 4.3%. Themajor components and changes in operating expenses were as follows:

 

•      Personnel costsdecreased approximately $1.2 million, resulting primarily from the cost cuttinginitiatives and headcount reductions that took place in 2005, which began tobenefit the Company during the second half of 2005.

 

•      Pension expensewas down approximately $545,000, due primarily to an additional pensionliability for a terminated executive of approximately $426,000 that wasrecorded during the first quarter of 2005, with no such expense recorded duringthe first quarter of 2006.

 

The following items actedto offset these changes;

•      Included inselling, general and administrative expenses is non-cash compensation expenseof approximately $1.0 million for the three months ended March 31, 2006, ofwhich approximately $582,000 relates to restricted and deferred stock awards. Theremaining $434,000 of non-cash compensation relates to the Company’s matchingcontributions to eligible employees under its defined contribution plan. Thiscompares to non-cash compensation of $619,000 for the three months ended March31, 2005, an increase of approximately $398,000. This increase is due primarilyto the increased non-cash compensation expense associated with restricted anddeferred stock units awarded in June 2005, November 2005 and December 2005.

 

Amortization of programlicense rights for the three months ended March 31, 2006 was $6.9 million,compared to $5.3 million for the three months ended March 31, 2005, an increaseof $1.5 million, or 28.5%. The increase for the three months ended March 31,2006 was primarily due the combination of increased renewal costs ofprogramming as well as the addition of *Sex and the City*at one of the Company’s stations.

 

18

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Depreciation of property andequipment and amortization of intangible assets was $4.8 million for the threemonths ended March 31, 2006 as compared to $6.4 million for the three monthsended March 31, 2005, a decrease of $1.6 million or 25.0%. The decrease is dueto the following:

 

•      Approximately$1.3 million of this decrease is the result of various furniture, fixtures andcomputers at one of the Company’s stations becoming fully depreciated duringthe second quarter of 2005.

 

•      Additionally,$141,000 of the decrease is due to lower amortization expense on debt issuancecosts, associated with the May 2005 refinancing.

 

Corporate Overhead forthe three months ended March 31, 2006 was $3.6 million as compared to $4.1million for the three months ended March 31, 2005, a decrease of $464,000, or 11.3%.The major components and changes in corporate expenses were as follows:

 

•      Legal,professional and consulting fees were down approximately $703,000 for the threemonths ended March 31, 2006. Approximately $246,000 of this decrease relates toa tax consulting project, which took place during the first quarter of 2005,with no such project occurring during the first quarter of 2006. The remainingdecrease is due to an overall reduction in expenses relating to the Company’sreview and compliance with corporate governance legislation.

 

The following acted tooffset the increase:

 

•      Personnel costswere up approximately $206,000, due in part to gain on the mark to market ofthe executive deferred compensation plan of approximately $98,000 for the threemonths ended March 31, 2006 as compared to a loss on the mark to market of thedeferred compensation plan of approximately $5,000 for the three months endedMarch 31, 2005. The remaining increase is due to the hiring of a new corporateemployee in mid-2005 as well as standard inflationary and contractual salaryincreases.

 

Interest expense for thethree months ended March 31, 2006 was $15.9 million, compared to $15.8 millionfor the same period in 2005, an increase of $35,000, or 0.2%. The Company receiveda payment on its interest rate swaps of $245,000 for the three months endedMarch 31, 2005, which was recorded as a reduction of interest expense. Pursuantto a refinancing transaction completed on May 3, 2005, the Company usedborrowings under its $300.0 million credit facility to purchase all of its$246.9 million principal amount of 8 1⁄2% Senior Notes due 2008. The seniorcredit facility bears various  floatinginterest rates, based upon LIBOR, ranging from 7.0% to 7.25%, at March 31,2006, thus increasing interest expense during the first quarter of 2006.

 

The Company recorded a$1.8 million non-cash gain in connection with the change in the market value ofinterest rate swaps for the three months ended March 31, 2005. This swap wasterminated at the end of 2005, and therefore, no non cash change in marketvalue was recorded for the first three months of 2006.

 

Other expense increasedapproximately $1.1 million due the Company’s share of losses on its equityinvestments in third parties for tower agreements.

 

The Company recorded anincome tax provision of  $12.7 million and$7.0 million for the three months ended March 31, 2006 and 2005, respectively. Thisprovision includes a deferred tax liability of $12.6 million and $6.9 millionfor the taxable temporary difference related to the amortization of the Company’sindefinite-lived intangible assets for 2006 and 2005, respectively, whichcontinues to be amortized for tax purposes.

 

On October 4, 2004, theCompany entered into an agreement with Mission Broadcasting, Inc. (“Mission”)to sell the assets of WTVO-TV, its station in Rockford, Illinois, for anaggregate cash purchase price of approximately $20.8 million. A gain ofapproximately $14.7 million, net of applicable taxes was recognized on the sale;$3.5 million of this gain, net of a provision for income taxes of $300,000, wasrecognized in the fourth quarter of 2004 and approximately $11.2 million, netof a provision for income taxes of $450,000, was recognized in the firstquarter of 2005. In connection with the sale of WTVO-TV, the Company recordedloss from discontinued operations of approximately $477 for the three monthsended March 31, 2005.

 

19

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As a result of theabove-discussed factors, the net loss for the Company was $30.6 million for thethree months ended March 31, 2006, compared to a net loss of $19.4 million forthe three months ended March 31, 2005, a change of $11.3 million, or 58.3%.

 

**Liquidity and Capital Resources**

 

Current FinancialCondition

 

The following tablespresent certain data that the Company believes is helpful in evaluating theCompany’s liquidity and capital resources (in thousands).

 
| ** **                                | ** ** | **Three Months Ended 31,** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **2005**                   | ** ** | **2006** | ** ** |
| Net cash provided by (used in):           |       |                       |       |   |   |
| Operating activities                      |       | $                          | (18,648    | ) | $ | (20,550 | ) |
| Investing activities                      |       | $                          | 4,594      |   | $ | (938 | ) |
| Financing activities                      |       | $                          | (183       | ) | $ | (767 | ) |
| Net decrease in cash and cash equivalents |       | $                          | (14,237    | ) | $ | (22,255 | ) |

 
| ** **                                | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                | ** ** | **2005**         | ** ** | **2006**      | ** ** |
| Cash and cash equivalents                 |       | $                | 78,099     |          | $          | 55,844 |   |
| Long-term debt, including current portion |       | $                | 785,792    |          | $          | 784,897 |   |
| Available under senior credit agreement   |       | $                | 20,000     |          | $          | 20,000 |   |

 

The Company’s cash flowis highly dependent upon the state of the advertising market and publicacceptance of television programming. Any significant decline in theadvertising market or performance of the television programming could adverselyimpact the Company’s cash flow from operations.

 

The performance ofKRON-TV has a large proportionate impact on the Company’s operating results. Consequently,the Company is particularly susceptible to economic conditions in the SanFrancisco advertising market. The Company’s operating results have beenadversely affected by a slower than expected recovery in the San Franciscomarket.

 

The Company has renewedits affiliations with ABC with respect to WKRN- TV, WTEN-TV, WRIC-TV, WATE-TVand WBAY-TV, with CBS with respect to WLNS-TV and KLFY-TV and with NBC withrespect to KWQC-TV. The renewed ABC affiliations expire on December 31, 2009,the renewed CBS affiliations expire on September 30, 2012 and the renewed NBCaffiliation expires on January 1, 2015. Under the renewed ABC, CBS and NBCaffiliations, the Company will be receiving significantly less network compensationthan it received from ABC, CBS and NBC under the expired agreements.

 

The Company receivednotice from CBS with respect to KELO that the network will not renew thecurrent affiliation agreement currently in place and that the network wishes tonegotiate a new agreement. This agreement with CBS expires on October 2, 2006. Whilethe Company is unable to predict the terms of a new affiliation agreement, theCompany believes the station will have a network affiliation in place at theexpiration of the current affiliation.

 

The principal uses ofcash that affect the Company’s liquidity position include the following: theacquisition of and payments under programming rights for entertainment andsporting events, capital and operational expenditures and interest payments onthe Company’s debt. It should be noted that commencing on September 30, 2005,the Company was required to make scheduled principal payments under the termloan portion of the senior credit agreement, on a quarterly basis, equal to0.25% of the initialaggregate amount of the term loan.

 

20

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**Sources and Uses of Cash**

 

*Operating Activities*

 

Net cash used inoperating activities for the three months ended March 31, 2006 and 2005 was $20.6million and $18.6 million, respectively. The reduction of cash from operatingactivities year over year was due primarily to the following factors:

 

•      The Companymade approximately $6.7 million of payments on its programming liabilities forthe three months ended March 31, 2006, an increase of approximately $1.2 millionfrom the three months ended March 31, 2005.

 

•      Accruedexpenses and other liabilities decreased approximately $14.1 million fromDecember 31, 2005. Approximately $11.7 million of this decrease relates tointerest payments made on the Company’s 8.75% and 10% Senior Subordinated Notesas well as the Company’s Senior Credit Facility, offset slightly by interestaccruals made during the first quarter of 2006. Furthermore, approximately $1.4million relates to a decrease in the accrued bonus resulting from bonuspayments made during the first quarter of 2006, which was accrued for atDecember 31, 2005. Additionally, approximately $263,000 of the decrease relatesto an adjustment as a result of the resolution of an ongoing union disputeduring the first quarter of 2006, resulting in the decrease of a prior accrualwhich was established to cover any retroactive liabilities. Additionally, theCompany paid out approximately $163,000 of severance during the first quarterof 2006, which was accrued for at December 31, 2005.

 

The following itempartially offset the above reductions:

 

•      The Companyrecorded its share of the losses on  Investmentsin Unconsolidated subsidiaries, net of dividends of approximately $1.2 millionfor the three months ended March 31, 2006 as compared to an increase of$109,000 for the three months ended March 31, 2005.

 

•      Accountsreceivable decreased by approximately $5.8 million and $5.2 million for thethree months ended March 31, 2006 and 2005, respectively. Historically,revenues are lower in the first quarter of the year for television broadcasterscompared to the fourth quarter, due in part to increases in retail advertisingin the fourth quarter leading up to and including the holiday season and asubsequent decrease in accounts receivable balances in the first quarter of thesucceeding year.

 

*Investing Activities*

 

Cash used in investingactivities for the three months ended March 31, 2006 was approximately $938,000,compared to cash provided by investing activities for the three months endedMarch 31, 2005 of $4.5 million. The following changes in investing activitieswere noted:

 

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

 

•      Capitalexpenditures for the three months ended March 31, 2006 of approximately$938,000 was lower than capital expenditures of $1.2 million for the threemonths ended March 31, 2005.

 

*Financing Activities*

 

Cash used in financingactivities for the three months ended March 31, 2006 and 2005 was $767,000 and$183,000, respectively. The following changes is financing activities werenoted:

 

•      The Companymade payments under capital lease obligations of approximately $17,000 and $183,000for the three months ended March 31, 2006 and 2005, respectively.

 

•      Additionally,the Company made a principal repayment of $750,000 on its Senior CreditFacility during the quarter ended March 31, 2006.

 

**Debt Instruments,Guarantees and Related Covenants**

 

OnMay 3, 2005, the Company amended and restated its senior credit facility (asamended, the “Senior Credit Facility”). The Senior Credit Facility consists of(i) a term loan in the amount of $300.0 million that matures in 2012 and (ii) arevolving credit facility in the amount of $20.0 million that matures in 2010.On May 3, 2005, the full $300 million of the term loan was borrowed. Approximately$278.0

 

21

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millionof the proceeds of the term loan borrowing were used to finance the purchase bythe Company of all of its $246,890,000 outstanding principal amount of 81⁄2%Senior Notes due 2008 pursuant to the cash tender offer and consentsolicitation commenced on April 11, 2005. The balance of the term loanborrowing will be used for working capital. The Company pays an annualcommitment fee at the rate of 0.5% per annum of the unused available borrowingsunder the revolving credit portion of the Senior Credit Facility. The Companycapitalized approximately $6.0 million of fees associated with the new termloan and revolving credit facility. At March 31, 2006, approximately $297.8million was outstanding under the term loan and the full $20.0 million wasavailable under the revolving facility.

 

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 acash and 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. At March 31, 2006, the Company was in compliance with allcovenants contained under the credit facility.

 

Inconnection with the cash tender offer and consent solicitation, the Companyrecorded a loss on the extinguishment of debt in the second quarter of 2005,totaling approximately $18.6 million. This loss is comprised of the cost of theconsent solicitations (approximately $18.1 million), plus the write-off of thedeferred financing costs (approximately $4.9 million), less the unamortizedportion of the bond premium relating to the 81⁄2% Senior Notes (approximately$4.6 million), plus various other administrative expenses (approximately$200,000).

 

On May 3, 2005, theCompany entered into an interest rate swap agreement for a notional amount of$71.0 million with a commercial bank who is also a lender under the SeniorCredit Facility. The swap will become effective on May 8, 2006 and expires onMay 8, 2008. Upon effectiveness, the Company will pay a fixed interest of4.3425% and the Company will receive interest from the commercial bank, basedupon a three month LIBOR rate. It is the Company’s intention to ensure theinterest rate reset dates of the swap and the term loan will match over theterm of the swap, and therefore the changes in the fair value of theinterest-rate swap are expected to significantly offset changes in the cashflows of the floating rate debt. The Company accounts for this agreement as acash flow hedge under FASB Statement No. 133 and as such the change in the fairvalue of the interest rate swap is reported as a component of othercomprehensive income (loss). For the quarter ended March 31, 2006, a gain ofapproximately $558,000 was recorded in other comprehensive income (loss). Thisamount will be reclassified commencing 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, theCompany entered into a partial termination agreement with Deutsche Bank toterminate one third of its original notional amount of $63.2 million interestrate swap, or approximately $21.1 million. In connection with the termination,the Company made a net interest payment of approximately $702,000, reduced bythe Company’s accrued interest income (approximately $35,000). In accordancewith the termination, the swap liability was reduced by the fair market valueof the one third portion of the swap as of the termination date (approximately$728,000). The difference between the payment and the fair market value of thepartially terminated swap was recorded as interest expense during the period(approximately $9,000).

 

On November 17, 2005, theCompany entered into a partial termination agreement with Deutsche Bank toterminate one half of its remaining notional amount $42.1 million interest rateswap. Further, on November 23, 2005, the Company entered into a finaltermination agreement with Deustche Bank to terminate the remaining notionalamount $21.1 million interest rate swap. In connection with the terminatedinterest rate swap agreement, the Company made net interest payments of$997,500 and $992,000, which includes the Company’s accrued interest on theswap from the last payment date of September 1, 2005 through the terminationdates of November 17, 2005 and November 23, 2005. In

 

22

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accordance with thetermination, the swap liability was reduced by the fair market value of theswap as of the termination dates (approximately $2.0 million in total on bothNovember 17, 2005 and November 23, 2005). The difference between the twopayments and the fair market value of the terminated swap was recorded asinterest expense during the period (approximately $19,000).

 

On April 26, 2006, the Companyannounced its intention to access a $50.0 million incremental Term Loan underits existing Senior Credit Facility. The Company also announced that it intendsto seek the consent of the required lenders to make certain amendments to theSenior Credit Facility, including the reduction of the minimum cash requirementfrom $35.0 million to $10.0 million. The Company intends to use the fundsavailable under the incremental term loan for working capital purposes. Whilethe Company expects to execute definitive documentation relating to theincremental term loan in the near future, closing of the incremental term loanwill be subject to customary conditions and there can be no assurance that theclosing of the incremental term loan will occur.

 

Thefollowing is a summary of our outstanding indebtedness (in thousands) andrelated annualized interest payments that is recorded during the period. Debtamounts outstanding at December 31, 2005 and March 31, 2006 were as follows:

 
| ** **                                   | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**           | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **12/31/05** | ** ** | **3/31/06** | ** ** | **Interest Payments(1)** | ** ** |
| Senior Credit Facility                       |       | $            | 298,500    |        | $          | 297,750                  |       | $ | 20,706 |   |
| 8 3⁄4% Senior Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                   |       |
| 10% Senior Subordinated Notes due 2011       |       | 347,292      | (2)        | $           | 347,147    | (2)                      | 34,429     |   |
| Total Debt  (excluding capital leases)       |       | $            | 785,792    |        | $          | 784,897                  |       | $ | 67.385 |   |

 

----

(1)           Theannualized interest payments are calculated based on the outstanding principal amountsat March 31, 2006, multiplied by the interest rates of the related notes. The annualizedinterest payments on the Senior Credit Facility takes into account the quarterlyprincipal payments of $750,000.

(2)           Includesan unamortized premium balance of $3.0 million and $2.8 million as of December31, 2005 and March 31, 2006, respectively.

 

The Company’s total debtat March 31, 2006 was approximately $785.0 million, consisting of $297.8million under the term loan portion of the Senior Credit Facility, $484.3million of Senior Subordinated Notes, $2.8 million of bond premiums and $49,000of capital leases. In addition, at March 31, 2006, the Company had anadditional $20.0 million of unused available borrowings under the Senior CreditFacility.

 

It is anticipated thatthe Company will be able to meet the working capital needs of its stations,scheduled principal and interest payments under the Company’s Senior CreditFacility and  Senior Subordinated Notes, corporateoverhead costs and capital expenditures, from cash on hand ($55.8 million atMarch 31, 2006), cash flows from operations and funds available under theSenior Credit Facility ($20.0 million at March 31, 2006).

 

**Income Taxes**

AtDecember 31, 2005, the Company had net operating loss (“NOL”) carryforwards fortax purposes of approximately $340.8 million expiring at various dates through2025, for which a full valuation allowance has been provided.

 

Withthe adoption of the FASB issued Statement No.142 , *Goodwill andOther Intangible Assets* (SFAS 142) the Company no longer amortizesthe book basis in the indefinite-lived intangibles, but continues to amortizethese intangibles for tax purposes. Beginning with the first quarter of 2005,the Company started recording a deferred tax provision for the excess of bookbasis over tax basis of intangible assets, not expected to reverse during thenet operating loss carryforward period. Income tax expense for the three monthsended March 31, 2006 primarilyconsists of deferred income taxes of $12.6 million related to the increase inthe Company’s deferred tax liability for the tax effect of the differencebetween the book and tax basis of the intangible assets not expected to reverseduring the net operating loss carryforward period.

 

TheCompany will have deferred tax liabilities that will arise each quarter becausethe taxable temporary differences related to the amortization of these assetswill not reverse prior to the expiration period of the

 

23

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Companys deductible temporary differences unless the related assets are sold or animpairment of the assets is recorded. The Company expects that it will record atotal of approximately $6.6 million to increase deferred tax liabilities duringthe remaining nine months of 2006.

 

**ContractualObligations and Other Commercial Commitments**

 

The Company hasobligations and commitments under its long-term debt agreements and instrumentsto make future payments of principal and interest. The Company also hasobligations and commitments under certain contractual arrangements to makefuture payments for goods and services. These arrangements secure the futurerights to various assets and services to be used in the normal course of operations.Under U.S generally accepted accounting principles, certain of thesearrangements (i.e., programming contracts that are currently available forairing) are recorded as liabilities on the Company’s consolidated balancesheet, while others (i.e., operating lease arrangements and programmingcontracts not currently available) are not reflected as liabilities.

 

The following tablesummarizes separately the Company’s material obligations and commitments atMarch 31, 2006 and the timing of payments required in connection therewith andthe effect that such payments are expected to have on the Company’s liquidityand 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)      |       | $                          | 782,049    |   | $ | 3,000 |   | $ | 6,000 |   | $ | 6,000 |   | $ | 767,049 |   |
| Cash Interest Payments(1)             |       | 280,766                    |       | 46,780 |   | 93,560 |   | 93,468 |   | 46,958 |   |
| Capital Lease Obligations             |       | 52                         |       | 31 |   | 21 |   | — |   | — |   |
| Operating Leases                      |       | 5,399                      |       | 1,656 |   | 2,780 |   | 905 |   | 58 |   |
| Unconditional Purchase Obligations(2) |       | 20,959                     |       | 12,666 |   | 6,769 |   | 1,524 |   | — |   |
| Other Long-Term Obligations(3)        |       | 108,413                    |       | 14,689 |   | 48,579 |   | 39,618 |   | 5,527 |   |
| Total Contractual Cash Obligations    |       | $                          | 1,197,638  |   | $ | 78,822 |   | $ | 157,709 |   | $ | 141,515 |   | $ | 819,592 |   |

 

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(1)Onlyincludes interest on fixed rate debt. The $300.0 million Senior CreditFacility, which matures on November 3, 2012, bears interest at various floatingrates based on LIBOR. The various March 31, 2006 LIBOR rates were used to computea weighted average LIBOR rate to calculate future cash interest payments. Basedon this weighted average,total additional interest over the term of the floating rate facilityapproximates $132.1 million.

(2) Unpaid programlicense liability reflected on the March 31, 2006 balance sheet.

(3) Obligations forprogramming that has been contracted for, but not recorded on the March 31, 2006Balance Sheet because the programs were not currently available for airing.

 

**Impact of Recently IssuedAccounting Standards**

 

Duringthe first quarter of 2006, the Company adopted FASB Statement No. 123 (R), *Share-Based Payment* (“SFAS 123R”), which requirescompanies to measure and recognize compensation expense for all stock-basedpayments at fair value. The Company adopted SFAS 123R using the modifiedprospective method, and consequently has not retroactively adjusted resultsfrom prior periods.

 

Priorto January 1, 2006, the Company had accounted for its share-based payments toemployees under FASB Statement No. 123, *Accounting for Stock BasedCompensation* (SFAS “123”) which allowed companies to either expensethe estimated fair value of stock options or to follow the intrinsic valuemethod set forth in Account Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), butdisclose the pro forma net income (loss) had the fair value of the options beenexpensed.

 

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On November 29, 2005, theCompany entered into an exchange agreement with each of its executive officerswhereby options to purchase an aggregate of 2,198,375 shares of common stock ofthe Company, representing all of the outstanding and unexercised options heldby the executive officers, were cancelled and, in exchange for such cancelledoptions, the executive officers were awarded an aggregate of 318,791 deferredstock units. On December 30, 2005 the Company concluded an offer to alleligible employees to exchange all of their outstanding stock options forrestricted shares (see Note 2 to the Consolidated Financial Statements). As aresult of the above-discussed exchange agreement and exchange offer, theCompany had an aggregate of 900 outstanding stock options that were unvested asof March 31, 2006 which were fully expensed during the first quarter of 2006,in the amount of approximately $5,000. In addition, the Company will incurcompensation expense associated with the issuance of the restricted anddeferred stock awards. The Company estimates recording additional compensationexpense relating to previously restricted shares and deferred stock units of approximately$2.0 million for the remainder of 2006 and approximately $1.9 million, and $876,000during 2007 and 2008, respectively.

** **

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

 

The Company’s SeniorCredit Facility, with $297.8 million outstanding as of March 31, 2006, bearsinterest at floating rates. Accordingly, to the extent there are amountsoutstanding under the Senior Credit Facility, we are exposed to potentiallosses related to changes in interest rates.

 

The Company’s SeniorSubordinated Notes of approximately $484.3 million outstanding principal amountas of March 31, 2006 are general unsecured obligations of the Company and aresubordinated in right of payment to all senior debt, including all indebtednessof the Company under the Senior Credit Facility. The 83⁄4% Senior SubordinatedNotes, $140.0 million of which is outstanding, mature in 2014. The 10% SeniorSubordinated Notes, $344.3 million of which is outstanding, mature in 2011. Theannualized interest expense on the outstanding Senior Subordinated Notes isapproximately $46.7 million.

 

The Company does notenter into derivatives or other financial instruments for trading orspeculative purposes; however, in order to manage its exposure to interest raterisk, the Company enters into derivative financial instruments. The Company hasentered into two derivative financial instruments. In 2001, the Company enteredinto an interest rate swap for a notional amount of $63.2 million, whichexpires in 2011. This swap was terminated during the year ended December 31,2005. On May 3, 2005 the Company entered into an interest rate swap agreementfor a notional amount of $71.0 million. The swap is effective on May 8, 2006and expires on May 8, 2008. The Company accounts for this agreement using hedgeaccounting 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).

 

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

 

Our management carriedout an evaluation, under the direction of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of March 31, 2006. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that (i) our disclosure controlsand procedures were effective to ensure that information required to bedisclosed by us in reports that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported, within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission, and (ii) our disclosure controls and procedures were designed toensure that information required to be disclosed by us in reports that we fileor submit 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 anychange in our internal control over financial reporting in connection with theevaluation required by Rule 13a-15(d) under the Exchange Act that occurredduring the quarter ended March 31, 2006 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II. OTHERINFORMATION**

 

**Item1. *Legal Proceedings.***

 

The Company is involvedin legal proceedings and litigation arising in the ordinary course of business.In the Company’s opinion, the outcome of such proceedings and litigationcurrently pending will not materially affect the Company’s financial conditionor results of operations.

 

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

 

The risk factor below shouldbe read in conjunction with the risk factors and information disclosed in theCompany’s 2005 Form 10-K.

 

**RecentEnforcement Activity by the Federal Communications Commission May AdverselyAffect The Company’s Business**

 

In recent years, theFederal Communications Commission (“FCC”) has vigorously enforced a number ofits rules. For example, the FCC has issued fines and sanctions for violationsof its indecency rules, equal employment opportunity rules, public inspectionfile rules, and children’s programming rules. The FCC’s recent enforcementactivity has typically been in connection with its review of station renewalapplications. When reviewing a station’s license renewal application, theCommunications Act of 1934, as amended (the “Communications Act”), requires theFCC to review (1) whether the station has served the public interest; (2) whetherthe station has committed any serious violations of either the CommunicationsAct or the FCC’s rules; and (3) whether the station has committed otherviolations of the Communications Act or the FCC’s rules which, taken together,would constitute a pattern of abuse.

 

In March 2006, the FCCproposed indecency fines against KLFY, KCLO, KELO, and KPLO in the amount of$32,500 per station for airing an episode of the CBS network program “Without aTrace.” The Company plans to oppose these proposed fines. Also, in March 2006,the FCC proposed a $10,000 fine against KLFY in connection with its pendinglicense renewal application for public inspection file rule violations. In2004, the FCC also proposed a $27,500 indecency fine against KRON, and theCompany’s opposition to the proposed fine remains pending. In addition, theCompany’s pending renewal applications for WATE, WLNS, KCLO, WKRN, and KWQCeach disclose minor compliance issues with either the public inspection filerules or children’s television rules. The Company is unable to predict theoutcome of the FCC’s review of these matters or the impact that these (and anyfuture) FCC-related compliance matters may have on the Company and the licenserenewal process at the relevant station.

 

**Item2. *Unregistered Sales of Equity Securities and Use ofProceeds***

 

None.

 

**Item3. *Defaults Upon Senior Securities***

 

None.

 

**Item4. *Submission of Matters to a Vote of Security Holders***

 

None.

 

**Item5. *Other Items***

 

NotApplicable.

 

**Item6. *Exhibits***

 

*Exhibits.*

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|              |   | YOUNG BROADCASTING INC. |                           |
|-------------------|--------|-------------------------|--------------------------------|
|              |   |                    |                           |
|              |   |                    |                           |
| Date: May 4, 2006 |   | By:                     | /s/ Vincent J. Young           |   |   |
|              |   |                    | Vincent J. Young               |   |
|              |   |                    | Chairman                       |   |
|              |   |                    |                           |   |
|              |   |                    |                           |   |
| Date: May 4, 2006 |   | By:                     | /s/ James A. Morgan            |   |   |
|              |   |                    | James A. Morgan                |   |
|              |   |                    | Executive Vice  President and  |   |
|              |   |                    | Chief Financial Officer        |   |
|              |   |                    | (principal financial  officer) |   |

 

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