**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.   20549**

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**FORM 10-Q**

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

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

 

**YOUNGBROADCASTING INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

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

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

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

Large accelerated filer o                                  Acceleratedfiler x                                    Non-acceleratedfiler o

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

Number of sharesof Common Stock outstanding as of October 23, 2006: 20,043,374 shares of ClassA Common Stock, and 1,941,414 shares of Class B Common Stock.

 

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**YOUNG BROADCASTING INC.**

**FORM 10-Q**

**Table of Contents**
| Part I               | Financial Information                                                |                                                                                                   |
|----------------------|----------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                 |                                                                 |                                                                                                   |
|                 | Item 1. Financial Statements (unaudited)                             |                                                                                                   |
|                 |                                                                 |                                                                                                   |
|                 |                                                                 | Consolidated Balance Sheets as of December 31, 2005  and September 30, 2006                            | 2 |
|                 |                                                                 |                                                                                                   |   |
|                 |                                                                 | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2005 and 2006 | 3 |
|                 |                                                                 |                                                                                                   |   |
|                 |                                                                 | Consolidated Statements of Stockholders’ Equity for  the Nine Months Ended September 30, 2006     | 4 |
|                 |                                                                 |                                                                                                   |   |
|                 |                                                                 | Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2005 and 2006           | 5 |
|                 |                                                                 |                                                                                                   |   |
|                 |                                                                 | Notes to Consolidated Financial Statements                                                             | 6 |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 2.                                                              | Management’s Discussion and Analysis of Financial  Condition and Results of Operations            | 16 |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 3.                                                              | Quantitative and Qualitative Disclosures About Market  Risk                                            | 33 |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 4.                                                              | Controls and Procedures                                                                                | 34 |
|                 |                                                                 |                                                                                                   |   |
| Part  II Other Items | 35                                                                   |
|                 |                                                                 |                                                                                                   |
|                 | Item  1. Legal Proceedings                                           | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 1A. Risk Factors                                                | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 3. Defaults Upon Senior Securities                              | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 4. Submission of Matters to a Vote of Security  Holders         | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item  5. Other Information                                           | 35                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
|                 | Item 6. Exhibits                                                     | 36                                                                                                     |
|                 |                                                                 |                                                                                                   |   |
| Signatures           | 37                                                                   |
|                      |                                                                      |                                                                                                        |  |  |

 

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**PartI  Financial Information**

**Item 1. *FinancialStatements***

**Young BroadcastingInc. and SubsidiariesConsolidated Balance Sheets**
| ** **                                                                                                                                            | ** ** | **December 31,** | ** **  | **September 30,** | ** **      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|------------------------|-----------------|
| ** **                                                                                                                                            | ** ** | **2005**              | ** **  | **2006**               | ** **      |
| ** **                                                                                                                                            | ** ** | ** **            | ** **  | **(Unaudited)**        | ** **      |
| **Assets**                                                                                                                                            |       |                  |        |                   |            |
| Current assets:                                                                                                                                       |       |                  |        |                   |            |
| Cash and cash  equivalents                                                                                                                            |       | $                     | 78,099,123  | ** **             | **$**           | **95,711,617** | ** ** |
| Trade accounts  receivable, less allowance for doubtful accounts of $1,050,000 in 2005 and  $1,144,000 in 2006                                        |       | 40,768,181            | ** **  | **38,705,280**         | ** **      |
| Current portion  of program license rights                                                                                                            |       | 21,763,650            | ** **  | **26,449,032**         | ** **      |
| Prepaid expenses                                                                                                                                      |       | 2,785,369             | ** **  | **2,667,769**          | ** **      |
| Other current  assets                                                                                                                                 |       | 1,979,314             | ** **  | **2,010,804**          | ** **      |
| Total current assets                                                                                                                                  |       | 145,395,637           | ** **  | **$**                  | **165,544,502** | ** ** |
|                                                                                                                                                  |       |                  |        |                   |            |
| Property and equipment,  less accumulated depreciation and amortization of $184,348,672 in 2005 and  $193,603,672 in 2006                             |       | 75,328,016            | ** **  | **69,236,279**         | ** **      |
| Program license rights,  excluding current portion                                                                                                    |       | 7,018,090             | ** **  | **3,392,769**          | ** **      |
| Deposits and other  assets                                                                                                                            |       | 3,575,404             | ** **  | **3,969,010**          | ** **      |
| Investments in  unconsolidated subsidiaries                                                                                                           |       | 4,451,831             | ** **  | **3,335,584**          | ** **      |
| Unamortizable  intangible assets                                                                                                                      |       | 475,928,822           | ** **  | **475,928,822**        | ** **      |
| Amortizable intangible  assets, less accumulated amortization                                                                                         |       | 65,454,167            | ** **  | **62,300,634**         | ** **      |
| Deferred charges, less  accumulated amortization of $3,285,390 in 2005 and $4,510,879 in 2006                                                         |       | 10,395,399            | ** **  | **10,466,064**         | ** **      |
| **Total Assets**                                                                                                                                      |       | $                     | 787,547,366 | ** **             | **$**           | **794,173,664** | ** ** |
| ** **                                                                                                                                            | ** ** | ** **            | ** **  | ** **             | ** **      |
| **Liabilities and stockholders’  deficit**                                                                                                       | ** ** | ** **            | ** **  | ** **             | ** **      |
| Current liabilities:                                                                                                                                  |       |                  |        |                   |            |
| Trade accounts  payable                                                                                                                               |       | $                     | 8,933,428   | ** **             | **$**           | **10,262,921** | ** ** |
| Accrued interest                                                                                                                                      |       | 18,954,497            | ** **  | **9,422,241**          | ** **      |
| Accrued expenses                                                                                                                                      |       | 17,187,952            | ** **  | **20,366,911**         | ** **      |
| Current  installments of program license liability                                                                                                    |       | 17,282,456            | ** **  | **25,560,112**         | ** **      |
| Current  installment of long term debt                                                                                                                |       | 3,000,000             | ** **  | **3,500,000**          | ** **      |
| Current  installments of obligations under capital leases                                                                                             |       | 45,445                | ** **  | **30,984**             | ** **      |
| Total current  liabilities                                                                                                                            |       | 65,403,778            | ** **  | **69,143,169**         | ** **      |
| Program license  liability, excluding current installments                                                                                            |       | 9,119,940             | ** **  | **6,926,969**          | ** **      |
| Long-term debt,  excluding current installments                                                                                                       |       | 782,791,781           | ** **  | **829,357,342**        | ** **      |
| Deferred tax liability  and other long-term tax liabilities                                                                                           |       | 26,684,273            | ** **  | **38,971,034**         | ** **      |
| Other liabilities                                                                                                                                     |       | 4,847,411             | ** **  | **4,718,014**          | ** **      |
| Obligations under  capital leases, excluding current installments                                                                                     |       | 20,546                | ** **  | **—**             | ** **      |
| **Total liabilities**                                                                                                                                 |       | 888,867,729           | ** **  | **949,116,528**        | ** **      |
| Stockholders’ deficit:                                                                                                                           | * *   | * *              | * *    | * *               | * *        |
|                                                                                                                                                  | * *   | * *              | * *    | * *               | * *        |
| Class A Common  Stock, $.001 par value. Authorized 40,000,000 shares; issued and outstanding  18,907,651 shares at 2005 and 19,854,849 shares at 2006 |       | 18,908                | ** **  | **19,855**             | ** **      |
| 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           | ** **  | **387,685,882**        | ** **      |
| Accumulated  other comprehensive loss                                                                                                                 |       | (2,481,117            | )           | **(2,252,807**         | **)**           |
| Accumulated  deficit                                                                                                                                  |       | (483,033,115          | )           | **(540,397,735**       | **)**           |
| Total stockholders’  deficit                                                                                                                     |       | (101,320,363          | )           | **(154,942,864**       | **)**           |
| **Total liabilities and stockholders’ deficit**                                                                                                  |       | $                     | 787,547,366 | ** **             | **$**           | **794,173,664** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements*

2

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**Young BroadcastingInc. and SubsidiariesConsolidated Statements of Operations(Unaudited)**
| ** **                                                                                     | ** ** | **Three Months Ended** | ** **  | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **September 30,**           | ** **  | **September 30,**          | ** ** |
| ** **                                                                                     | ** ** | **2005**                         | ** **  | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net operating  revenue                                                                         |       | $                                | 47,480,775  | ** **                      | **$**      | **53,550,762** |   | $ | 143,855,438 | ** ** | **$** | **158,692,051** | ** ** |
|                                                                                           |       |                             | ** **  | ** **                      |       |   | ** ** | ** ** | ** ** |
| Operating  expenses, excluding depreciation expense                                            |       | 17,967,932                       | ** **  | **18,288,474**                  |       | 54,567,448 | ** ** | **52,302,879** | ** ** |
| Amortization of  program license rights                                                        |       | 6,290,784                        | ** **  | **7,010,686**                   |       | 16,896,803 | ** ** | **20,683,297** | ** ** |
| Write- down of  program license rights                                                         |       | —                           | ** **  | **4,343,569**                   |       | — | ** ** | **4,543,569** | ** ** |
| Selling, general  and administrative expenses, excluding depreciation and amortization expense |       | 16,936,067                       | ** **  | **17,303,037**                  |       | 50,608,861 | ** ** | **51,136,525** | ** ** |
| Depreciation and  amortization                                                                 |       | 4,806,872                        | ** **  | **4,457,634**                   |       | 17,243,248 | ** ** | **13,978,142** | ** ** |
| Corporate  overhead, excluding depreciation expense                                            |       | 2,728,574                        | ** **  | **3,316,715**                   |       | 9,882,600 | ** ** | **10,360,345** | ** ** |
| Operating income  (loss)                                                                       |       | (1,249,454                       | )           | **(1,169,353**                  | **)**      | (5,343,522 | ) | **5,687,294** | ** ** |
|                                                                                           |       |                             | ** **  | ** **                      |       |   | ** ** | ** ** | ** ** |
| Interest  expense, net                                                                         |       | (15,445,738                      | )           | **(17,103,650**                 | **)**      | (46,682,749 | ) | **(49,443,157** | **)** |
| Non-cash change  on market valuation of swaps                                                  |       | (881,986                         | )           | **—**                      |       | (1,540,493 | ) | **—** | ** ** |
| Loss on  extinguishment of debt                                                                |       | —                           | ** **  | **—**                      |       | (18,625,706 | ) | **—** | ** ** |
| Other expense,  net                                                                            |       | (148,233                         | )           | **(1,317,883**                  | **)**      | (448,688 | ) | **(2,875,751** | **)** |
|                                                                                           |       | (16,475,957                      | )           | **(18,421,533**                 | **)**      | (67,297,636 | ) | **(52,318,908** | **)** |
|                                                                                           |       |                             | ** **  | ** **                      |       |   | ** ** | ** ** | ** ** |
| Loss from  continuing operations before provision for income tax                               |       | (17,725,411                      | )           | **(19,590,886**                 | **)**      | (72,641,158 | ) | **(46,631,614** | **)** |
| Income tax  (expense) benefit                                                                  |       | (3,440,108                       | )           | **3,849,903**                   |       | (15,233,645 | ) | **(10,733,006** | **)** |
| Loss from  continuing operations                                                               |       | (21,165,519                      | )           | **(15,740,983**                 | **)**      | (87,874,803 | ) | **(57,364,620** | **)** |
| Income from  discontinued operations, net of taxes                                             |       | —                           | ** **  | **—**                      |       | 11,203,884 | ** ** | **—** | ** ** |
| Net loss                                                                                       |       | $                                | (21,165,519 | )                               | **$**      | **(15,740,983** | **)** | $ | (76,670,919 | ) | **$** | **(57,364,620** | **)** |
|                                                                                           |       |                             | ** **  | ** **                      |       |   | ** ** | ** ** | ** ** |
| Basic and  diluted net loss per common share:                                                  |       |                             | ** **  | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations                                                                |       | $                                | (1.03       | )                               | **$**      | **(0.72** | **)** | $ | (4.34 | ) | **$** | **(2.69** | **)** |
| Income from discontinued operations                                                            |       | —                           | ** **  | **—**                      |       | 0.55 | ** ** | **—** | ** ** |
| Net loss per common share                                                                      |       | $                                | (1.03       | )                               | **$**      | **(0.72** | **)** | $ | (3.79 | ) | **$** | **(2.69** | **)** |
|                                                                                           |       |                             | ** **  | ** **                      |       |   | ** ** | ** ** | ** ** |
| Weighted average shares  – Basic and dilutive                                             |       | 20,598,750                       | ** **  | **21,758,368**                  |       | 20,259,702 | ** ** | **21,309,575** | ** ** |

 

*See accompanying notes to consolidated financialstatements.*

3

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**Young BroadcastingInc. and SubsidiariesConsolidated Statements of Stockholders’ Equity(Unaudited)**
| ** **                                                            | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** **  | ** **        | ** ** | **Accumulated**   | ** ** | **Total**              | ** ** | **Total**    | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|-------------|-------------------|------------|-------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                            | ** ** | **Common Stock** | ** ** | **Paid-In**      | ** ** | **Accumulated** | ** **  | **Comprehensive** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                            | ** ** | **Class A**      | ** ** | **Class B** | ** ** | **Capital**     | ** **  | **Deficit**       | ** ** | **Loss**          | ** ** | **Loss**               | ** ** | **Equity**   | ** ** |
| Balance at  December 31, 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 |       | 413                   |       |             |       | 1,259,212       |        |              |       |              |       |                   |       | 1,259,625    |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |         |       |
| Non-cash stock compensation                                           |       | 523                   |       |             |       | 2,226,077       |        |              |       |              |       |                   |       | 2,226,600    |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |         |       |
| Employee stock purchase plan                                          |       | 11                    |       |             |       | 27,573          |        |              |       |              |       |                   |       | 27,584       |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |         |       |
| Net loss for the nine months ended September 30,  206            |       |                  |       |             |       |            |        | (57,364,620       | )          |              |       | (57,364,620            | )          | (57,364,620  | )          |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       |                   |       |         |       |
| Unrealized gain on derivative instrument                              |       |                  |       |             |       |            |        |              |       |              |       |                   |       |         |       |
| Total comprehensive loss                                              |       |                  |       |             |       |            |        |              |       | 228,310           |       | 228,310                |       | 228,310      |       |
|                                                                  |       |                  |       |             |       |            |        |              |       |              |       | (57,136,310            | )          | (57,136,310  | )          |
| Balance at September 30,  2006                                        |       | 19,855                |       | 1,941            |       | 387,685,882     |        | (540,397,735      | )          | (2,252,807        | )          |                   |       | (154,942,864 | )          |
|                                                                       |            |                       |            |                  |            |                 |             |                   |            |                   |            |                        |            |              |            |  |  |  |

 

*Seeaccompanying notes to consolidated financial statements*

4

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**Young Broadcasting Inc. and SubsidiariesConsolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** **      |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|-----------------|
| ** **                                                                                 | ** ** | **2005**                                                | ** **      | **2006** | ** ** |
| **Operating  activities**                                                                  | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Net loss                                                                                   | ** ** | **$**                                                   | **(76,670,919** | **)** | **$** | **(57,364,620** | **)** |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Gain on the sale of station, net of taxes                                                  | ** ** | **(11,204,230**                                         | **)**           | **—** | ** ** |
| Depreciation and amortization of property and  equipment                                   | ** ** | **12,631,487**                                          | ** **      | **9,599,121** | ** ** |
| Provision for uncollectible accounts                                                       | ** ** | **224,734**                                             | ** **      | **184,910** | ** ** |
| Amortization of program license rights, including  write-off                               | ** ** | **16,896,803**                                          | ** **      | **25,226,866** | ** ** |
| Amortization of intangibles and deferred charges                                           | ** ** | **4,611,761**                                           | ** **      | **4,379,022** | ** ** |
| Non-cash compensation                                                                      | ** ** | **2,094,204**                                           | ** **      | **3,796,142** | ** ** |
| Non-cash change on market valuation of swap                                                | ** ** | **1,540,493**                                           | ** **      | **—** | ** ** |
| Provision for income taxes                                                                 | ** ** | **15,233,645**                                          | ** **      | **10,733,006** | ** ** |
| (Gain) loss on unconsolidated subsidiaries, net of  dividend                               | ** ** | **(153,486**                                            | **)**           | **1,116,247** | ** ** |
| Loss on extinguishment of debt                                                             | ** ** | **388,757**                                             | ** **      | **—** | ** ** |
| Non-cash curtailment charge                                                                | ** ** | **542,223**                                             | ** **      | **—** | ** ** |
| (Gain) loss on sale of fixed assets                                                        | ** ** | **(12,254**                                             | **)**           | **46,999** | ** ** |
| Payments on programming license liabilities                                                | ** ** | **(16,730,569**                                         | **)**           | **(20,079,295** | **)** |
| Changes in  assets and liabilities                                                         | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Decrease in trade accounts receivable                                                      | ** ** | **2,188,836**                                           | ** **      | **1,877,988** | ** ** |
| Decrease in prepaid expenses                                                               | ** ** | **1,671,606**                                           | ** **      | **117,600** | ** ** |
| Increase in trade accounts payable                                                         | ** ** | **1,093,689**                                           | ** **      | **1,188,546** | ** ** |
| Decrease in accrued expenses and other liabilities                                         | ** ** | **(11,675,992**                                         | **)**           | **(5,640,165** | **)** |
| Increase in other assets                                                                   | ** ** | **(1,182,916**                                          | **)**           | **(202,329** | **)** |
| Net cash used in  operating activities                                                     | ** ** | **(58,512,128**                                         | **)**           | **(25,019,962** | **)** |
| ** **                                                                                 | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| **Investing  activities**                                                                  | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Capital  expenditures                                                                      | ** ** | **(4,634,983**                                          | **)**           | **(4,209,902** | **)** |
| Net proceeds  from the sale of WTVO-TV                                                     | ** ** | **5,802,243**                                           | ** **      | **—** | ** ** |
| Proceeds from  the disposal of fixed assets                                                | ** ** | **54,877**                                              | ** **      | **673,520** | ** ** |
| Net cash (used  in) provided by investing activities                                       | ** ** | **1,222,137**                                           | ** **      | **(3,536,382** | **)** |
| ** **                                                                                 | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| **Financing  activities**                                                                  | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Principal  borrowings on long-term debt                                                    | ** ** | **300,000,000**                                         | ** **      | **50,000,000** | ** ** |
| Principal  payment on Credit Facility                                                      | ** ** | **(750,000**                                            | **)**           | **(2,500,000** | **)** |
| Repurchase of  senior notes                                                                | ** ** | **(246,890,000**                                        | **)**           | **—** | ** ** |
| Deferred debt  financing costs incurred                                                    | ** ** | **(6,144,937**                                          | **)**           | **(1,296,155** | **)** |
| Principal  payments under capital lease obligations                                        | ** ** | **(600,038**                                            | **)**           | **(35,007** | **)** |
| Net cash  provided by financing activities                                                 | ** ** | **45,615,025**                                          | ** **      | **46,168,838** | ** ** |
|                                                                                       | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| **Net (decrease)  increase in cash**                                                       | ** ** | **(11,674,966**                                         | **)**           | **17,612,494** | ** ** |
| Cash and cash  equivalents at beginning of year                                            | ** ** | **93,831,317**                                          | ** **      | **78,099,123** | ** ** |
| **Cash  and cash equivalents at September 30**                                             | ** ** | **$**                                                   | **82,156,351**  | ** ** | **$** | **95,711,617** | ** ** |
| ** **                                                                                 | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| **Supplemental  disclosure of cash flow information**                                      | ** ** | ** **                                              | ** **      | ** ** | ** ** |
| Interest paid                                                                              | ** ** | **$**                                                   | **58,449,707**  | ** ** | **$** | **62,313,023** | ** ** |

 

*See accompanying notes to consolidated financialstatements.*

5

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**YoungBroadcasting Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements(Unaudited)**

**1. Basis of Presentation**

The businessoperations of Young Broadcasting Inc. and subsidiaries (the “Company”) consistof nine network affiliated stations (five with ABC, three with CBS, and onewith NBC).  Additionally, on March 16,2006, KRON-TV, our only independent station, entered into an affiliationagreement with MyNetworkTV.  Furthermore,on March 28, 2006, KELO-DT, KDLO-DT and KPLO-DT, our digital stations, enteredinto an affiliation agreement with MyNetworkTV. The MyNetworkTV affiliation agreements are for a term of five yearscommencing with the 2006/2007 broadcast season. MyNetworkTV launched on September 5, 2006.  The markets served by our stations arelocated 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. Inaddition, the accompanying condensed consolidated financial statements includethe Company’s wholly owned national television sales representation firm.Significant intercompany transactions and accounts have been eliminated.

As a result of the affiliation of KRON-TV with MyNetworkTV in September2006, the Company shifted certain syndicated programming previously being shownfrom 10:00 P.M. to 11:00 P.M. to late night (11:30 P.M. to 12:30 A.M.).  Spot rates for late night are lower thanthose charged for primetime spots. Accordingly, during the third quarter the Company determined that theasset value of the prior primetime programming that was shifted to late night,with a contract end date of September 12, 2009, was above realizable value anda write-down of this asset was required. At the same time, certain other programming assets were also writtendown.  For the three and nine monthsended September 30, 2006, a total write down of approximately $4.3 million and$4.5 million, respectively, was recorded.

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

For investments inwhich the Company owns 20% to 50% of voting shares and does have significantinfluence over operating and financial policies, the equity method ofaccounting is used.  Four of the Company’sstations are party to equity investments in third parties for tower agreementswhich are accounted for under the equity method.  Accordingly, the Company’s share of earningsand losses of these companies are included in other income (expense), net, inthe accompanying consolidated statements of operations of the Company.  The Company recorded its share of earnings ofapproximately $506,000 and its share of losses of approximately $1.0 million forthe nine months ended September 30, 2005 and 2006, respectively, and its shareof earnings of approximately $42,000 and approximately $73,000 for the threemonths ended September 30, 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 the consolidated financial statementsand footnotes thereto included in the Company’s annual report on Form 10-K forthe year ended December 31, 2005.

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**2.Stock-Based Compensation**

On May 4, 2004,the shareholders of the Company approved the 2004 Equity Incentive Plan (“2004Plan”).  The 2004 Plan is a continuationof the 1995 Stock Option Plan and supplants the 1995 Stock Option Plan, underwhich no further awards will be granted. The 2004 Plan is administered by the Compensation Committee of the Boardof Directors.

In June 2006, June2005 and May 2004, the Company awarded 636,700, 438,500 and 109,100 deferredstock units, respectively, to executive officers of the Company under the 2004Plan, with aggregate market values at the date of grant of approximately $2.3million, $2.0 million and $1.8 million, respectively.  Deferred stock awards represent the right toreceive shares of Class B common stock at the end of specified deferralperiods. The deferred stock awards vest ratably in three equal annualinstallments beginning one year from the date of the grant and, as they vest,are charged to the income statement as non-cash compensation expense includedin selling, general and administrative expenses.  Upon vesting the recipients will be creditedwith units equivalent to shares.  Duringthe deferral period, the participants have no voting or other rights associatedwith stock ownership unless and until the shares are actually delivered at theend of the deferral period. The end of the deferral period for the deferredstock awards will occur after the termination of employment.  Additionally, granted but unvested deferred stockunits are forfeited upon termination of employment, unless for reasons of deathor disability.

The June 2005awards of deferred stock units were subject to the consummation of atransaction that resulted in there being available for grant under the 2004Plan a number of additional shares of common stock equal to the aggregatenumber of deferred units conditionally awarded to such executive officers.  These conditional awards became effective onNovember 29, 2005, when the Company entered into an exchange agreement witheach of its executive officers (collectively, the “Exchange Agreements”).Pursuant to the Exchange Agreements, options to purchase an aggregate of2,198,375 shares of common stock of the Company, representing all of theoutstanding and unexercised stock options held by such executive officers, werecancelled and, in exchange for such cancelled options (which had a fair marketvalue 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 expense associated with the fair market value of thedeferred stock units ($602,000) will be recognized ratably over the three yearvesting period.

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

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

*Stock Options*As a result of the above-discussed Exchange Agreements andexchange offer, the Company had an aggregate of 900 outstanding stock optionsthat were unvested which were fully expensed during the nine months endedSeptember 30, 2006, in the amount of approximately $5,000.

*RestrictedShares and Deferred Stock Units*The fair value of nonvested restricted shares and deferredstock units is determined based on the closing trading price of the Company’s ClassA common stock on the grant date. The Company recorded non-cash compensationexpense in connection with the issuance of the restricted shares and deferredstock units of approximately $614,000 and $1.0 million, respectively, for thethree months ended September 30, 2005 and 2006, and $1.2 million and $2.4million, respectively, for the nine months ended September 30, 2005 and2006.

There were1,472,363 and 2,480,534 unvested restricted shares and deferred stock unitswith a weighted average share price of $4.89 and $3.97 as of December 31, 2005and September 30, 2006, respectively.

The Companyestimates it will record additional compensation expense relating to previouslyissued restricted shares and deferred stock units of approximately $1.1 millionfor the remainder of 2006 and approximately $3.5 million, $2.5 million and $739,000during 2007, 2008 and 2009, respectively.

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

The Company doesnot currently recognize tax benefits resulting from tax deductions in excess ofthe compensation costs recognized because of the federal and state netoperating loss carryforwards available to offset future federal and statetaxable income.  Accordingly, theadoption of SFAS 123R did not have any impact on the Company’s consolidatedstatements of cash flows.

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Prior to January1, 2006, the Company had accounted for its share-based payments to employeesunder FASB Statement No. 123, Accounting for Stock Based Compensation (SFAS “123”)which allowed companies to either expense the estimated fair value of stockoptions or to follow the intrinsic value method set forth in Account PrinciplesBoard 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.

For stock optionsgranted prior to the adoption of SFAS 123(R), the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of SFAS 123(R) to its stock option plans would have been as followsfor the three and nine months ended September 30, 2005:
|                                                                                                                                           | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| **(dollars in thousands, except per share data)**                                                           | ** ** | **Ended**             | ** ** | **Ended**            | ** ** |
| Net loss-as reported                                                                                                                      |       | $                     | (21,166    | )                    | $          | (76,671 | ) |
| Add stock based employee compensation expense included  in reported net loss                                                              |       | 614                   |       | 1,158                |       |
| Deduct total stock-based employee compensation expense  determined under fair value based method, including employee stock purchase  plan |       | (1,264                | )          | (3,293               | )          |
| Net loss-pro forma                                                                                                                        |       | $                     | (21,816    | )                    | $          | (78,806 | ) |
| Net loss per basic common share-as reported                                                                                               |       | $                     | (1.03      | )                    | $          | (3.79 | ) |
| Net loss per  basic common share-pro forma                                                                                                |       | $                     | (1.06      | )                    | $          | (3.89 | ) |

 

**3.Intangible Assets**

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

The followingtable sets forth the additional disclosures related to the Company’s intangibleassets:
|                                      | ** ** | **As of December 31, 2005** | ** ** | **As of September 30, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands)**            | ** ** |
| ** **                           | ** ** | **Gross  Carrying**                             | ** ** | **Accumulated**                                  | ** ** | **Net  Carrying** | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** | **Net  Carrying** | ** ** |
| ** **                           | ** ** | **Amount**                                      | ** ** | **Amortization**                                 | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Indefinite-lived  intangible assets: |       |                                            |       |                                             |       |   |   |   |   |   |   |   |   |
| Broadcast  licenses                  |       | $                                               | 475,929    |                                             | —     |   | $ | 475,929 |   | $ | 475,929 |   | — |   | $ | 475,929 |   |
|                                 |       |                                            |       |                                             |       |   |   |   |   |   |   |   |   |
| Definite-lived  intangible assets:   |       |                                            |       |                                             |       |   |   |   |   |   |   |   |   |
| Network  Affiliations                |       | 91,164                                          |       | (30,914                                          | )          | 60,250 |   | 91,164 |   | (33,065 | ) | 58,099 |   |
| Other intangible  assets             |       | 13,401                                          |       | (8,197                                           | )          | 5,204 |   | 13,401 |   | (9,199 | ) | 4,202 |   |
|                                 |       | $                                               | 104,565    |                                             | $          | (39,111 | ) | $ | 65,454 |   | $ | 104,565 |   | $ | (42,264 | ) | $ | 62,301 |   |
|                                      |            |                                                 |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Aggregateamortization expense for the nine months ended September 30, 2005 and 2006 was$3.3 million and $3.2 million, respectively. Aggregate amortization expense for the three months ended September 30,2005 and 2006 was $1.1 million and $1.1 million, respectively.

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

To assist the Company in evaluating its intangibleassets, the Company utilized the service of an independent valuation consultingfirm. Broadcast licenses are valued using a “Greenfield” income approach.  Under this approach, the broadcast license isvalued by analyzing the estimated after-tax discounted future cash flows of thestation.  The assumptions used in thediscounted cash flow models reflect historical station performance, industrystandards and trends in the respective markets. An analysis of the financial multiples for publicly-traded broadcastingcompanies, as well as a comparable sales analysis of television station sales,was also utilized to confirm the results of the income approach.  The Company adopted this methodology to valuebroadcast licenses as the Company believes this methodology has, in recentyears, become the methodology generally used within the broadcast industry tovalue such licenses.

If these estimates or related assumptions materiallychange in the future, the Company may be required to record impairment chargesnot previously recorded for these assets. The Company will perform its annual impairment test in the fourthquarter of 2006 and determine if the fair value of its indefinite-lived assetsare in excess of their carrying value.

**4. Saleof Station**

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

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

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The Company recorded a loss from discontinued operations related toWTVO-TV of $346 for the nine months ended September 30, 2005.

**5. Long-Term Debt**

On May 3, 2005,the Company (i) entered into an amended and restated Senior Credit Facility(the “Senior Credit Facility”) and (ii) accepted for payment and paid for, inconnection with a cash tender offer and consent solicitation commenced on April11, 2005, all of its $246,890,000 outstanding principal amount of 81⁄2% SeniorNotes Due 2008.  The amended creditfacility provides for a $300 million term loan and a $20 million revolvingcredit facility.  The Senior Credit Facilitybears various floating interest rates, based upon LIBOR, ranging from 7.88% to 8.00%at September 30, 2006.  On May 3, 2005,the full amount of the term loan was borrowed. Approximately $278 million of the proceeds of such term loan borrowingwas used to pay fees and expenses related to the amended credit facility and tofinance the purchase of the Senior Notes in the tender offer, including thepayment of related premiums, accrued interest, fees and expenses.  The balance of the term loan borrowing willbe used for working capital.  The termloan will mature in 2012 and the revolving facility will mature in 2010.  TheCompany capitalized approximately $6.0 million of fees associated with the newterm loan and revolving credit facility.

In connection withthe cash tender offer and consent solicitation, the Company recorded a loss onthe extinguishment of debt for the nine months ended September 30, 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 30, 2006,the Company entered into (i) the First Amendment (the “First Amendment”) to theSenior Credit Facility and (ii) the Increase Joinder (the “Increase Joinder”)to the Senior Credit Facility. The First Amendment effected certain amendmentsto the Senior Credit Facility including, without limitation, (i) the reductionof the minimum amount of cash the Company must maintain from $35.0 million to$10.0 million and (ii) an increase of 0.25% to each of the Base Rate Margin andthe Eurodollar Margin (used in the calculation of interest rates payable by theCompany under the Senior Credit Facility). As a result of the margin increases, the Base Rate and the EurodollarRate margins are now equal to 1.50% and 2.50%, respectively.  The IncreaseJoinder provided for a $50.0 million incremental term loan under the SeniorCredit Facility. The full $50.0 million of the incremental term loan wasborrowed by the Company on May 30, 2006. The proceeds of the incremental termloan borrowing will be used for working capital and to pay fees and expensesrelated to the incremental term loan and the First Amendment. The Companycapitalized approximately $1.3 million of fees associated with the incrementalterm loan and First Amendment.

The incrementalterm loan has the same terms and conditions as the term loans outstanding underthe Senior Credit Facility (as amended by the First Amendment) immediatelyprior to the incremental term loan borrowing. As of September 30, 2006,approximately $346.0 million was outstanding under the term loan portion of theSenior Credit Facility.

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On May 3, 2005,the Company entered into an interest rate swap agreement for a notional amountof $71.0 million with a commercial bank who is also a lender under the Senior CreditFacility.  The swap expires on May 8,2008.  Upon effectiveness, the Companybegan to pay a fixed interest rate of 4.3425% and the Company receives interestfrom the commercial bank, based upon a three month LIBOR rate.  It is the Company’s intention to ensure theinterest rate reset dates of the swap and the term loan will match over theterm of the swap, and therefore the changes in the fair value of theinterest-rate swap are expected to significantly offset changes in the cashflows of the floating rate debt.  TheCompany accounts for this agreement as a cash flow hedge under FASB StatementNo. 133, Accounting for Derivative Instruments and Hedging Activities, and assuch, the change in the fair value of the interest rate swap is reported as acomponent of other comprehensive income (loss). For the three and nine months ended September 30, 2006 a loss ofapproximately $739,000 and gain of $228,000 was recorded in other comprehensiveincome (loss).

On May 5, 2005,the Company entered into a partial termination agreement with Deutsche Bank toterminate one third of its original notional amount of $63.2 million interestrate swap, or approximately $21.1 million. In consideration of the termination, the Company was required to make anet payment of approximately $702,000, reduced by the Company’s accruedinterest income from the last payment date of March 1, 2005 through thetermination date of May 5, 2005 (approximately $35,000).  In accordance with the termination, the swapliability was reduced by the fair market value of the one third portion of theswap as of the termination date (approximately $728,000).  The difference between the payment and thefair market value of the partially terminated swap was recorded as interestexpense for the period (approximately $9,000).

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

Long-term debt atDecember 31, 2005 and September 30, 2006 consisted of the following:
|                                                       | ** ** | **12/31/05**            | ** ** | **9/30/06** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Senior Credit  Facility                               |       | $                       | 298,500    |        | $          | 346,000 |   |
| 8 3⁄4% Senior Subordinated  Notes due 2014         |       | 140,000                 |       | 140,000     |       |
| 10% Senior  Subordinated Notes due 2011               |       | 347,292                 | (1)        | 346,857     | (1)        |
| Total Long Term  Debt                                 |       | $                       | 785,792    |        | $          | 832,857 |   |
| Less:                                                 |       |                    |       |        |       |
| Scheduled current maturities                          |       | $                       | (3,000     | )           | (3,500     | ) |
| Long term debt  excluding all current installments(2) |       | $                       | 782,792    |        | $          | 829,357 |   |

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(1)          Includesan unamortized premium balance of $3.0 million and $2.6 million as of December31, 2005 and September 30, 2006.

(2)          Excludescapital leases.

The Company’s Senior Subordinated Notes are general unsecured obligationsof the Company and subordinated in right of payment to all senior debt,including all indebtedness of the Company under the Senior Credit Facility. TheSenior Subordinated 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 independent assets or operations, other than theequity in its subsidiaries.

**6. IncomeTaxes**

At December 31, 2005, the Company had net operating loss (“NOL”)carryforwards for tax purposes of approximately $339.9 million expiring atvarious dates through 2025, for which a full valuation allowance has beenprovided.

Included in the Company’s income tax benefit(expense) for the three and nine months ended September 30, 2006 are deferred income taxes of $4.2 million and $18.4million, respectively related to the increase in the Company’s deferred taxliability for the tax effect of the difference between the book and tax basis ofthe intangible assets not expected to reverse during the net operating losscarryforward period.  During the threemonths ended September 30, 2006, the Company’s tax provision included areduction in its tax accruals of approximately $8.0 million due to theexpiration of a statute of limitations.

The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these intangible assets will notreverse prior to the expiration period of the Company’s deductible temporarydifferences unless the related assets are sold or an impairment of the assetsis recorded. The Company expects that it will record a total of approximately $800,000to increase deferred tax liabilities during the remaining three months of 2006.

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

Non-income based taxes of approximately $259,000 and $1.4 million duringthe three months ended September 30, 2005 and 2006, respectively, and $1.1million and $1.9 million during the nine months ended September 30, 2005 and2006, respectively, are included in other expenses, net.

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**7.Employee Benefit Plans**

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

The Company contributed approximately $352,000to the benefit plan in 2006**. **No contributions are expected tobe made during the remainder of the year.

Components of the net periodic benefit (cost)were as follows:
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                       | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                             |       |                             |       |                            |       |   |   |   |   |
| Service cost                                                     |       | $                                | 68,514     |                            | $          | 10,500 |   | $ | 205,543 |   | $ | 31,500 |   |
| Interest cost                                                    |       | 155,036                          |       | 150,000                         |       | 465,107 |   | 450,000 |   |
| Expected return  of plan assets                                  |       | (168,463                         | )          | (169,000                        | )          | (505,388 | ) | (507,000 | ) |
| Amortization of  the unrecognized obligation or transition asset |       | 33,269                           |       | 36,500                          |       | 99,807 |   | 109,500 |   |
| Recognized  (gains) or loss                                      |       | 11,118                           |       | —                          |       | 33,355 |   | — |   |
| Recognized prior  service costs                                  |       | (5,933                           | )          | (3,500                          | )          | (17,798 | ) | (10,500 | ) |
| Curtailment Loss                                                 |       | 135,556                          |       | —                          |       | 406,667 |   | — |   |
| Net periodic cost                                                |       | $                                | 229,097    |                            | $          | 24,500 |   | $ | 687,293 |   | $ | 73,500 |   |

 

In September 2006, the FASBissued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans. SFAS No. 158 requires companies to recognizethe over funded or under funded status of a defined benefit postretirement planas an asset or liability in the statement of financial position. The fundedstatus of a plan represents the difference between the fair value of planassets and the related plan projected benefit obligation. Changes in the fundedstatus should be recognized through comprehensive income in the year in whichthe changes occur. Additionally, disclosure of additional information aboutcertain effects on net periodic benefit cost for the next fiscal year thatarise from delayed recognition of gains or losses, prior service costs orcredits, and transition assets or obligations will be required. SFASNo. 158 is effective for the Company’s fiscal year endingDecember 31, 2006. SFAS No. 158 also requires the funded status of aplan to be measured as of the date of the year-end statement of financialposition. The Company uses the end of its fiscal year as the measurement datefor measuring plan assets and liabilities. As such, this requirement will notimpact our financial statements. The Company is currently unable to estimatethe impact of adopting SFAS No. 158 on its Consolidated Balance Sheet. Theimpact of adopting SFAS No. 158 is dependent on plan asset performancethrough the end of 2006 as well as interest rates and other factors that will beapplicable as of December 31, 2006.

**8.Commitments and Contingencies**

*NetworkAffiliation Agreements*

TheCompany has renewed its affiliations with ABC with respect to WKRN-TV, WTEN-TV,WRIC-TV, WATE-TV and WBAY-TV, with CBS with respect to WLNS-TV and KLFY-TV andwith NBC with respect to KWQC-TV.  Therenewed

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ABCaffiliations expire on December 31, 2009, the renewed CBS affiliations expireon September 30, 2012 and the renewed NBC affiliation expires on January 1,2015.  Under the renewed ABC, CBS and NBCaffiliations, the Company will be receiving significantly less networkcompensation than it received from ABC, CBS and NBC under the prior agreements.

TheCompany received notice from CBS with respect to KELO-TV and its satellitestations (KCLO-TV, KPLO-TV and KDLO-TV) that the network will not renew thecurrent affiliation agreement in place and that the network wishes to negotiatea new agreement.  This agreement with CBSexpired on October 2, 2006.  Negotiationswith CBS are ongoing.  The Company isoperating under an extension of the CBS affiliation agreement through November 9,2006.  While the Company is unable topredict the terms of the renewed CBS affiliation agreement, the Companybelieves that a renewed affiliation agreement will be in place by December 31,2006, but on terms that provide less network compensation to the station thanwas provided under the expired agreement. In the event, however, of the Company’s inability to maintain itscurrent affiliation under this agreement, the station may no longer be able tocarry programming of CBS.  This loss innetwork programming would require the Company to obtain replacementprogramming, which may involve higher costs and which may not be as attractiveto audiences, resulting in reduced advertising revenues.  Additionally, the Company would be requiredto write off the net book value of its intangible assets associated with thenetwork.

On March 16, 2006,KRON-TV, our only independent station, entered into an affiliation agreementwith MyNetworkTV.   Additionally, onMarch 28, 2006, KELO-DT, KDLO-DT and KPLO-DT, the companys digital stations, enteredinto an affiliation agreement with MyNetworkTV. The MyNetworkTV affiliation agreements are for a term of five yearcommencing with the 2006/2007 broadcast season. MyNetworkTV launched on September 5, 2006.

**9. EarningsPer Share**

The weighted average number of shares outstandingduring the period has been used to calculate earnings per share.   The outstanding stock options and deferredstock units have not been included in the computation of earnings per share becausethey would be anti-dilutive.

For the three and nine months ended September 30, 2006,common stock equivalents, consisting of 300,098 and 227,333 shares of commonstock underlying outstanding deferred stock units, have been excluded in thecomputation as they are anti-dilutive on the loss per share. For the three andnine months ended September 30, 2005, common share equivalents, consisting of 110,000and 53,791 shares of common stock underlying outstanding deferred stock units,have been excluded in the computation as they are anti-dilutive on the loss pershare.    For the three and nine months ended September30, 2006 and September 30, 2005, there are no shares underlying outstandingstock options, since the exercise price of all previously granted stock optionsthat remain outstanding was greater than the average market price of the commonshares.

15

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

**FORWARD-LOOKING STATEMENTS**

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

**Introduction**

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

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

***Resultsof Operations***– This section provides an analysis of theCompany’s results of operations for the three and nine months ended September30, 2006 and 2005.  This analysis ispresented on a consolidated basis.  Inaddition, this section provides a brief description of significant transactionsand events that impact the comparability of the results being analyzed.

***Liquidityand Capital Resources***–******Thissection provides an analysis of the Company’s cash flows for the nine monthsended September 30, 2006 and 2005. Included in the discussion of outstanding debt is a discussion of theamount of financial capacity available to fund the Company’s future commitmentsand obligations, as well as a discussion of other financing arrangements.

**Overviewof our Business**

The operatingrevenue of the Company’s stations is derived primarily from advertising revenueand, to a much lesser extent, from compensation paid by the networks to itsaffiliated stations for broadcasting network programming.

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

16

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area. Rates are highestduring the most desirable viewing hours, with corresponding reductions duringother hours.  The ratings of a localstation affiliated with a national television network can be affected byratings of network programming.

Most advertisingcontracts are short-term, and generally run only for a few weeks. Approximately55% of the gross revenue of the Company’s stations during the nine months endedSeptember 30, 2006 was generated from local advertising, which is sold by astation’s sales staff directly to local accounts. The remainder of the grossrevenue is primarily comprised of revenues from national advertising, which issold by the Company’s wholly owned subsidiary, Adam Young Inc. (“AYI”), anational advertising sales representative. The stations generally paycommissions to advertising agencies on local, regional and national advertising.

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

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

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

**RecentDevelopments**

The Companyreceived notice from CBS with respect to KELO-TV and its satellite stations(KCLO-TV, KPLO-TV, and KDLO-TV) that the network will not renew the currentaffiliation agreement currently in place and that the network wishes tonegotiate a new agreement.  Thisagreement with CBS expired on October 2, 2006. Negotiations with CBS are ongoing. The Company is operating under an extension of the CBS affiliationagreement through November 9, 2006. While the Company is unable to predict the terms of the renewed CBSaffiliation agreement, the Company believes that a renewed affiliationagreement will be in place by December 31, 2006, but on terms that provide lessnetwork compensation to the station than was provided under the expiredagreement.  In the event, however, of theCompany’s inability to maintain its current affiliation under this agreement,the station may no longer be able to carry programming of CBS.  This loss in network programming wouldrequire the Company to obtain replacement programming, which may involve highercosts and which may not be as attractive to audiences, resulting in reducedadvertising revenues.  Additionally, theCompany would be required to write off the net book value of its intangibleassets associated with the network.

**TelevisionRevenues**Set forth below are the principal types of televisionrevenues received by the Company’s stations, excluding WTVO-TV, for the periodsindicated, and the percentage contribution of each to the Company’s totalrevenue, as well as agency and national sales representative commissions:

17

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** **
|                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **       | ** ** | **2005**                                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **       | ** ** | **Amount**                                               | ** ** | **%**                                                   | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**                     | ** ** |
| Revenues         |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Local            |       | $                                                        | 32,221     |                                                    | 58.4       |   | $ | 32,497 |   | 52.3 |   | $ | 99,133 |   | 59.3 |   | $ | 101,629 |   | 55.2 |   |
| National         |       | 17,500                                                   |       | 31.7                                                    |       | 17,946 |   | 28.9 |   | 53,880 |   | 32.2 |   | 56,025 |   | 30.4 |   |
| Network          |       | 1,342                                                    |       | 2.5                                                     |       | 732 |   | 1.2 |   | 2,080 |   | 1.3 |   | 1,978 |   | 1.1 |   |
| Political        |       | 1,263                                                    |       | 2.3                                                     |       | 7,769 |   | 12.5 |   | 2,491 |   | 1.5 |   | 13,838 |   | 7.5 |   |
| Barter           |       | 227                                                      |       | 0.4                                                     |       | 1,330 |   | 2.1 |   | 3,644 |   | 2.2 |   | 4,592 |   | 2.5 |   |
| Production/Other |       | 2,592                                                    |       | 4.7                                                     |       | 1,913 |   | 3.0 |   | 5,880 |   | 3.5 |   | 6,153 |   | 3.3 |   |
| Total            |       | 55,145                                                   |       | 100.0                                                   |       | 62,187 |   | 100.0 |   | 167,108 |   | 100.0 |   | 184,215 |   | 100.0 |   |
|             |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |       | (7,664                                                   | )          | (13.9                                                   | )          | (8,636 | ) | (13.9 | ) | (23,253 | ) | (13.9 | ) | (25,523 | ) | (13.9 | ) |
|             |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue      |       | $                                                        | 47,481     |                                                    | 86.1       |   | $ | 53,551 |   | 86.1 |   | $ | 143,855 |   | 86.1 |   | $ | 158,692 |   | 86.1 |   |

 

**Resultsof Operations**

***Three Months Ended September 30, 2006 Compared to Three Months EndedSeptember 30, 2005***

The following table sets forth the Company’s operating results for thethree months ended September 30, 2006 as compared to the three months endedSeptember 30, 2005.  
| ** **                                           | ** ** | **For the three months ended September 30,  (in thousands, except per share data)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                                                                                                                   | ** ** | **2006** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Net revenue                                          |       | $                                                                                                                                          | 47,481     |   | $ | 53,551 |   | $ | 6,070 |   | 12.8 | % |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Operating  expenses, including SG&A              |       | 34,904                                                                                                                                     |       | 35,591 |   | 687 |   | 2.0 |   |
| Amortization of  program license rights              |       | 6,291                                                                                                                                      |       | 7,011 |   | 720 |   | 11.4 |   |
| Write-down of  program license rights                |       | —                                                                                                                                     |       | 4,343 |   | 4,343 |   | 100.0 |   |
| Depreciation and  amortization                       |       | 4,807                                                                                                                                      |       | 4,458 |   | (349 | ) | (7.3 | ) |
| Corporate  overhead, excluding depreciation expense  |       | 2,728                                                                                                                                      |       | 3,317 |   | 589 |   | 21.6 |   |
| Operating income                                     |       | (1,249                                                                                                                                     | )          | (1,169 | ) | 80 |   | 6.4 |   |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Interest  expense, net                               |       | (15,446                                                                                                                                    | )          | (17,104 | ) | (1,658 | ) | (10.7 | ) |
| Non-cash change  in market valuation of swaps        |       | (882                                                                                                                                       | )          | — |   | 882 |   | 100.0 |   |
| Other expense,  net                                  |       | (148                                                                                                                                       | )          | (1,318 | ) | (1,170 | ) | 790.1 |   |
|                                                 |       | (16,476                                                                                                                                    | )          | (18,422 | ) | (1,946 | ) | (12.0 | ) |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Loss from  continuing operations before income taxes |       | (17,725                                                                                                                                    | )          | (19,591 | ) | (1,866 | ) | (10.5 | ) |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Income tax  (expense) benefit                        |       | (3,440                                                                                                                                     | )          | 3,850 |   | 7,290 |   | 211.9 |   |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Net loss                                             |       | $                                                                                                                                          | (21,165    | ) | $ | (15,741 | ) | $ | 5,424 |   | 25.6 | % |
|                                                 |       |                                                                                                                                       |       |   |   |   |   |   |   |
| Basic net loss  per common share                     |       | $                                                                                                                                          | (1.03      | ) | $ | (0.72 | ) |   |   |   |   |
| Basic shares used in  earnings per share calculation |       | 20,598,750                                                                                                                                 |       | 21,758,368 |   |   |   |   |   |

 

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Net Revenue includes: (i) cash and barter advertising revenues, net ofagency commissions; (ii) network compensation; and (iii) other revenues whichrepresent less than 5% of total net revenue. Net revenue for the three months ended September 30, 2006 was $53.6 million,as compared to $47.5 million for the three months ended September 30, 2005, an increaseof $6.1 million or 12.8%.  The majorcomponents of, and changes to, net revenue were as follows:

·                  Gross politicalrevenue for the three months ended September 30, 2006 was $7.8 million ascompared to $1.3 million for the three months ended September 30, 2005, an increaseof $6.5 million, or 515%.  This increaseis due to various local midterm elections in 2006 at nine geographic locationsin which we own stations.

·                  The Company’sgross local revenues for the three months ended September 30, 2006 increased by1% compared to the three months ended September 30, 2005, and gross nationalrevenues for the three months ended September 30, 2006 were up 2.5% compared tothe prior year.  The increase in grosslocal revenues is partially attributable to new advertisers in conjunction withnew local sales initiatives.  Six of theten stations experienced increased local revenues from various accounts. The increasein gross national revenues for the three months ended September 30, 2006 wasmainly due to increased spending by various national accounts, includingautomotive and retail noted at four of the Company’s stations.

·                  Networkcompensation for the three months ended September 30, 2006 was $732,000, adecrease of approximately $610,000, or 45%, compared to $1.3 million for thethree months ended September 30, 2005.  This majority of this decrease relates to the ABC affiliation agreementswhich were renewed in September 2005 and were retroactive to October 1,2004.  As a result, for the three monthsended September 30, 2005, the Company recognized approximately $1.1 million ofrevenue relating to the period October 1, 2004 through September 30, 2005.  All amounts received prior to thefinalization of the ABC agreement had been recorded as deferred revenue.

·                  Barter revenueincreased approximately $1.1 million for the three months ended September 30,2006.  During the quarter ended September30, 2005 there was a revaluation of barter programming at one of the Company’sstations, resulting in a reduction of barter revenue for 2005.

·                  Included inProduction/Other revenue for the three months ended September 30, 2005 is $1.2million of revenue in respect of the period from the quarter ended June 30,2001 through the quarter ended June 30, 2005. This revenue was recognized in connection with a contract claimssettlement in 2005.  Offsetting thisdecrease is an increase relating to retransmission consent revenue ofapproximately $496,000 during the three months ended September 30, 2006, whichrepresents consideration received from some satellite and cable providers inreturn for consent to retransmission of the signals of the Company’s televisionstations.  In some cases, the considerationis based on the number of subscribers receiving the signals.

Operatingexpenses, including selling, general and administrative expenses, for the threemonths ended September 30, 2006 were $35.6 million as compared to $34.9 millionfor the three months ended September 30, 2005, an increase of $687,000 or 2%.  The major components of, and changes to,operating expenses were as follows:

·                  Barter expenseincreased approximately $1.1 million quarter over quarter.  During the quarter ended September 30, 2005there was a revaluation of barter programming at one of the Company’s stations.

·                  The Companyincurred approximately $290,000 of increased expenses associated with theCompany’s new local sales initiatives.

·                  Local salescommissions increased approximately $194,000 for the quarter, as a result ofthe above mentioned increase in local sales.

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·                  Included in theselling, general and administrative expenses is non-cash compensation expenseof approximately $1.5 million for the three months ended September 30, 2006, ofwhich approximately $1.0 million relates to awards of restricted shares anddeferred stock units.  The remaining $506,000of non-cash compensation relates to the Company’s matching contributions toeligible employees under its defined contribution plan.  This compares to non-cash compensation of$918,000 for the three months ended September 30, 2005, of which approximately$614,000 related to rewards of restricted shares and deferred stock units andthe remaining $304,000 related to the Company’s matching contributions foreligible employees under its defined contribution plan.

The following items acted to slightly offset the increases in operatingexpenses:

·                  For the threemonths ended September 30, 2005, the Company recorded a non-cash curtailmentcharge of approximately $542,000 as a result of the pension plan freezeeffective October 15, 2005, with no such similar charge for the three monthsended September 30, 2006.

·                  Personnel costswere down $553,000 resulting primarily from the cost cutting initiatives andheadcount reductions that took place in 2005, which did not fully benefit theCompany until 2006.

·                  Professionalfees at one of the Company’s stations were down approximately $302,000.  During the three months ended September 30,2005 a settlement payment was made, which was recorded as part of professionalfees.  Furthermore, additionalprofessional fees were incurred at this station relating to payments forcertain college sports rights during the three months ended September 30, 2006. There were no such expenses incurredduring the three months ended September 30, 2006.

Amortization of program license rights for the three months endedSeptember 30, 2006 was $7.0 million, compared to $6.3 million for the threemonths ended September 30, 2005, an increase of $720,000, or 11.4%.  This increase was due to increased renewalcosts.

In September 2006, the Company’s San Francisco station, KRON-TV, becamean affiliate of MyNetwork.  Thisaffiliation required the shifting of syndicated programming previously beingshown from 10:00 P.M. to 11:00 P.M. to late night (11:30 P.M. to 12:30 A.M.).  Spot rates for late night are lower thanthose charged for primetime spots. Accordingly, during the third quarter the Company determined that theasset value of the prior primetime programming that was shifted to late night,with a contract end date of September 12, 2009, was above realizable value anda write-down of this asset was required. At the same time, certain other programming assets were also writtendown.  For the three months endedSeptember 30, 2006 a total write down of approximately $4.3 million wasrecorded.

Depreciation of property and equipment and amortization of intangibleassets was $4.5 million for the three months ended September 30, 2006 ascompared to $4.8 million for the three months ended September 30, 2005, a decreaseof approximately $349,000 or 7.3%.  Themajority of this decrease resulted from decreases in depreciation expense at twoof the Company’s stations, which had fixed assets that became fully depreciatedin 2006.

Corporate Overhead for the three months ended September 30, 2006 was $3.3million, compared to $2.7 million for the three months ended September 30, 2005,an increase of $589,000, or 21.6%.  Themajor components and changes in corporate expenses were as follows:

·                  Personnel costsincreased approximately $470,000 for the three months ended September 30, 2006.This increase was mainly due to an increase in bonus expense of approximately$403,000, resulting from increased revenues and the Company meeting its interimperformance targets during 2006.

·                  Professional andconsulting fees increased approximately $119,000.  During the third quarter of 2005 the Companyrecorded a reduction of previously expensed legal fees in

20

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the amount of$420,000 for a settlement received, with no such reduction taken in the thirdquarter of 2006.  Excluding the effect ofthis settlement in 2005, legal and other professional fees were down during thethird quarter of 2006 due to an overall reduction in expenses relating to theCompany’s review and compliance with corporate governance legislation.

Interestexpense for the three months ended September 30, 2006 was $17.1 million,compared to $15.4 million for the same period in 2005, an increase of $1.7million, or 10.7%.  The Company receivedpayment on its interest rate swap of approximately $148,000 and $147,000 forthe three months ended September 30, 2006 and 2005, which was recorded as areduction of interest expense.  Pursuantto the refinancing transaction completed on May 3, 2005 the Company usedborrowings under its new $300.0 million senior credit facility to purchase allof its $246,890,000 principal amount of 81⁄2% Senior Notes due 2008.  In May 2006, the Company requested anincremental term loan of $50.0 million under the Credit Agreement through anIncrease Joinder.  On May 30, 2006, thefull $50.0 million of the incremental term loan was borrowed by theCompany.  The credit facility bearsvarious floating interest rates, based upon LIBOR, ranging from 7.88% to 8.00%,at September 30, 2006 thus increasing interest expense for the third quarter of2006.

The Company recorded an $882,000 non-cash loss in connection with thechange in the market value of interest rate swaps for the three months endedSeptember 30, 2005. The swap was terminated at the end of 2005, therefore nonon-cash change in market value was recorded for the three months endedSeptember 30, 2006.

The Company recorded an income tax benefit of $3.9 million for thethree months ended September 30, 2006 and a provision of $3.4 million for thethree months ended September 30, 2005.  Includedin the (benefit)/provision was a deferred tax liability of $4.2 million and $3.3million for the taxable temporary difference related to the amortization of theCompany’s indefinite-lived intangible assets for 2006 and 2005, respectively,which continues to be amortized for tax purposes.  Duringthe three months ended September 30, 2006, the Company’s tax provision includeda reduction in its tax accruals of approximately $8.0 million due to theexpiration of a statute of limitations.

As a result of the above-discussed factors, the net loss for theCompany was $15.7 million for the three months ended September 30, 2006,compared to a net loss of $21.2 million for the three months ended September30, 2005, a change of $5.4 million, or 25.6%.

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***Nine Months Ended September 30, 2006 Compared to Nine Months EndedSeptember 30, 2005***

The following table sets forth the Company’s operating results for thenine months ended September 30, 2006 as compared to the nine months endedSeptember 30, 2005.  The results fromcontinuing operations for the nine months ended September 30, 2006 and 2005 donot include the results of operations for WTVO-TV.  Results for WTVO-TV are reflected asdiscontinued operations.
| ** **                                                                                            | ** ** | **For the nine months ended September 30,  (in thousands, except per share data)** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                                                                                                                  | ** ** | **2006** | ** ** | **Change** | ** ** | **% Change** | ** ** |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Net revenue                                                                                           |       | $                                                                                                                                         | 143,855    |   | $ | 158,692 |   | $ | 14,837 |   | 10.3 | % |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Operating expenses,  including SG&A                                                               |       | 105,176                                                                                                                                   |       | 103,440 |   | (1,736 | ) | (1.7 | ) |
| Amortization of  program license rights                                                               |       | 16,897                                                                                                                                    |       | 20,683 |   | 3,786 |   | 22.4 |   |
| Write off of  program license rights                                                                  |       | —                                                                                                                                    |       | 4,544 |   | 4,544 |   | 100.0 |   |
| Depreciation and  amortization                                                                        |       | 17,243                                                                                                                                    |       | 13,978 |   | (3,265 | ) | (18.9 | ) |
| Corporate  overhead, excluding depreciation expense                                                   |       | 9,882                                                                                                                                     |       | 10,360 |   | 478 |   | 4.8 |   |
| Operating income  (loss)                                                                              |       | (5,343                                                                                                                                    | )          | 5,687 |   | 11,030 |   | 206.4 |   |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Interest  expense, net                                                                                |       | (46,683                                                                                                                                   | )          | (49,443 | ) | 2,760 |   | 5.9 |   |
| Non-cash change  in market valuation of swaps                                                         |       | (1,540                                                                                                                                    | )          | — |   | (1,540 | ) | (100.0 | ) |
| Loss on  extinguishment of debt                                                                       |       | (18,626                                                                                                                                   | )          | — |   | (18,626 | ) | (100.0 | ) |
| Other expense,  net                                                                                   |       | (449                                                                                                                                      | )          | (2,876 | ) | 2,427 |   | 540.5 |   |
|                                                                                                  |       | (67,298                                                                                                                                   | )          | (52,319 | ) | 14,979 |   | 22.3 |   |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Loss from  continuing operations before income taxes                                                  |       | (72,641                                                                                                                                   | )          | (46,632 | ) | 26,009 |   | 35.8 |   |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Income tax  expense                                                                                   |       | (15,234                                                                                                                                   | )          | (10,733 | ) | 4,501 |   | 29.5 |   |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Loss from  continuing operations                                                                      |       | (87,875                                                                                                                                   | )          | (57,365 | ) | 30,510 |   | 34.7 |   |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of taxes (including gain on sale of $11.2 million  in 2005) |       | 11,204                                                                                                                                    |       | — |   | (11,204 | ) | (100.0 | ) |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Net loss                                                                                              |       | $                                                                                                                                         | (76,671    | ) | $ | (57,365 | ) | $ | 19,306 |   | 25.2 | % |
|                                                                                                  |       |                                                                                                                                      |       |   |   |   |   |   |   |
| Basic loss from  continuing operations per common share                                               |       | $                                                                                                                                         | (4.34      | ) | $ | (2.69 | ) |   |   |   |   |
| Loss (income)  from discontinued operations, net                                                      |       | 0.55                                                                                                                                      |       | — |   |   |   |   |   |
| Basic net loss  per common share                                                                      |       | $                                                                                                                                         | (3.79      | ) | $ | (2.69 | ) |   |   |   |   |
| Basic shares used in  earnings per share calculation                                                  |       | 20,259,702                                                                                                                                |       | 21,309,575 |   |   |   |   |   |

 

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Net revenue for the nine months ended September 30, 2006 was $158.7million, as compared to $143.9 million for the nine months ended September 30,2005, an increase of $14.8 million or 10.3%. The major components of, and changes to, net revenue were as follows:

·                  Gross politicalrevenue for the nine months ended September 30, 2006 was $13.8 million, as comparedto $2.5 million for the nine months ended September 30, 2005, an increase ofapproximately $11.3 million, or 452%.  Theincrease is due to various local midterm elections in 2006 at nine geographiclocations in which we own stations.

·                  The Company’s grosslocal revenues for the nine months ended September 30, 2006 increased by 2.5%compared to the nine months ended September 30, 2005, and gross nationalrevenues for the nine months ended September 30, 2005 were up 4.0% compared tothe prior year.  The increase in grosslocal revenues is partially attributable to new advertisers in conjunction withnew local sales initiatives. Furthermore, eight of the ten stations increased local revenues fromvarious accounts, including hospitals, furniture, automotive and healthcare.  The increase in gross national revenues forthe nine months ended September 30, 2006 was due to various factors, including increasesin prime time ratings at several stations.

·                  Barter revenueincreased approximately $948,000 for the nine months ended September 30,2006.  This increase was due to acombination of the addition of four barter programs at one of the Company’sstations during 2006, as well as a full year of barter revenue for barterprogramming added in September 2005.

·                  Included inProduction/Other revenue for the nine months ended September 30, 2005 is $1.2million of revenue in respect of the period from the quarter ended June 30,2001 through the quarter ended June 30, 2005. This revenue was recognized in connection with a contract claimssettlement occurring in 2005.  Offsettingthis decrease is an increase relating to retransmission consent revenue of approximately$1.0 million, during the nine months ended September 30, 2006, which representsconsideration received from some satellite and cable providers in return forconsent to retransmission of the signals of the Company’s televisionstations.  In some cases, theconsideration is based on the number of subscribers receiving the signals.

Operating expenses, including selling, general and administrativeexpenses, for the nine months ended September 30, 2006 were $103.4 million ascompared to $105.2 million for the nine months ended September 30, 2005, a decreaseof $1.7 million, or 1.7%.  The majorcomponents of, and changes to, operating expenses were as follows:

·                  Personnel costs,including severance costs, decreased approximately $3.1 million, resultingprimarily from the cost cutting initiatives and headcount reductions that tookplace in 2005, which did not fully benefit the Company until 2006. Of thisdecrease, approximately $2.7 million relates to expense reductions that willcontinue to benefit future periods.

·                  Pension expensewas down approximately $1.2 million, due in part to a non-cash curtailmentcharge of approximately $542,000 taken during the nine months ended September30, 2005 as a result of the pension plan freeze that was effective October 15,2005.  Furthermore, the Company recordedan additional pension benefit obligation approximating $426,000 for a retiredgeneral manager at one of the Company’s stations during the nine months endedSeptember 30, 2005 with no such expense recorded during the first nine monthsof 2006.

·                  Approximately $573,000of the decrease is attributable to decreases in media spending at one of theCompany’s stations during the nine months ended September 30, 2006.

The followingitems acted to offset these changes to operating expenses:

·                  Local salescommissions paid to employees of the Company’s network affiliated stationsincreased approximately $671,000 due to the increase in local revenues, asnoted above.

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·                  There wasapproximately $256,000 of increased expenses associated with the Company’s newlocal sales initiatives.

·                  Music licensefees were up approximately $188,000, as the nine months ended September 30,2005 included a one time contract renegotiation adjustment, with no suchadjustment made in the current year.

·                  Insurance costswere up approximately $102,000 due to a combination of increased premiums andchanges in the mix of insurance plan types at several of the Company’sstations.

·                  Included inselling, general and administrative expenses is non-cash compensation expenseof approximately $3.8 million for the nine months ended September 30, 2006, ofwhich approximately $2.4 million relates to awards of restricted shares anddeferred stock units.  The remaining $1.4million of non-cash compensation relates to the Company’s matchingcontributions to eligible employees under its defined contribution plan.  This compares to approximately $2.1 millionfor the nine months ended September 30, 2005, of which approximately $1.2million relates to awards of restricted shares and deferred stock units.  The remaining $936,000 of non-cashcompensation relates to the Company’s matching contributions to eligibleemployees under its defined contribution plan.

Amortization of program license rights for the nine months endedSeptember 30, 2006 was $20.7 million, compared to $16.9 million for the ninemonths ended September 30, 2005, an increase of approximately $3.8 million, or 22.4%,due mainly to increased renewal costs.

In September 2006, the Company’s San Francisco station, KRON-TV, becamean affiliate of MyNetwork.  Thisaffiliation required the shifting of syndicated programming previously beingshown from 10:00 P.M. to 11:00 P.M. to late night (11:30 P.M. to 12:30A.M.).  Spot rates for late night arelower than those charged for primetime spots. Accordingly, the Company determined that the asset value of the priorprimetime programming that was shifted to late night, with a contract end dateof September 12, 2009, was above realizable value and a write-down of thisasset was required.  At the same time,certain other programming assets were also written down.  For the nine months ended September 30, 2006a total write down of approximately $4.5 million was recorded.

Depreciation of property and equipment and amortization of intangibleassets was $14.0 million for the nine months ended September 30, 2006 ascompared to $17.2 million for the nine months ended September 30, 2005, a decreaseof approximately $3.3 million, or 18.9%. This decrease is due to the following:

·                  Approximately $2.3million of this decrease is the result of various furniture, fixtures andcomputers at one of the Company’s stations becoming fully depreciated in June2005.

·                  Additionally,approximately $570,000 of this decrease is the result of various furniture,fixtures and computers at two of the Company’s stations which became fullydepreciated during 2006.

Corporate Overhead for the nine months ended September 30, 2006 was $10.4million as compared to $9.9 million for the nine months ended September 30, 2005,an increase of approximately $478,000, or 4.8%. The major components and changes in corporate expenses were as follows:

·                  Personnel costsincreased approximately $1.1 million for the nine months ended September 30,2006. This increase was mainly due to an increase in bonus expense ofapproximately $831,000, resulting from increased revenues and the Company meetingits interim performance targets during 2006.

·                  Travel costswere up approximately $194,000 due to additional executive meetings andtraining seminars during 2006 as compared to 2005.

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The following acted to offset these increases in corporate expenses:

·                  Professional andconsulting fees decreased approximately $862,000.  Approximately $246,000 of this decreaserelates to a tax consulting project, which took place during 2005, with no suchproject occurring during 2006.  Theremaining decrease is due to an overall reduction in expenses relating to theCompany’s review and compliance with corporate governance legislation.

Interestexpense for the nine months ended September 30, 2006 was $49.4 million,compared to $46.7 million for the same period in 2005, an increase of $2.8 million,or 5.9%.  The Company received a paymenton its interest rate swaps of $148,000 and $819,000 for the nine months endedSeptember 30, 2006 and 2005, respectively, which was recorded as a reduction ofinterest expense.  Pursuant to arefinancing transaction completed on May 3, 2005, the Company used borrowingsunder its $300.0 million Senior Credit Facility to purchase all of its $246.9million principal amount of 8 1⁄2% Senior Notes due 2008.  In May 2006, the Company requested an incrementalterm loan of $50.0 million under the Senior Credit Facility through an IncreaseJoinder.  On May 30, 2006, the full $50million of the incremental term loan was borrowed by the Company.  The Senior Credit Facility and incrementalterm loan bears various floating interest rates, based upon LIBOR, ranging from7.88% to 8.00%, at September 30, 2006, thus increasing interest expense duringthe first nine months of 2006.

The Company recorded a $1.5 million non-cash loss in connection withthe change in the market value of interest rate swaps for the nine months endedSeptember 30, 2005.  This swap wasterminated at the end of 2005, and therefore, no non-cash change in marketvalue was recorded for the first nine months of 2006.

For the nine months ended September 30, 2005 the Company recorded aloss on extinguishment of debt totaling approximately $18.6 million inconnection with the cash tender offer and consent solicitation completed May 3,2005.  This loss is comprised of the cost of theconsent solicitations (approximately $18.1 million), plus the write-off of thedeferred financing costs (approximately $4.9 million), less the unamortizedportion of the bond premium relating to the 81⁄2% Senior Notes (approximately $4.6million), plus various other administrative expenses (approximately $200,000).

The Company recorded an income tax provision of $10.7 million and $15.2million for the nine months ended September 30, 2006 and 2005, respectively.  This provision includes a deferred taxliability of $18.4 million and $14.8 million for the taxable temporarydifference related to the amortization of the Company’s indefinite-livedintangible assets for September 30, 2006 and 2005, which continues to beamortized for tax purposes.  During thenine months ended September 30, 2006, the Company’s tax provision included a reduction in its tax accruals ofapproximately $8.0 million due to the expiration of a statute of limitations.

On October 4, 2004, the Company entered into an agreement with MissionBroadcasting, Inc. (“Mission”) to sell the assets of WTVO-TV, its station inRockford, Illinois, for an aggregate cash purchase price of approximately $20.8million. A gain of approximately $14.7 million, net of applicable taxes wasrecognized on the sale; $3.5 million of this gain, net of a provision forincome taxes of $300,000, was recognized in the fourth quarter of 2004 andapproximately $11.2 million, net of a provision for income taxes of $450,000,was recognized in the first quarter of 2005. The Company recorded a loss from discontinued operations ofapproximately $346 for the nine months ended September 30, 2005.

As a result of the above-discussed factors, the net loss for theCompany was $57.4 million for the nine months ended September 30, 2006,compared to a net loss of $76.7 million for the nine months ended September 30,2005, a change of $19.3 million, or 25.2%.

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**Liquidity and Capital Resources**

CurrentFinancial Condition

Thefollowing tables present certain data that the Company believes is helpful inevaluating the Company’s liquidity and capital resources (dollars inthousands).
|                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                                | ** ** | **2006** | ** ** |
| Net cash  provided by (used in):                      |       |                                                    |       |   |   |
| Operating  activities                                 |       | $                                                       | (58,512    | ) | $ | (25,020 | ) |
| Investing  activities                                 |       | 1,222                                                   |       | (3,536 | ) |
| Financing  activities                                 |       | 45,615                                                  |       | 46,169 |   |
| Net (decrease) increase  in cash and cash equivalents |       | $                                                       | (11,675    | ) | $ | 17,613 |   |

 
|                                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| Cash and cash  equivalents                 |       | $                     | 78,099     |                   | $          | 95,712 |   |
| Long-term debt,  including current portion |       | $                     | 785,792    |                   | $          | 832,857 |   |
| Available under senior  credit agreement   |       | $                     | 20,000     |                   | $          | 20,000 |   |

 

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

Theperformance of KRON-TV has a significant impact on the Company’s operatingresults.  Consequently, the Company isparticularly susceptible to economic conditions in the San Franciscoadvertising market.  The Company’soperating results have been adversely affected by a slower than expectedrecovery in the San Francisco market.

TheCompany has renewed its affiliations with ABC with respect to WKRN-TV, WTEN-TV,WRIC-TV, WATE-TV and WBAY-TV, with CBS with respect to WLNS-TV and KLFY-TV andwith NBC with respect to KWQC-TV.  Therenewed ABC affiliations expire on December 31, 2009, the renewed CBSaffiliations expire on September 30, 2012 and the renewed NBC affiliationexpires on January 1, 2015.  Under therenewed ABC, CBS and NBC affiliations, the Company will be receivingsignificantly less network compensation than it received from ABC, CBS and NBCunder the prior agreements.

The Companyreceived notice from CBS with respect to KELO-TV and its satellite stations(KCLO-TV, KDLO-TV and KPLO-TV) that the network will not renew the current affiliationagreement in place and that the network wishes to negotiate a newagreement.  This agreement with CBS expiredon October 2, 2006.  Negotiations withCBS are ongoing.  The Company isoperating under an extension of the CBS affiliation agreement through November 9,2006.  While the Company is unable topredict the terms of the renewed CBS affiliation agreement, the Companybelieves that a renewed affiliation agreement will be in place by December 31,2006, but on terms that provide less network compensation to the station thanwas provided under the expired agreement. In the event, however, of the Company’s inability to maintain itscurrent affiliation under this agreement, the station may no longer be able tocarry programming of CBS.  This loss innetwork programming would require the Company to obtain replacement

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programming, whichmay involve higher costs and which may not be as attractive to audiences,resulting in reduced advertising revenues.

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

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

**Sourcesand Uses of Cash**

*OperatingActivities*

Netcash used in operating activities for the nine months ended September 30, 2006and 2005 was $25.0 million and $58.5 million, respectively.  The decrease in net cash used for operatingactivities was primarily due to the increases in the Company’s net revenue andresulting operating income for the nine months ended September 30, 2006, ascompared to the same period in 2005.   The following changes in operating activitieswere noted:

·                  The Company madeapproximately $20.1 million of payments on its programming liabilities for thenine months ended September 30, 2006.

·                  Trade accountsreceivable decreased approximately $1.9 million.  This decrease is consistent with the revenuetrends for broadcasters, whereby revenues are lower in the first and thirdquarters of the year.  The accountsreceivable balance is always larger at the end of the year due in part toincreases in retail advertising in the fourth quarter leading up to andincluding the holiday season.

·                  Tradeaccounts payable increased approximately $1.2 million, due mainly to timing ofprogramming payments at one of the Company’s stations.

Thefollowing items acted to offset these changes in operating expenses:

·                  Accrued expensesand other liabilities decreased approximately $5.6 million for the nine monthsended September 30, 2006.  Accruedinterest decreased approximately $9.5 million due primarily to an interestpayment made in September 2006 on the Company’s 10% Senior Subordinated Notes.  Offsetting this decrease was an increase inaccrued expenses due to (1) increases in deferred revenue approximating $2.3million primarily due to cash payments received in advance for politicaladvertising and (2) increases in bonus accruals of approximately $1.4 million,consistent with the higher bonus expense for the year resulting from increasedrevenues and the Company meeting its interim performance targets during 2006.

·                  TheCompany recorded its share of the losses on Investments in Unconsolidated Subsidiaries,net of dividends, of approximately $1.1 million for the nine months endedSeptember 30, 2006 as compared to recording its share of gains of approximately$153,000 for the nine months ended September 30, 2005.

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*Investing Activities*Cash used in investing activities for the nine months endedSeptember 30, 2006 was $3.5 million, compared to cash provided by investingactivities for the nine months ended September 30, 2005 of $1.2 million. Thefollowing changes in investing activities were noted:

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

·      Capital expenditures for thenine months ended September 30, 2006 of $4.2 million as compared to capitalexpenditures of $4.6 million for the nine months ended September 30, 2005.

·      Proceedsfrom the disposal of fixed assets for the nine months ended September 30, 2006was $674,000 as compared to $55,000 for the nine months ended September 30,2005.

*Financing Activities*Cash provided by financing activities for the nine monthsended September 30, 2006 was approximately $46.2 million, as compared to cash providedby financing activities of approximately $45.6 million for the nine monthsended September 30, 2005.  The followingchanges in financing activities were noted:

·      On May 30, 2006, the Companyentered into the First Amendment to the Senior Credit Facility and the IncreaseJoinder, which provided for a $50.0 million incremental term loan under theSenior Credit Facility.  On May 30, 2006,the full $50.0 million incremental term loan was borrowed by the Company. See below for further details on theincremental term loan.

·      The Company made paymentsunder capital lease obligations of approximately $35,000 and $600,000 for thenine months ended September 30, 2006 and 2005, respectively.

·      Additionally,the Company made principal repayments of $2.5 million and $750,000 on itsSenior Credit Facility during the nine months ended September 30, 2006 and2005, respectively.

**DebtInstruments, Guarantees and Related Covenants**

On May 3, 2005, the Company amended and restated itssenior credit facility (as amended, the “Senior Credit Facility”). The SeniorCredit Facility consists of (i) a term loan in the amount of $300.0 millionthat matures in 2012 and (ii) a revolving credit facility in the amount of$20.0 million that matures in 2010. On May 3, 2005, the full $300.0 million ofthe term loan was borrowed.  Approximately$278.0 million of the proceeds of the term loan borrowing were used to financethe purchase by the Company of all of its $246.9 million outstanding principalamount of 81⁄2% Senior Notes due 2008 pursuant to the cash tender offer andconsent solicitation commenced on April 11, 2005.  The balance of the term loan borrowing willbe used for working capital.  The Companypays an annual commitment fee at the rate of 0.5% per annum of the unusedavailable borrowings under the revolving credit portion of the Senior CreditFacility.  The Company capitalizedapproximately $6.0 million of fees associated with the new term loan andrevolving credit facility.

On May 30, 2006, the Companyentered into (i) the First Amendment (the “First Amendment”) to the SeniorCredit Facility and (ii) the Increase Joinder (the “Increase Joinder”) to theSenior Credit Facility. The First Amendment effected certain amendments to theSenior Credit Facility including, without limitation, (i) the reduction of theminimum amount of cash the Company must maintain from $35.0 million to $10.0million and (ii) an increase of 0.25% to each of the Base Rate Margin and theEurodollar Margin (used in the calculation of interest rates payable by theCompany under the Senior Credit Facility). As a result ofthe margin increases, the Base Rate and the Eurodollar Rate margins are nowequal to 1.50% and 2.50%, respectively.   The Increase Joinderprovided for a $50.0 million incremental term loan under the Senior CreditFacility.  The full $50.0 million of theincremental term loan was borrowed by the Company on May 30, 2006.

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The proceeds of the incremental term loan borrowingwill be used for working capital and to pay fees and expenses related to theincremental term loan and the First Amendment. The Company capitalizedapproximately $1.3 million of fees associated with the incremental term loanand First Amendment.

The incremental term loanhas the same terms and conditions as the term loans outstanding under theSenior Credit Facility (as amended by the First Amendment) immediately prior tothe incremental term loan borrowing. The term loan portion of the Senior CreditFacility matures in 2012.

At September 30, 2006, $346.0 million wasoutstanding under the term loan and the full $20.0 million was available underthe revolving facility.

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

On May 3, 2005, the Companyentered into an interest rate swap agreement for a notional amount of $71.0million with a commercial bank who is also a lender under the Senior CreditFacility.  The swap became effective onMay 8, 2006 and expires on May 8, 2008. Upon effectiveness, the Company began to pay a fixed interest of 4.3425%and the Company receives interest from the commercial bank, based upon a threemonth LIBOR rate.  It is the Company’sintention to ensure the interest rate reset dates of the swap and the term loanwill match over the term of the swap, and therefore the changes in the fairvalue of the interest-rate swap are expected to significantly offset changes inthe cash flows of the floating rate debt. The Company accounts for this agreement as a cash flow hedge under FASBStatement No. 133, Accounting for Derivative Instruments and HedgingActivities, and as such, the change in the fair value of the interest rate swapis reported as a component of other comprehensive income (loss).  For the three and nine months ended September30, 2006 a loss of approximately $739,000 and gain of $228,000 was recorded inother comprehensive income (loss).

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

On November 17,2005, the Company entered into a partial termination agreement with DeutscheBank to terminate one half of its remaining notional amount $42.1 millioninterest rate swap.  Further, on November23, 2005, the Company entered into a final termination agreement with DeustcheBank to terminate the remaining notional amount $21.1 million interest rateswap.  In

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connection withthe terminated interest rate swap agreement, the Company made net interestpayments of $997,500 and $992,000, which includes the Company’s accruedinterest on the swap from the last payment date of September 1, 2005 throughthe termination dates of November 17, 2005 and November 23, 2005.  In accordance with the termination, the swapliability was reduced by the fair market value of the swap as of thetermination dates (approximately $2.0 million in total on both November 17,2005 and November 23, 2005).  Thedifference between the two payments and the fair market value of the terminatedswap was recorded as interest expense during the period (approximately$19,000).

The following is a summary of the Company’s outstanding indebtedness (inthousands) and related annualized interest payments that are recorded duringthe period.  Debt amounts outstanding atDecember 31, 2005 and September 30, 2006 were as follows:
|                                               | ** ** | ** **   | ** ** | ** **  | ** ** | **Annualized**                | ** ** |
|-----------------------------------------------|------------|--------------|------------|-------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **12/31/05** | ** ** | **9/30/06** | ** ** | **Interest Payments(1)** | ** ** |
| Senior Credit  Facility                       |       | $            | 298,500    |        | $          | 346,000                       |       | $ | 27,786 |   |
| 8 3⁄4% Senior  Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                        |       |
| 10% Senior  Subordinated Notes due 2011       |       | 347,292      | (2)        | 346,857     | (2)        | 34,430                        |       |
| Total Debt (excluding  capital leases)        |       | $            | 785,792    |        | $          | 832,857                       |       | $ | 74,466 |   |

 

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(1)   The annualized interestpayments are calculated based on the outstanding principal amounts at September30, 2006, multiplied by the interest rates of the related debt instruments. Theannualized interest on the Senior Credit Facility takes into account thequarterly principal payments of $875,000.

(2)   Includes unamortized premiumbalances of $3.0 million and $2.6 million as of December 31, 2005 and September30, 2006, respectively.

The Company’stotal debt at September 30, 2006 was approximately $832.9 million, consistingof approximately $346.0 million under the term loan portion of the SeniorCredit Facility, $484.3 million of Senior Subordinated Notes, $2.6 million ofbond premiums and $31,000 of capital leases. In addition, at September 30, 2006,the Company had an additional $20.0 million of unused available borrowingsunder the Senior Credit Facility.

At September 30,2006 the Company was in compliance with all applicable covenants contained inthe Senior Credit Facility and the indentures governing the Senior SubordinatedNotes.

The Company’s Senior Subordinated Notes are general unsecured obligationsof the Company and subordinated in right of payment to all senior debt,including all indebtedness of the Company under the Senior Credit Facility. TheSenior Subordinated 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 independent assets or operations, other than theequity in its subsidiaries.

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

**Income Taxes**

At December 31, 2005, the Company had net operating loss (“NOL”) carryforwardsfor tax purposes of approximately $339.9 million expiring at various datesthrough 2025, for which a full valuation allowance has been provided.

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Included in the Company’s income tax benefit(expense) for the three and nine months ended September 30, 2006 are deferred income taxes of $4.2 million and$18.4 million, respectively related to the increase in the Company’s deferredtax liability for the tax effect of the difference between the book and taxbasis of the intangible assets not expected to reverse during the net operatingloss carryforward period.  During thethree months ended September 30, 2006, the Company’s tax provision included a reductionin its tax accruals of approximately $8.0 million due to the expiration of a statuteof limitations.

The Company will have deferred taxliabilities that will arise each quarter because the taxable temporarydifferences related to the amortization of these assets will not reverse priorto the expiration period of the Company’s deductible temporary differencesunless the related assets are sold or an impairment of the assets is recorded.The Company expects that it will record a total of approximately $800,000 toincrease deferred tax liabilities during the remaining three months of 2006.

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

**Contractual Obligations and Other CommercialCommitments**

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

The following table summarizes separately the Company’s materialobligations and commitments at September 30, 2006, the timing of paymentsrequired in connection therewith and the effect that such payments are expectedto have on the Company’s liquidity and cash flow in future periods.  The Company expects to fund its short-termobligations with cash on hand, cash flow from operations and funds availableunder its Senior Credit Facility.

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| ** **                                        | ** ** | ** **                           | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                  | ** ** | **Total**                            | ** ** | **Less than  1 year**           | ** ** | **Year 2 –  Year 3** | ** ** | **Year 4 -  Year 5** | ** ** | **After 5  years** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| Long-Term Debt  (principal only)                  |       | $                                    | 831,174    |                                      | $          | 3,500 |   | $ | 7,000 |   | $ | 7,000 |   | $ | 813,674 |   |
| Cash Interest  Payments (1)                       |       | $                                    | 254,824    |                                      | $          | 46,780 |   | $ | 93,560 |   | $ | 76,203 |   | $ | 38,281 |   |
| Capital Lease  Obligations                        |       | $                                    | 31         |                                      | $          | 31 |   |   |   | — |   | — |   |
| Operating Leases  (net of sublease rental income) |       | $                                    | 5,578      |                                      | $          | 1,689 |   | $ | 2,709 |   | $ | 878 |   | $ | 302 |   |
| Unconditional  Purchase Obligations(2)            |       | $                                    | 32,487     |                                      | $          | 25,560 |   | $ | 6,920 |   | $ | 7 |   | — |   |
| Other Long-Term  Obligations(3)                   |       | $                                    | 124,532    |                                      | $          | 17,756 |   | $ | 49,429 |   | $ | 43,878 |   | $ | 13,469 |   |
| Total Contractual Cash  Obligations               |       | $                                    | 1,248,626  |                                      | $          | 95,316 |   | $ | 159,618 |   | $ | 127,966 |   | $ | 865,726 |   |

 

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(1) Onlyincludes interest on Senior Subordinated Notes. The Senior Credit Facility, which matures on November 3, 2010, bearsinterest at various floating rates based on LIBOR.  The various September 30, 2006 LIBOR rateswere used to compute a weighted average LIBOR rate to calculate future cashinterest payments.  Based on thisweighted average rate, total interest over the term of the facilityapproximates $163.7 million.

(2) Unpaidprogram license liability reflected on the September 30, 2006 balance sheet.

(3) Obligations for programming that has been contracted for, but notrecorded on the September 30, 2006 Balance Sheet.  Such obligations were not recorded becausethe programs were not currently available for airing.

**Impact of Recently Issued Accounting Standards**

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 157, Fair Value Measurements. SFASNo. 157 defines fair value, provides a framework for measuring fair valueunder current standards in GAAP, and requires additional disclosure about fairvalue measurements. In accordance with the Statement, the definition of fairvalue retains the exchange price notion, and exchange price is defined as theprice in an orderly transaction between market participants to sell an asset ortransfer a liability. If there is a principal market for the asset orliability, the fair value measurement should reflect that price, whether thatprice is directly observable or otherwise used in a valuation technique.Depending on the asset or liability being valued, the inputs used to determinefair value can range from observable inputs (i.e. prices based on market dataindependent from the entity) and unobservable inputs (i.e. entity’s ownassumptions about the assumptions that market participants would use). TheStatement applies to other accounting pronouncements that require or permitfair value measurements and will be effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. The Companyis currently evaluating the provisions of SFAS No. 157 to determine thepotential impact, if any, the adoption will have on the Company’s financialstatements.

In September 2006, the FASB issued SFAS No. 158, Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans. SFASNo. 158 requires companies to recognize the over funded or under fundedstatus of a defined benefit postretirement plan as an asset or liability in thestatement of financial position. The funded status of a plan represents thedifference between the fair value of plan assets and the related plan projectedbenefit obligation. Changes in the funded status should be recognized throughcomprehensive income in the year in which the changes occur. Additionally,disclosure of additional information about certain effects on net periodicbenefit cost for the next fiscal year that arise from delayed recognition ofgains or losses, prior service costs or credits, and transition assets orobligations will be required. SFAS No. 158

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is effective for the Company’s fiscal year ending December 31, 2006.SFAS No. 158 also requires the funded status of a plan to be measured asof the date of the year-end statement of financial position. The Company usesthe end of its fiscal year as the measurement date for measuring plan assetsand liabilities. As such, this requirement will not impact our financialstatements. The Company is currently unable to estimate the impact of adoptingSFAS No. 158 on its Consolidated Balance Sheet. The impact of adoptingSFAS No. 158 is dependent on plan asset performance through the end of2006 as well as interest rates and other factors that will be applicable as ofDecember 31, 2006.

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

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

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

On November 29, 2005, the Company entered into an exchange agreementwith each of its executive officers whereby options to purchase an aggregate of2,198,375 shares of common stock of the Company, representing all of theoutstanding and unexercised options held by the executive officers, werecancelled and, in exchange for such cancelled options, the executive officerswere awarded an aggregate of 318,791 deferred stock units. On December 30, 2005the Company concluded an offer to all eligible employees to exchange all oftheir outstanding stock options for restricted shares (see Note 2 to theConsolidated Financial Statements).  As aresult of the above-discussed exchange agreements and exchange offer, as ofSeptember 30, 2006, the Company had an aggregate of 900 outstanding unvestedstock options which were fully expensed during the first quarter of 2006, inthe amount of approximately $5,000.  Inaddition, the Company will incur compensation expense associated with theissuance of the restricted shares and deferred stock units.  The Company estimates recording additionalcompensation expense relating to previously issued restricted shares anddeferred stock units of approximately $1.1 million for the remainder of 2006and approximately $3.5 million, $2.5 million and $739,000 during 2007, 2008 and2009, respectively.

**Item 3**. ***Quantitativeand Qualitative Disclosure About Market Risk.***

TheCompany’s Senior Credit Facility, with approximately $346.0 million outstandingas of September 30, 2006, bears interest at floating rates based on LIBOR.Accordingly, the Company

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isexposed to potential losses related to changes in interest rates.  The Company has entered into an interest ratederivative agreement to reduce the impact of changing interest rates on itsfloating debt rate.

TheCompany’s Senior Subordinated Notes of approximately $484.3 million outstandingprincipal amount as of September 30, 2006 are general unsecured obligations ofthe Company and are subordinated in right of payment to all senior debt,including all indebtedness of the Company under the Senior Credit Facility. The83⁄4% Senior Subordinated Notes, $140.0 million of which is outstanding, maturein 2014.  The 10% Senior SubordinatedNotes, $344.3 million of which is outstanding, mature in 2011. The annualizedinterest expense on the outstanding Senior Subordinated Notes is approximately$46.7 million.

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

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

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

There has not been any change in our internal controlover financial reporting in connection with the evaluation required by Rule 13a-15(d)under the Exchange Act that occurred during the quarter ended September 30, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II. OTHER INFORMATION**

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

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

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

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

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

None.

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

None.

**Item 4. *Submission of Matters to a Vote of Security Holders*.**

None.

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

Inaccordance with the outside director compensation policy adopted by the Boardof Directors in October 2003, each of the non-employee directors of the Companyis entitled to receive an annual retainer of $60,000, with half of such retainerbeing payable in cash and the other half being payable in deferred stockunits.  In addition, under this compensation policy, the Chairman of theAudit Committee and the Chairman of the Compensation Committee are eachentitled to receive an additional annual retainer of $10,000 and $5,000,respectively, paid one half in cash and one half in deferred stock units.

Accordingly,on October 2, 2006, for their service on the Company’s Board of Directorsduring the twelve months beginning October 1, 2006, each of the fivenon-employee directors of the Company (Alfred J. Hickey, David C. Lee, LeifLomo, Richard Lowe and Reid Murray) was paid $30,000 in cash and was granted anaward of 13,333.33 deferred stock units.  Such number of deferred stockunits was determined by dividing $30,000 by $2.25 (the closing selling priceper share of the Company’s Class A common stock on the Nasdaq NationalMarket on October 2, 2006). In addition, on October 2, 2006, Mr. Lomo (asChairman of the Audit Committee) and Mr. Lee (as Chairman of theCompensation Committee) were paid $5,000 and $2,500 in cash, respectively, andwere granted awards of 2,222.22 and 1,111.11 deferred stock units,respectively.

Thedeferred stock units represent the right to receive a like number of shares ofthe Company’s common stock on the 180th day following the date the directorceases to serve as a board member (or, if such 180th day is not a business day,the first business day immediately succeeding such 180th day), to the extentthe units have vested as of such date.  The deferred stock units will vestin equal installments on the first and second anniversaries of the date ofaward. If a director voluntarily leaves the Board or is removed for cause, anyunvested deferred stock units will be

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forfeited.If a director ceases to be a Board member for any other reason, any unvestedunits will automatically vest in full.

**Item6. *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:  | November 9, 2006 | By:                                  | /s/ Vincent J. Young |   |
|   |             | Vincent J. Young                     |
|   |             | Chairman and Chief Executive Officer |
|   |             |                                 |
|   |             |                                 |
| Date:  | November 9, 2006 | By:                                  | /s/ James A. Morgan |   |
|   |             | James A. Morgan                      |
|   |             | Executive Vice President and         |
|   |             | Chief Financial Officer              |
|   |             | (principal financial officer)        |

 

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