**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-Q**

 

**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 30, 2005**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from                    to**

 

**Commission File Number 0-19728**

 

**GRANITEBROADCASTING CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**              | ** ** | **13-3458782**                        |
|---------------------------|------------|---------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification No.) |

 

**767 ThirdAvenue, 34th FloorNew York, New York 10017(212) 826-2530**

(Address,including zip code, and telephone number,including area code, of registrant’s principal executive offices)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes   ý   No   o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theact).  Yes   o   No   ý

 

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

 

(APPLICABLE ONLY TO CORPORATE ISSUERS:)

 

As of November 9,2005, the Registrant had 98,250 shares of Class A Voting Common Stock, parvalue $.01 per share outstanding; and 19,480,142 shares of Common Stock(Nonvoting), par value $.01 per share outstanding.

 

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**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**GRANITEBROADCASTING CORPORATION**

**Form 10-Q**

**Table ofContents**

 
|       |                  | **Page**                                                                                                            |
|------------|-----------------------|---------------------------------------------------------------------------------------------------------------------|
| PART I     | FINANCIAL INFORMATION | 3                                                                                                                   |
|       |                  |                                                                                                                |   |
|       | Item 1.               | Financial Statements                                                                                                | 3 |
|       |                  | Consolidated Balance Sheets as of  September 30, 2005 (unaudited) and December 31, 2004                             | 3 |
|       |                  | Consolidated Statements of  Operations for the Three and Nine Months Ended September 30, 2005 and 2004  (unaudited) | 4 |
|       |                  | Consolidated Statement of  Stockholders’ Deficit for the Nine Months Ended September 30, 2005  (unaudited)     | 5 |
|       |                  | Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (unaudited)            | 6 |
|       |                  | Notes to Consolidated Financial  Statements                                                                         | 7 |
|       |                  |                                                                                                                |   |
|       | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 22 |
|       | Item 3.               | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 35 |
|       | Item 4.               | Controls and  Procedures                                                                                            | 35 |
|       |                  |                                                                                                                |   |
| PART II    | OTHER INFORMATION     | 36                                                                                                                  |
|       |                  |                                                                                                                |   |
|       | Item 4.               | Submission  of Matters to a Vote of Security Holders                                                                | 36 |
|       | Item 5.               | Other Information                                                                                                   | 36 |
|       | Item 6.               | Exhibits                                                                                                            | 36 |
|       |                  |                                                                                                                |   |
| SIGNATURES | 37                    |

 

GraniteBroadcasting Corporation is a Delaware corporation. As used in this QuarterlyReport on Form 10-Q and unless the context otherwise requires, (1) ”Granite,”the “Company,” “we,” “us” and “our” refer to Granite Broadcasting Corporation,together with its direct and indirect subsidiaries, and (2) ”MalaraBroadcast Group” and “Malara” refer to Malara Broadcast Group, Inc.,together with its direct and indirect subsidiaries.  Our principal executive offices are locatedat 767 Third Avenue, 34th Floor, New York, NY 10017, and our telephone numberat that address is (212) 826-2530. Our web site is located athttp://www.granitetv.com. The information on our web site is not part of thisreport.

 

As ofMarch 8, 2005, we have shared services agreements and advertisingrepresentation agreements (which we generally refer to as local serviceagreements) relating to the two television stations owned by Malara BroadcastGroup, but do not own any of the equity interests in Malara BroadcastGroup.  For a description of therelationship between us and Malara Broadcast Group, see Item 2.  “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Recent Developments.”

 

1

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes andincorporates forward-looking statements. We have based these forward-looking statements on our currentexpectations and projections about future events.  Generally, the words “anticipates,” “believes,”“expects,” “intends,” “estimates,” “projects,” “plans” and similar expressionsidentify forward-looking statements. While we believe that the forward-lookingstatements contained in this report are based upon reasonable assumptions, wecan give no assurance that our goals will be achieved. These forward-lookingstatements are subject to risks, uncertainties and assumptions about us,including, among other things:

 

•      inability to implement our strategy, or,having implemented it, failure to realize anticipated cost savings or revenueopportunities available through implementation of our strategy;

 

•      inability to effect dispositions oracquisitions of television stations, which are an important part of ourstrategy;

 

•      the effects of governmental regulation ofbroadcasting, including adverse changes in, or interpretations of, theexceptions to the Federal Communications Commission’s duopoly rule which couldrestrict, or eliminate, our ability to enter into duopoly-type operatingarrangements and implement our operating strategy;

 

•      pricing fluctuations in national andlocal advertising;

 

•      volatility or increases in programmingcosts;

 

•      restrictions on our operations due to,and the effect of, our significant leverage and limited sources of liquidity;

 

•      the impact of changes in national andregional economies;

 

•      delay in any economic recovery or therecovery not being as robust as might otherwise have been anticipated;

 

•      our ability to service our outstandingdebt;

 

•      successful integration of acquiredtelevision stations (including achievement of synergies and cost reductions);

 

•      successful results of local servicesarrangement with Malara Broadcast Group stations in Fort Wayne, Indiana andDuluth, Minnesota;

 

•      any extraordinary, newsworthy event,including hostilities or terrorist attacks;

 

•      competition in the markets in which thestations we own and the stations to which we provide services are located;

 

•      loss of network affiliations or changesin the terms of network affiliation agreements upon renewal; and

 

•      technologicalchange and innovation in the broadcasting industry.

 

Other matters set forthin this report, as well as risk factors set forth in our Annual Report on Form10-K for the year ended December 31, 2004, filed with the Securities andExchange Commission may also cause actual results in the future to differmaterially from those described in the forward-looking statements.  We undertake no obligation to update andrevise any forward-looking statements, whether as a result of new information,future events or otherwise.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this report might not occur.

 

2

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**PART I.FINANCIAL INFORMATION**

***Item 1.****  **Financial Statements*

##### **GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **September30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2005**         | ** **  | **2004**         | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **(Unaudited)**  | ** **  | ** **       | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                         |       |             |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Current  assets:                                                                                                                                                                                                                                                                                                                                                               |       |             |        |             |       |
| Cash  and cash equivalents (Excludes $24,997,500 of restricted cash equivalents at  September 30, 2005, which is shown separately below.)                                                                                                                                                                                                                                      |       | $                | 21,977,027  |             | $          | 60,858,710 |   |
| Marketable  securities, at fair value                                                                                                                                                                                                                                                                                                                                          |       | —           |        | 5,603,500        |       |
| Accounts  receivable, less allowance for doubtful accounts ($657,840 at September 30,  2005 and $896,465 at December 31, 2004)                                                                                                                                                                                                                                                 |       | 19,806,142       |        | 20,551,203       |       |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                          |       | 3,903,733        |        | 3,776,749        |       |
| Other  current assets                                                                                                                                                                                                                                                                                                                                                          |       | 3,527,176        |        | 3,176,834        |       |
| Assets  held for sale                                                                                                                                                                                                                                                                                                                                                          |       | 148,255,779      |        | 158,142,996      |       |
| Total  current assets                                                                                                                                                                                                                                                                                                                                                          |       | 197,469,857      |        | 252,109,992      |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Restricted  cash equivalents                                                                                                                                                                                                                                                                                                                                                   |       | 24,997,500       |        | —           |       |
| Property  and equipment, net                                                                                                                                                                                                                                                                                                                                                   |       | 41,899,134       |        | 37,229,555       |       |
| Film  contract rights                                                                                                                                                                                                                                                                                                                                                          |       | 84,711           |        | 157,842          |       |
| Other  non current assets                                                                                                                                                                                                                                                                                                                                                      |       | 4,822,216        |        | 8,384,731        |       |
| Deferred  financing fees, less accumulated amortization ($3,718,346 at September 30,  2005 and $1,989,038 at December 31, 2004)                                                                                                                                                                                                                                                |       | 12,273,173       |        | 11,760,080       |       |
| Goodwill,  net                                                                                                                                                                                                                                                                                                                                                                 |       | 50,571,645       |        | 28,937,539       |       |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                       |       | 45,403,394       |        | 37,979,394       |       |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                     |       | 74,701,378       |        | 53,370,047       |       |
| Total  assets                                                                                                                                                                                                                                                                                                                                                                  |       | $                | 452,223,008 |             | $          | 429,929,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Liabilities  and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                    |       |             |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                          |       |             |        |             |       |
| Accounts  payable                                                                                                                                                                                                                                                                                                                                                              |       | $                | 910,811     |             | $          | 1,063,782 |   |
| Accrued  interest                                                                                                                                                                                                                                                                                                                                                              |       | 13,162,500       |        | 3,290,625        |       |
| Other  accrued liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 5,328,630        |        | 6,277,190        |       |
| Film  contract rights payable                                                                                                                                                                                                                                                                                                                                                  |       | 5,039,419        |        | 5,013,574        |       |
| Current  portion of long-term debt                                                                                                                                                                                                                                                                                                                                             |       | 2,800,000        |        | —           |       |
| Other  current liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 2,686,666        |        | 1,133,678        |       |
| Liabilities  held for sale                                                                                                                                                                                                                                                                                                                                                     |       | 36,407,836       |        | 46,056,768       |       |
| Total  current liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 66,335,862       |        | 62,835,617       |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Long-term  debt, less current portion                                                                                                                                                                                                                                                                                                                                          |       | 451,842,181      |        | 400,791,298      |       |
| Film  contract rights payable                                                                                                                                                                                                                                                                                                                                                  |       | 213,785          |        | 370,890          |       |
| Deferred  tax liability                                                                                                                                                                                                                                                                                                                                                        |       | 22,308,602       |        | 19,347,007       |       |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                    |       | 199,102,319      |        | 198,835,862      |       |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                               |       | 89,417,456       |        | 70,256,573       |       |
| Other  non current liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 10,162,900       |        | 9,582,081        |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |             |        |             |       |
| Stockholders’  deficit:                                                                                                                                                                                                                                                                                                                                                   |       |             |        |             |       |
| Common  stock: 41,000,000 shares authorized consisting of 1,000,000 shares of Class A  Common Stock, $.01 par value, and 40,000,000 shares of Common Stock  (Nonvoting), $.01 par value; 98,250 shares of Class A Common Stock and  19,480,142 shares of Common Stock (Nonvoting) (19,283,924 shares at  December 31, 2004) issued and outstanding at September 30, 2005. |       | 195,783          |        | 193,820          |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                    |       | 370,246          |        | 361,088          |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                          |       | —           |        | (12,914          | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                           |       | (386,765,326     | )           | (331,410,284     | )          |
| Less:  Unearned compensation                                                                                                                                                                                                                                                                                                                                                   |       | (85,125          | )           | (346,183         | )          |
| Treasury  stock, at cost                                                                                                                                                                                                                                                                                                                                                       |       | (875,675         | )           | (875,675         | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                              |       | (387,160,097     | )           | (332,090,148     | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                              |       | $                | 452,223,008 |             | $          | 429,929,180 |   |

 

See accompanyingnotes.

 

3

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

 
| ** **                                                                                                                  | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                             | ** **  | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Net  revenues                                                                                                               |       | $                                    | 20,823,020  |                                | $          | 19,436,884 |   | $ | 61,701,433 |   | $ | 57,329,892 |   |
| Operating  expenses:                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Direct  operating expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 8,982,974                            |        | 8,302,260                           |       | 26,300,818 |   | 24,649,637 |   |
| Selling,  general and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 6,459,081                            |        | 5,871,748                           |       | 18,358,601 |   | 16,944,595 |   |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,558,465                            |        | 2,736,505                           |       | 7,981,523 |   | 8,710,355 |   |
| Depreciation                                                                                                                |       | 1,193,997                            |        | 1,384,909                           |       | 3,778,784 |   | 4,259,874 |   |
| Amortization  of intangible assets                                                                                          |       | 843,231                              |        | 606,474                             |       | 2,344,232 |   | 1,819,431 |   |
| Performance  award expense                                                                                                  |       | 319,797                              |        | 1,911,887                           |       | 959,391 |   | 2,960,429 |   |
| Corporate  separation agreement expense                                                                                     |       | —                               |        | 1,250,842                           |       | — |   | 1,250,842 |   |
| Non-cash  compensation expense (1)                                                                                          |       | 94,146                               |        | 109,757                             |       | 282,296 |   | 544,759 |   |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Operating  income (loss)                                                                                                    |       | 371,329                              |        | (2,737,498                          | )          | 1,695,788 |   | (3,810,030 | ) |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Other  expenses (income):                                                                                                   |       |                                 |        |                                |       |   |   |   |   |
| Interest  expense                                                                                                           |       | 11,172,520                           |        | 9,872,368                           |       | 32,503,642 |   | 29,617,422 |   |
| Interest  income                                                                                                            |       | (574,854                             | )           | (349,410                            | )          | (1,312,653 | ) | (865,949 | ) |
| Non-cash  interest expense                                                                                                  |       | 1,008,879                            |        | 956,920                             |       | 2,942,798 |   | 2,968,628 |   |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                            |        | 6,386,961                           |       | 19,160,883 |   | 19,160,883 |   |
| Other                                                                                                                       |       | 22,080                               |        | 50,019                              |       | 192,412 |   | 451,671 |   |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Loss  from continuing operations before income taxes                                                                        |       | (17,644,257                          | )           | (19,654,356                         | )          | (51,791,294 | ) | (55,142,685 | ) |
| Benefit  for income taxes                                                                                                   |       | (156,086                             | )           | (4,959,263                          | )          | (481,479 | ) | (9,636,927 | ) |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Loss  from continuing operations                                                                                            |       | (17,488,171                          | )           | (14,695,093                         | )          | (51,309,815 | ) | (45,505,758 | ) |
| Discontinued  operations:                                                                                                   |       |                                 |        |                                |       |   |   |   |   |
| Loss  from discontinued operations, net of taxes                                                                            |       | (2,166,190                           | )           | (5,307,377                          | )          | (4,045,227 | ) | (7,612,147 | ) |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Net loss                                                                                                                    |       | $                                    | (19,654,361 | )                                   | $          | (20,002,470 | ) | $ | (55,355,042 | ) | $ | (53,117,905 | ) |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Basic  and diluted net loss per share from continuing operations                                                            |       | $                                    | (0.89       | )                                   | $          | (0.76 | ) | $ | (2.62 | ) | $ | (2.35 | ) |
| Basic  and diluted net loss per share from discontinued operations                                                          |       | $                                    | (0.11       | )                                   | $          | (0.27 | ) | $ | (0.21 | ) | $ | (0.39 | ) |
| Basic  and diluted net loss per share                                                                                       |       | $                                    | (1.00       | )                                   | $          | (1.03 | ) | $ | (2.83 | ) | $ | (2.74 | ) |
|                                                                                                                        |       |                                 |        |                                |       |   |   |   |   |
| Weighted  average common shares outstanding                                                                                 |       | 19,578,392                           |        | 19,381,124                          |       | 19,552,211 |   | 19,360,569 |   |

 

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(1)           Allocationof non-cash compensation expense to other operating expenses:

 
| Operating  expense - Selling, general and administrative expenses |   | $      | 19,456 |   | $      | 23,670  |   | $       | 58,226  |   | $ | 76,512  |   |
|-------------------------------------------------------------------|--------|--------|--------|--------|--------|---------|--------|---------|---------|--------|---|---------|--------|
| Corporate  expense                                                |   | 74,690 |   | 86,087 |   | 224,070 |   | 468,247 |    |
| Non-cash  compensation expense                                    |   | $      | 94,146 |   | $      | 109,757 |   | $       | 282,296 |   | $ | 544,759 |   |

 

See accompanyingnotes.

 

4

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT(Unaudited)**

 
| ** **                                   | ** ** | **Class A  Common  Stock** | ** ** | **Common  Stock  (Nonvoting)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Other  Comprehensive  Income/(Loss)** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** ** | **Treasury  Stock** | ** **   | **Total  Stockholders’  Deficit** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|--------------|----------------------------------------|------------|
|                                         |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         |                                   |       |
| Balance  at December 31, 2004                |       | $                          | 982        |                           | $          | 192,838                          |       | $                                       | 361,088    |                     | $          | (12,914                    | )          | $                   | (331,410,284 | )                                      | $          | (346,183 | ) | $ | (875,675 | ) | $ | (332,090,148 | ) |
| Issuance  of Common Stock (Nonvoting)        |       |                       |       | 1,963                          |       | (1,963                           | )          |                                    |       |                     |       |                       |       |                |         | —                                 |       |
| Stock  expense related to stock plans        |       |                       |       |                           |       | 18,383                           |       |                                    |       |                     |       | 111,873                    |       |                |         | 130,256                                |       |
| Forfeiture  of stock award under stock plans |       |                       |       |                           |       | (7,262                           | )          |                                    |       |                     |       | 7,262                      |       |                |         | —                                 |       |
| Discount  on loans to officers               |       |                       |       |                           |       |                             |       |                                    |       |                     |       | 141,923                    |       |                |         | 141,923                                |       |
| Net  loss                                    |       |                       |       |                           |       |                             |       |                                    |       | (55,355,042              | )          |                       |       |                |         | (55,355,042                            | )          |
| Realized  gain on investment                 |       |                       |       |                           |       |                             |       | 12,914                                  |       |                     |       |                       |       |                |         | 12,914                                 |       |
| Comprehensive  loss                          |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         | (55,342,128                            | )          |
|                                         |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         |                                   |       |
| Balance  at September 30, 2005               |       | $                          | 982        |                           | $          | 194,801                          |       | $                                       | 370,246    |                     | $          | —                     |       | $                   | (386,765,326 | )                                      | $          | (85,125 | ) | $ | (875,675 | ) | $ | (387,160,097 | ) |

 

See accompanyingnotes.

 

5

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                            | ** **  | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                          | ** **  | ** ** | ** ** |
| Cash  flows from operating activities:                                       |       |                                |        |   |   |
| Net  loss                                                                    |       | $                                   | (55,355,042 | ) | $ | (53,117,905 | ) |
|                                                                         |       |                                |        |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                |        |   |   |
| Amortization  of intangible assets                                           |       | 6,386,779                           |        | 5,891,306 |   |
| Depreciation                                                                 |       | 4,709,146                           |        | 5,196,942 |   |
| Performance  award expense                                                   |       | 959,391                             |        | 2,960,429 |   |
| Non-cash  compensation expense                                               |       | 282,296                             |        | 544,759 |   |
| Non-cash  interest expense                                                   |       | 3,341,809                           |        | 3,355,424 |   |
| Non-cash  preferred stock dividend                                           |       | 19,160,883                          |        | 19,160,883 |   |
| Deferred  tax benefit                                                        |       | (481,479                            | )           | (9,636,927 | ) |
| Change  in assets and liabilities:                                           |       |                                |        |   |   |
| Decrease  in accounts receivable                                             |       | 3,165,483                           |        | 2,914,965 |   |
| Increase  in accrued liabilities                                             |       | 8,350,196                           |        | 11,266,649 |   |
| Decrease  in accounts payable                                                |       | (775,782                            | )           | (1,574,763 | ) |
| WB  affiliation payment                                                      |       | (1,261,714                          | )           | (2,319,246 | ) |
| Decrease  in income tax receivable                                           |       | —                              |        | 16,326,799 |   |
| Decrease  in film contract rights and other assets                           |       | 7,926,034                           |        | 2,383,268 |   |
| Decrease  in film contract rights payable and other liabilities              |       | (7,960,282                          | )           | (6,806,696 | ) |
| Net  cash used in operating activities                                       |       | (11,552,282                         | )           | (3,454,113 | ) |
|                                                                         |       |                                |        |   |   |
| Cash  flows from investing activities:                                       |       |                                |        |   |   |
| Sales  (purchases) of marketable securities and other investments            |       | 5,600,506                           |        | (6,593,327 | ) |
| Payment  for acquisition of assets                                           |       | (55,742,424                         | )           | — |   |
| Purchase  of U.S. Government Securities                                      |       | (24,997,500                         | )           | — |   |
| Capital  expenditures                                                        |       | (2,755,698                          | )           | (3,728,789 | ) |
| Net  cash used in investing activities                                       |       | (77,895,116                         | )           | (10,322,116 | ) |
|                                                                         |       |                                |        |   |   |
| Cash  flows from financing activities:                                       |       |                                |        |   |   |
| Proceed  from senior credit facility                                         |       | 53,500,000                          |        | — |   |
| Payment  of senior credit facility                                           |       | (691,884                            | )           | — |   |
| Payment  of deferred financing fees                                          |       | (2,242,401                          | )           | (226,212 | ) |
| Net  cash provided by (used in) financing activities                         |       | 50,565,715                          |        | (226,212 | ) |
|                                                                         |       |                                |        |   |   |
| Net  decrease in cash and cash equivalents                                   |       | (38,881,683                         | )           | (14,002,441 | ) |
| Cash  and cash equivalents, beginning of period                              |       | 60,858,710                          |        | 90,213,995 |   |
| Cash  and cash equivalents, end of period                                    |       | $                                   | 21,977,027  |   | $ | 76,211,554 |   |
|                                                                         |       |                                |        |   |   |
| Supplemental  information:                                                   |       |                                |        |   |   |
| Cash  paid for interest                                                      |       | $                                   | 22,096,374  |   | $ | 17,440,313 |   |
| Cash  paid for income taxes                                                  |       | 116,766                             |        | 163,320 |   |
| Non-cash  capital expenditures                                               |       | 258,833                             |        | 172,386 |   |

 

See accompanyingnotes.

 

6

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**GRANITEBROADCASTING CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**Note 1 –Operations of the Company**

 

The business operationsof Granite Broadcasting Corporation and its wholly owned subsidiaries (the “Company”)consist of eight network affiliated television stations in the United States,consisting of four NBC-affiliated television stations, one ABC-affiliatedstation, one CBS-affiliated television station and two WB Network stations. TheCompany’s stations are located in New York, California, Michigan, Indiana,Illinois and Minnesota. Through various local service agreements (as fully discussedbelow), Granite Broadcasting Corporation provides advertising sales, promotion,administrative services and selected programming to two television stationsowned by Malara Broadcast Group, Inc (“Malara Broadcast Group”).

 

As more fully discussedin Note 3, the Company completed the sale of its Fort Wayne, Indiana ABCaffiliate, WPTA-TV, to Malara Broadcast Group and acquired the Fort Wayne,Indiana NBC affiliate, WISE-TV from New Vision Group, LLC in March 2005.  Malara Broadcast Group also acquired KDLH-TV,the CBS affiliate serving Duluth, Minnesota from New Vision Group, LLC. TheCompany entered into a strategic arrangement with Malara Broadcast Group, underwhich the Company provides advertising sales, promotion and administrativeservices, and selected programming to WPTA-TV and KDLH-TV under local servicesagreements. Although the Company does not own Malara Broadcast Group or itstelevision stations, the Company is deemed to be the primary beneficiary ofMalara Broadcast Group as defined under Financial Accounting Standards BoardInterpretation No. 46, *Consolidation of VariableInterest Entities* (“Interpretation 46”). As a result, Interpretation46 requires the Company to consolidate Malara Broadcast Group’s financialposition, results of operations and cash flows for the period ended September30, 2005.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of a SeniorCredit Facility (the “Malara Broadcast Group Senior Credit Facility”)consisting of two terms loans totaling $48.5 million and a revolving loan of $5million. The $23.5 million Malara Broadcast Group Term Loan A is secured by aletter of credit. To secure the reimbursement obligations in the event of adraw on the letter of credit, pursuant to the terms and conditions of anApplication and Agreement for Standby Letter of Credit, the Company pledged $25million of U.S. Government Securities. The $25 million Malara Broadcast GroupTerm Loan B and the $5 million revolving loan are secured by the assets ofWPTA-TV and KDLH-TV, and guaranteed on an unsecured basis by the Company.

 

The Company anticipates having sufficient unrestrictedcash on hand to make the December 1, 2005 interest payment on its 9 3/4 % Senior Secured Notes (the “Notes”). Absent changes to its capital structure and station ownership mix, theCompany will not have enough liquidity to service its existing obligations overthe next twelve months. In order to improve the Company’s existing liquidityposition and to further the Company’s business strategy, the Company enteredinto separate definitive agreements to sell its two WB affiliates (as discussedin the following paragraph) and is currently exploring additional changes inits station ownership mix and the raising of additional capital.  However, under its Indenture, the Company’suse of the net proceeds from the sale of assets is restricted. Of the netproceeds received in an asset sale, $5 million may be used for working capitalpurposes and the remainder must be used either:

 

•      tomake an investment in properties and assets that replace the properties andassets that were the subject of such asset sale or in properties and assetsthat will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, aPermitted Business Acquisition or enter into a definitive agreement toeffectuate such acquisition; provided that (A) the primary purpose of suchacquisition of Replacement Assets or Permitted Business Acquisition is toacquire, and there is acquired, a television station with a Big-4 (ABC, CBS,NBC or Fox) network affiliation agreement in place or the creation (throughownership by the Company and its Restricted Subsidiaries) of a “duopoly” in amarket and (B) that the Company shall use all reasonable best efforts topromptly dispose of any other assets acquired in such acquisition or PermittedBusiness Acquisition (as such terms are defined in the Indenture); or

 

•      tomake an offer to all holders of the Notes to purchase such amount of the Notesless any such net proceeds used to acquire qualifying Replacement Assets or tomake a Permitted Business Acquisition.

 

On September 8, 2005, theCompany entered into separate definitive agreements to sell its two WBaffiliates, KBWB-TV serving San Francisco, California and WDWB-TV servingDetroit, Michigan to affiliates of AM Media Holdings, LLC. The agreementscontain covenants by the Company not to compete in the San Francisco,California and Detroit, Michigan markets for a period of five years. Theaggregate consideration to be received by the Company for the sale of theassets of KBWB-TV is

 

7

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$72,500,000, beforeclosing adjustments, which is payable $71,250,000 in cash and $1,250,000 inequity in AM Media Holdings, LLC.  Theaggregate consideration to be received by the Company for the sale of theassets of WDWB-TV is $87,500,000, before closing adjustments which is payable$86,250,000 in cash and $1,250,000 in equity in AM Media Holdings, LLC. Theconsideration for each covenant not to compete in the San Francisco and Detroitmarkets is $10 million, respectively.

 

The Company anticipatesthat it will retain approximately $30 million of the aggregate proceeds fromthe transactions to be used for working capital purposes, consisting of $5million per asset sale as permitted under the Company’s Indenture and $10million for each covenant not to compete. The remaining net proceeds, afterclosing adjustments, will be used to make investments in property or assetsthat replace the property and assets that were the subject of such asset saleand/or make an offer to all of the holders of the Notes. The Company expectsboth transactions, each of which is subject to customary closing conditions, toclose in the fourth quarter of 2005. The Company continues to explore theraising of additional capital and changes in its station ownership mix.

 

Assuming the Company issuccessful in selling the KBWB-TV and WDWB-TV and / or raising additionalcapital, it believes that the available proceeds together with the cash andcash equivalents on hand and internally generated funds from operations will besufficient to satisfy our cash requirements for our existing operations for thenext twelve months. However, a lack of liquidity would have a material adverseeffect on the Company’s business strategy and therefore affect its ability tocontinue as a going concern. The 2005 quarterly financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

As of September 30, 2005,the Company had $21,977,000 of cash and cash equivalents on hand, whichexcluded $24,997,500 in U.S. Government Securities which are pledged to securethe reimbursement obligations in the event of a draw on the letter of creditthat serves as collateral for the Term Loan A under Malara Broadcast Group’sSenior Credit Facility and is restricted and not available for working capitalor any other purposes.  To the****extent that principal payments are made on the Term Loan A,the letter of credit shall be proportionately reduced and the Company shall bepermitted to proportionately reduce the amount of pledged U.S. GovernmentSecurities.

 

**Note 2 – Summary ofSignificant Accounting Policies**

 

*Interim Financial Statements*

 

The accompanying unaudited consolidated financialstatements include the accounts of the Company and have been prepared inaccordance with the instructions to Form 10-Q and do not include all of theinformation and footnotes required by United States generally acceptedaccounting principles for complete financial statements.  Operating results for the three and ninemonths ended September 30, 2005 are not necessarily indicative of the resultsthat may be expected for the year ended December 31, 2005.  For further information, refer to the Company’sconsolidated financial statements and notes thereto for the year ended December31, 2004, which were included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004.  In theopinion of management, all adjustments of a normal recurring nature, which arenecessary for a fair presentation of the results for the interim periods, havebeen made.

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include the accounts of the Company and the accounts ofindependently-owned Malara Broadcast Group where it is deemed that the Companyis the primary beneficiary of a variable interest entity in accordance withInterpretation 46. All intercompany account balances and transactions have beeneliminated in consolidation.

 

Malara Broadcast Group isincluded in these consolidated financial statements because the Company isdeemed to be the primary beneficiary of Malara Broadcast Group as defined byInterpretation 46 as a result of (i) the Company’s guarantee of the obligationsincurred under Malara Broadcast Group’s Senior Secured Credit Facility, (ii)local service agreements the Company has with Malara Broadcast Group and (iii)put or call option agreements the Company has with Malara Broadcast Group toacquire all of the assets and assume the liabilities of each Malara BroadcastGroup television station, subject to approval by the Federal CommunicationsCommission (“FCC”) (see Note 3 for further details on the aforementioned).

 

*Discontinued Operations*

 

In accordance with theprovisions of Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets,*the operating results of KBWB-TV, San Francisco, California and WDWB-TV,Detroit, Michigan are not included in our consolidated results from continuingoperations for the periods ended September 30, 2005 and 2004 since the assetsale agreements for KBWB-TV, San Francisco, California and WDWB-TV, Detroit,Michigan, each met all of the criteria for a qualifying plan of sale as ofSeptember 8, 2005.  The assets andliabilities being disposed of have been classified as “held for sale” on

 

8

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the accompanying balancesheets and their operations have been recorded as discontinued operations.Discontinued operations have not been segregated in the consolidated statementof cash flows and, therefore, amounts for certain captions will not agree withthe accompanying consolidated balance sheets and statements of operations.Their financial position and results of operations have been reclassifiedaccordingly for all periods presented. (See Note 7 *DiscontinuedOperations*, for further details.)

 

*Reclassification*

 

Certain balances in theprior period have been reclassified to conform to the current period’spresentation.

 

*RestrictedCash Equivalents*

 

The $23.5 million TermLoan A under the Malara Broadcast Group Senior Credit Facility is secured by aletter of credit.  To secure the reimbursement obligations in the event ofa draw on the letter of credit and pursuant to the terms and conditions of anApplication and Agreement for Standby Letter of Credit, the Company pledged $25million of U.S. Government Securities, which are not available for workingcapital or any other purposes and held in escrow. To the****extentthat principal payments are made on the Term Loan A, the letter of credit shallbe proportionately reduced and the Company shall be permitted toproportionately reduce the amount of the pledged U.S. Government Securities.The Company anticipates payments of principal on the Term Loan A to commence in2007. As of September 30, 2005, the restricted U.S. Government Securitiestotaled $24,997,500.

 

*CashEquivalents and Investments in Marketable Securities*

 

All highly liquidinvestments with a maturity of ninety days or less from the date of purchaseare considered cash equivalents. Marketable securities, if applicable, areclassified as available-for-sale in accordance with the provisions of Statementof Financial Accounting Standards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  Marketable securities are carried at fairmarket value based on current market quotes. Any unrealized gains and lossesare reported in stockholders’ equity as a separate component of othercomprehensive income / (loss) until realized. Gains and losses on securities sold are based on the specificidentification method. The Company does not hold securities for speculative ortrading purposes. As of September 30, 2005, the Company’s did not have anymarketable securities.  During the ninemonths ended September 30, 2005, the Company recorded a realized gain of approximately$12,914.

 

*Propertyand Equipment*

 

Property and equipmentare recorded at cost and depreciated on a straight-line basis over theirestimated useful lives, by asset classifications, ranging from a period of 3 to40 years. Effective January 1, 2005, the Company revised its estimated usefullives of certain asset classifications which were being depreciated on astraight-line basis ranging from 3 to 35 years in periods prior to January 1,2005. Maintenance and repairs are charged to operations as incurred.

 

*Stock-BasedCompensation*

 

The Company has adoptedthe disclosure provisions of Statement of Financial Accounting Standards No.148, *Accounting for Stock-Based Compensation –Transition and Disclosure*, or Statement 148, to require disclosurein the summary of accounting policies of the effects of an entity’s accountingpolicy with respect to stock-based compensation on reported net income / (loss)and earnings per share in annual and interim financial statements.

 

The Company accounts forstock option grants under the recognition and measurement principles ofAccounting Principles Board (“APB”) No 25, *Accounting for StockIssued to Employees*and related interpretations. Under APB No. 25,because the exercise price of the Company’s stock options equals the marketprice (fair value) of the underlying stock on the date of grant, nocompensation expense is recorded.

 

The following tableillustrates the effect on net loss and loss per share as if the Company hadapplied the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123 *Accounting for Stock-BasedCompensation,* as amended by Statement 148, to stock-basedcompensation for the three and nine months ended September 30, 2005 and 2004which may not be representative of the impact in future years.

 

9

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| ** **                                                 | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                             | ** **  | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **(unaudited)**                      | ** **  | **(unaudited)**                     | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                                       |       |                                 |        |                                |       |   |   |   |   |
| Net  loss attributable to common shareholders, as reported |       | $                                    | (19,654,361 | )                                   | $          | (20,002,470 | ) | $ | (55,355,042 | ) | $ | (53,117,905 | ) |
| Add:  pro forma compensation expense                       |       | 104,355                              |        | 332,730                             |       | 313,065 |   | 1,048,168 |   |
| Less:  compensation expense, as reported                   |       | 9,500                                |        | 11,167                              |       | 28,500 |   | 35,167 |   |
| Pro  forma net loss attributable to common shareholders    |       | $                                    | (19,749,216 | )                                   | $          | (20,324,033 | ) | $ | (55,639,607 | ) | $ | (54,130,906 | ) |
|                                                       |       |                                 |        |                                |       |   |   |   |   |
| Basic  and diluted net loss per share, as reported         |       | $                                    | (1.00       | )                                   | $          | (1.03 | ) | $ | (2.83 | ) | $ | (2.74 | ) |
| Pro  forma compensation expense                            |       | (0.01                                | )           | (0.02                               | )          | (0.02 | ) | (0.05 | ) |
| Pro  forma basic and diluted net loss per share            |       | $                                    | (1.01       | )                                   | $          | (1.05 | ) | $ | (2.85 | ) | $ | (2.79 | ) |

 

The fair value foreach option grant was estimated at the date of grant using the Black-Scholesoptions pricing model.  The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility.  TheCompany’s employee stock options have characteristics significantly differentfrom those of traded options and changes in the subjective input assumptionscan materially affect the fair value estimate.

 

*RecentAccounting Pronouncements*

 

In May 2005, theFinancial Accounting Standards Board (“FASB) issued Statement of FinancialAccounting Standards No. 154, *Accounting Changes andError Corrections – a replacement of APB No. 20 and FASB Statement No. 3,*orStatement 154. Statement 154 changes the requirements of accounting for andreporting a change in accounting principle and applies to all voluntary changesin accounting principle and changes required by an accounting pronouncement, inthe event that the accounting pronouncement does not include specifictransition provisions. Statement 154 requires retrospective application ofchanges in accounting principle to prior periods’ financial statements unlessit is impracticable. Statement 154 also requires that a change in the method ofdepreciation, amortization or depletion of long-lived, non-financial assets beaccounted for as a change in accounting estimate affected by a change inaccounting principle. The guidance contained in APB Opinion No. 20, *Accounting Changes* for reporting the correction of an errorwas carried forward in Statement 154 without change. Statement 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

 

In December 2004,FASB issued Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, or Statement 123(R). Statement 123(R)addresses the accounting for share-based payment transactions in which anenterprise receives

employee services inexchange for (i) equity instruments of the enterprise or(ii) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. Statement 123(R) requires an entity to recognize the grant-datefair-value expense of stock options or other equity based compensation issuedto employees in the statement of operations. The revised Statement generallyrequires that an entity account for those transactions using thefair-value-based method, and eliminates the intrinsic value method ofaccounting in Accounting Principles Board No. 25, *Accountingfor Stock Issued to Employees*, or APB 25.   The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial position, results ofoperations or cash flows.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first annual reporting period that begins afterJune 15, 2005. All public companies must use either the modifiedprospective or modified retrospective transition method. Early adoption ofStatement 123(R) for interim or annual periods for which financial statementsor interim reports have not been issued is encouraged but not required. TheCompany has not fully evaluated the impact, if any, of adopting thispronouncement which must be adopted in the first quarter of 2006, but itbelieves that the adoption of this Statement will not have a significantaccounting impact. See “Stock-Based Compensation” for the pro forma impact ifcompensation costs for the Company’s stock option plans had been determinedbased on the fair value method set forth in Statement 123(R).

 

**Note 3 – Acquisitions and Dispositions**

 

On March 7,2005, the Company completed the sale of its Fort Wayne, Indiana ABC affiliate,WPTA-TV to a subsidiary of Malara Broadcast Group Inc. (“Malara Broadcast Group”)for approximately $45.4 million, pursuant to the terms and conditions of anasset purchase agreement, dated April 23, 2004.  In addition, on March 8, 2005, theCompany completed its purchase of WISE-TV, the NBC affiliate serving Fort Waynefrom New Vision Group, LLC, or New Vision Television, for approximately $43.5million, pursuant to the terms and conditions of a stock purchase agreement,dated April 23, 2004.

 

10

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In addition, anothersubsidiary of Malara Broadcast Group acquired CBS affiliate KDLH-TV, Duluth,Minnesota from New Vision Television on March 8, 2005 for approximately $9.5million, pursuant to the terms and conditions of an asset purchase agreement,dated April 23, 2004.

 

On March 8,2005, the Company entered into a strategic arrangement with Malara BroadcastGroup, under which the Company provides advertising sales, promotion andadministrative services, and selected programming to WPTA-TV and KDLH-TV inreturn for certain fees that will be paid by Malara Broadcast Group to theCompany. The fees payable to the Company will be paid after current debtservice as well as certain other expenses Malara Broadcast Group incursdirectly are satisfied. During the three and nine months ended September 30,2005, Malara Broadcast Group paid the Company approximately $996,000 and$1,796,000, respectively owed under the strategic arrangements between bothcompany’s. As of September 30, 2005, the total amount owed to the Company fromMalara Broadcast Group totaled approximately $9,998,000.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of the MalaraBroadcast Group Senior Credit Facility (see Note 6).

 

The Company does not ownMalara Broadcast Group or its television stations. However, as a result of theCompany’s guarantee of the obligations incurred under Malara Broadcast Group’ssenior secured credit facility with respect to the Term Loan B and therevolving loan and due to its arrangements under the local service agreementsand put or call option agreements, under Interpretation 46, the Company isrequired to consolidate Malara Broadcast Group’s financial position, results ofoperations and cash flows. In addition, in accordance with the provisions ofInterpretation 46, the Company did not account for the sale of the assets ofWPTA-TV and no gain there from was recognized in the consolidated statements ofoperations. Additionally, the Company did not apply the provisions of purchaseaccounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

In May 2004, an applicationwas filed with the FCC, seeking consent to assign the license of televisionstation KDLH to a subsidiary of Malara Broadcast Group.  A petition to deny the application was filedwith the FCC jointly by two competing television station licensees in the Duluthmarket asserting that the Company will have a prohibited ownership interest inKDLH by virtue of the operating arrangement between Malara Broadcast Group andthe Company.  The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application in December2004.  In January 2005, the petitioningbroadcasters filed an application for review seeking Commission-level review ofthe Bureau’s decision.  Malara BroadcastGroup filed an opposition to the application for review, and the petitioningbroadcasters filed a response to that opposition.

 

The FCC has not yet ruledon the application for review.  Althoughthe Company believes that the application for review is without merit andanticipates that the FCC will affirm the grant of the assignment applicationfor KDLH, it is not possible to predict how the FCC will rule on theapplication for review.  It also is notpossible to predict any remedial action or possible sanction that may beimposed by the FCC in the event that it grants the application for review.  An FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, LLC, or a sale byMalara Broadcast Group of its ownership of KDLH.

 

Each of the acquisitionslisted below was consummated during the three months ended March 31, 2005. TheCompany’s acquisition of WISE and Malara Broadcast Group’s acquisition of KDLHwere accounted for under the purchase method of accounting. The consolidatedfinancial statements continue to include the operating results of WPTA as wellas the operating results of WISE and KDLH from the date of consummation of theacquisition. In accordance with the provisions of Interpretation 46, the Companydid not account for the sale of the assets of WPTA.

 
| **Station**   | ** ** | **Network  Affiliation** | ** ** | **Market**           | ** ** | **Date Acquired** | ** ** | **Acquiring Company**          | ** ** |
|---------------|------------|--------------------------|------------|----------------------|------------|-------------------|------------|--------------------------------|------------|
| WISE          |       | NBC                      |       | Fort Wayne,  Indiana |       | March 8, 2005     |       | Granite  Broadcast Corporation |       |
| WPTA (1), (2) |       | ABC                      |       | Fort Wayne,  Indiana |       | March 7, 2005     |       | Malara Broadcast  Group        |       |
| KDLH (1)      |       | CBS                      |       | Duluth,  Minnesota   |       | March 8, 2005     |       | Malara Broadcast  Group        |       |

 

----

(1)   Operations underlocal service agreements, whereby, the Company provides advertising, sales,promotions, administrative services and selected programming services to MalaraBroadcast Group television stations in return for certain fees that will bepaid to the Company by Malara Broadcast Group.

(2)   In accordance withInterpretation 46, the Company did not account for the sale of the assets ofWPTA-TV and no gain there from was recognized in the consolidated statements ofoperations. In addition, the Company did not apply the provisions of purchaseaccounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

11

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*WISE*

 

On March 8, 2005, theCompany acquired the stock of WISE-TV from New Vision Group, LLC for $43.5million plus approximately $2,400,000 of transactions costs. The acquisitionwas accounted for under the purchase method of accounting and accordingly, thepurchase price was allocated to liabilities acquired based on their estimatedfair value on the acquisition date.

 

The following tablesummarizes the allocation of the purchase price of WISE-TV on March 8, 2005.The Company is currently obtaining a third-party valuation of certain acquiredintangible assets and therefore the allocation below is preliminary andestimated and is subject to change once the third-party valuation is completed.In addition, net liabilities acquired are subject to future adjustments andtherefore the amount below is preliminary and estimated and subject to change.

 
| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase  Price                                        |       | $                 | 45,879,000 |   |
| Net  Liabilities Acquired                              |       | 1,586,000         |       |
| FCC  License (indefinite lived)                        |       | (5,424,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (20,797,000       | )          |
| Goodwill  (indefinite lived)                           |       | $                 | 21,244,000 |   |

 

*KDLH*

 

On March 8, 2005, MalaraBroadcast Group acquired substantially all of the assets of KDLH-TV from NewVision Group, LLC for $9.5 million plus approximately $360,000 of transactionscosts. The acquisition was accounted for under the purchase method ofaccounting and accordingly, the purchase price was allocated to assets acquiredbased on their estimated fair value on the acquisition date.

 

The following tablesummarizes the allocation of the purchase price of KDLH-TV acquired on March 8,2005. Malara Broadcast Group is currently obtaining a third-party valuation ofcertain acquired intangible assets and therefore the allocation below ispreliminary and estimated and is subject to change once the third-partyvaluation is completed. In addition, net assets acquired are subject to futureadjustments and therefore the amount below is preliminary and estimated andsubject to change.

 
| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase  Price                                        |       | $                 | 9,864,000  |   |
| Net  Assets Acquired                                   |       | (4,639,000        | )          |
| FCC  License (indefinite lived)                        |       | (2,000,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (2,879,000        | )          |
| Goodwill  (indefinite lived)                           |       | $                 | 346,000    |   |

 

The following unauditedpro forma information from continuing operations for the three months endedSeptember 30, 2004 and nine months ended September 30, 2005 and 2004 has beenpresented as if the Company’s acquisition of WISE-TV and Malara Broadcast Group’sacquisition of KDLH-TV had occurred on January 1, of each year:

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|-------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2005**                             | ** **  | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Actual**                           | ** **  | **Pro Forma**                       | ** ** | **Pro Forma** | ** ** | **Pro Forma** | ** ** |
| Net  Revenues                                 |       | $                                    | 20,823,000  |                                | $          | 26,754,000 |   | $ | 63,553,000 |   | $ | 66,733,000 |   |
| Operating  Expenses                           |       | 20,452,000                           |        | 25,118,000                          |       | 61,775,000 |   | 69,146,000 |   |
| Income  (loss) from Operations                |       | 371,000                              |        | 1,636,000                           |       | 1,778,000 |   | (2,413,000 | ) |
| Other  Expenses                               |       | 18,016,000                           |        | 18,286,000                          |       | 54,412,000 |   | 55,131,000 |   |
| Loss  before taxes                            |       | (17,645,000                          | )           | (16,650,000                         | )          | (52,634,000 | ) | (57,544,000 | ) |
| Benefit  for income taxes                     |       | (156,000                             | )           | (4,949,000                          | )          | (482,000 | ) | (9,627,000 | ) |
| Net  loss attributable to common shareholders |       | $                                    | (17,489,000 | )                                   | $          | (11,701,000 | ) | $ | (52,152,000 | ) | $ | (47,917,000 | ) |
|                                          |       |                                 |        |                                |       |   |   |   |   |
| Basic  and diluted net loss per share         |       | $                                    | (0.89       | )                                   | $          | (0.60 | ) | $ | (2.67 | ) | $ | (2.47 | ) |
|                                          |       |                                 |        |                                |       |   |   |   |   |
| Weighted  average common shares outstanding   |       | 19,578,392                           |        | 19,381,124                          |       | 19,552,211 |   | 19,360,569 |   |

 

12

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The selected unauditedpro forma information is presented for illustrative purposes only and is notnecessarily indicative of

results of operations inthe future periods or results that would have been achieved had the Company’sacquisition of WISE-TV and Malara Broadcast Group’s acquisition of KDLH-TVoccurred during the specified periods

 

**Note 4 –Related Parties**

 

In February 2003,the Compensation Committee recommended, and the Board of Directors approved, anincentive award of $3,286,065 to each of W. Don Cornwell and Stuart J Beck tobe paid, subject to vesting terms, only upon the occurrence of the refinancingwith a maturity of at least two years, of the senior debt due April 15,2004. On December 22, 2003, the Company issued $405 million aggregate principalamount of 9 3/4 % Senior Secured Notes, the proceeds of which were used by theCompany in part to repay all outstanding borrowings (plus accrued interest)under the Company’s then outstanding senior credit agreement, which satisfiedthe performance objective of the awards. Mr. Cornwell’s award, which vests in one-third tranches over three yearsfrom the refinancing date, will be used to repay in full his outstanding loanfrom the Company of $3,286,065 due January 25, 2006.  Mr. Cornwell has irrevocably elected to deferpayment of the first two tranches under his performance award untilJanuary 25, 2006 when his loan is repaid. On March 1, 2005, the Board of Directors approved the acceleration ofpayment of the third tranche of Mr. Cornwell’s award to January 25, 2006.

 

On September 21, 2004,Mr. Beck resigned from the Company to accept the appointment asAmbassador/Permanent Representative of the Republic of Palau to the UnitedNations.  Mr. Beck remains on the Company’sBoard of Directors. Pursuant to his separation agreement, the Company grantedMr. Beck severance totaling $1,008,000, payable in equal installments overeighteen months from the date of separation.  In addition, Mr. Beck wasawarded a pro-rated bonus of approximately $255,600 based upon achievements ofcertain financial targets in 2004 which was paid during the three months endedMarch 31, 2005.

 

Under the terms of theseparation agreement, the Company and Mr. Beck amended the Performance Awardand deferral of such payments pursuant to the separation agreement.  Under the amended terms of the PerformanceAward, Mr. Beck’s Performance Award fully vested as of the separation date anda payment of $221,200 was made on September 30, 2004 to repay his outstandingpromissory note to the Company.  Theremaining vested award of $3,065,000 is payable in cash on December 22, 2006.

 

In addition, the Companymodified the terms of Mr. Beck’s outstanding stock option awards to allow hisoptions to continue to vest and to allow Mr. Beck the right to exercise hisoptions until the earlier of (i) the later of January 2, 2007 and 30 days afterthe last day of Mr. Beck’s continuous service on the Company’s Board ofDirectors and (ii) the fixed date on which each stock option award wasinitially set to expire.

 

During the fourth quarterof 2004 and pursuant to the separation agreement, Mr. Beck exchanged 80,250shares of the Company’s Class A Voting Common Stock, par value $0.01 per share,for 80,250 shares of the Company’s Class B Non-Voting Common Stock, par value$0.01 per share.

 

From September 2004through July 2005, the Company allowed Mr. Beck to use office space at nocharge.

 

**Note 5 – Restructuringand Severance Charges**

 

*RestructuringCharges*

 

During 2004, the Companyrecorded a $2,027,000 restructuring charge relating to employee separations atboth its corporate office and its Buffalo, New York television station.  Of the total $2,027,000, approximately$1,406,000 related to severance and other benefits, associated with thedeparture of Stuart J. Beck (see Note 4, Related Parties) and administrativesupport staff at the corporate office which are being paid over an eighteenmonth period from date of separation, September 21, 2004. The remaining$621,000 restructuring charge includes severance and other benefits resultingfrom a reduction in the workforce at the Buffalo, New York television station.As of September 30, 2005, the Company completed the separation payments relatedto the Buffalo, New York restructuring charges, and reduced its accrual byapproximately $10,000 to adjust for payments of benefits and amounts originallyaccrued for.

 

Duringthe three months and nine months ended September 30, 2005, the Company recordedrestructuring charges totaling $34,000 and $447,000, respectively, related toemployee separations, which included severance, other benefits and stay-bonusesawarded to transitional employees at its Duluth, Minnesota and Fort Wayne,Indiana television stations. The Company anticipates minimal restructuringcharges in future periods relating to stay-bonuses awarded to transitionalemployees of both its Duluth, Minnesota and Fort Wayne, Indiana televisionstations upon separation.

 

13

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At September 30,2005, the accruals for restructuring activities were included in “other accruedliabilities” on the

consolidated BalanceSheets and the related expense for the charge at the television stations areincluded in “station operating expenses” and the related expense for thecorporate charges are included in “corporate separation agreement expenses” onthe consolidated Statement of Operations. These costs were recognized in accordance with the provisions ofStatement of Financial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

*AcquisitionCharges*

 

During the threeand nine months ended September 30, 2005, the Company accrued $5,000 and$627,000 related to employee separations, which included severance and otherbenefits as part of the Company’s purchase accounting. These accrued costs werea result of employees not retained by the Company subsequent to its acquisitionof its Fort Wayne, Indiana television station, which included line throughmanagement employees.

 

At September 30,2005, the accruals for acquisition activities of the television station wereincluded in “other accrued liabilities” on the consolidated Balance Sheets.These charges were recognized in accordance with the provisions of EmergingIssues Task Force Issue No. 95-3 *Recognition of Liabilitiesin Connection with a Purchase Business Combination*.

 

The following is areconciliation of the aggregate liability recorded for restructuring andacquisition charges as of September 30, 2005:

 
| ** **          | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended September 30, 2005**                                                     | ** ** |
| ** **          | ** ** | **June 30,  2005**                                                                            | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2005** | ** ** |
| Television stations |       | $                                                                                             | 273,000    |   | $ | 29,000 |   | $ | 180,000 |   | $ | 122,000 |   |
| Corporate           |       | 575,000                                                                                       |       | — |   | 192,000 |   | 383,000 |   |
|                |       |                                                                                          |       |   |   |   |   |   |   |
| Total               |       | $                                                                                             | 848,000    |   | $ | 29,000 |   | $ | 372,000 |   | $ | 505,000 |   |

 

 
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Nine Months Ended September 30, 2005**                                                      | ** ** |
| ** **           | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30, 2005** | ** ** |
| Television  stations |       | $                                                                                             | 250,000    |   | $ | 1,064,000 |   | $ | 1,192,000 |   | $ | 122,000 |   |
| Corporate            |       | 1,214,000                                                                                     |       | — |   | 831,000 |   | 383,000 |   |
|                 |       |                                                                                          |       |   |   |   |   |   |   |
| Total                |       | $                                                                                             | 1,464,000  |   | $ | 1,064,000 |   | $ | 2,023,000 |   | $ | 505,000 |   |

 

The liability for therestructuring and acquisition charges will be paid in accordance with theprovisions of the severance agreements and payments are expected to becompleted at various times through March 2006.

 

**Note 6 – Debt**

 

Current portion oflong-term debt consists of the following:

 
| ** **                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Malara Broadcast Group  Senior Credit Facility |       | $                       | 2,800,000  |                   | $          | — |   |
|                                           |       |                    |       |                   |       |
| Total                                          |       | $                       | 2,800,000  |                   | $          | — |   |

 

14

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Long-term debt consistsof the following:

 
| ** **                                                                                                                       | ** ** | **September 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| 9  3/4% Senior Secured Notes, due 2010, net of discount of $3,680,177 at  September 30, 2005 and $4,208,702 at December 31, 2004 |       | $                       | 401,320,000 |                   | $          | 400,791,000 |   |
| Malara  Broadcast Group Senior Credit Facility, less current portion                                                             |       | 50,522,000              |        | —                 |       |
|                                                                                                                             |       |                    |        |                   |       |
| Total                                                                                                                            |       | $                       | 451,842,000 |                   | $          | 400,791,000 |   |

 

***TheCompany’s 9 3/4 % Senior Secured Notes***

 

On December 22,2003, the Company completed a $405,000,000 offering of our 9 3/4 % SeniorSecured Notes (the “Notes”)

due December 1,2010, at a discount, resulting in proceeds of $400,067,100.  Interest on the Notes is payable onDecember 1 and June 1 of each year, which commenced on June 1,2004.  The Company used the net proceedsfrom the offering in part to (i) repay all outstanding borrowings, plusaccrued interest, under its senior credit agreement, (ii) redeem at par,plus accrued interest, all of its 9 3/8 % and 10 3/8 % senior subordinated notes due May andDecember 2005, respectively, and (iii) to repurchase at par, plusaccrued interest, all of its 8 7/8 % senior subordinated notes dueMay 2008.  The remaining proceedswere invested in short-term securities as well as being used for generalworking capital purposes.

 

The Notes are the Company’ssenior secured obligations. The Notes are guaranteed by each of the Company’sdomestic restricted subsidiaries. The Notes and the guarantees are secured bysubstantially all of the Company’s assets. The Company may redeem some or all of the Notes at any time on or afterDecember 1, 2006. The Company may also redeem up to 35% of the aggregateprincipal amount of the Notes using the proceeds of one or more equityofferings on or before December 1, 2005.

 

The Indenture, whichgoverns the Company’s Notes, restricts its ability and the ability of itsrestricted subsidiaries to, among other things: (i) incur additional debtand issue preferred stock; (ii) make certain distributions, investmentsand other restricted payments; (iii) create certain liens; (iv) enterinto transactions with affiliates; (v) enter into agreements that restrictits restricted subsidiaries from making payments to the Company;(vi) merge, consolidate or sell substantially all of its assets;(vii) sell or acquire assets; and (viii) enter into new lines of business.

 

Under the Indenture, theMalara Broadcast Group companies to which the Company provides servicespursuant to the local services agreements are subject to the terms of theIndenture applicable to Restricted Subsidiaries that are not Guarantors, assuch terms are defined in the Indenture.

 

***MalaraBroadcast Group’s Senior Credit Facility***

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV in March 2005 with theproceeds of the Malara Broadcast Group Senior Credit Facility, consisting oftwo terms loans totaling $48.5 million and a revolving loan of $5 million. The$23.5 million Malara Broadcast Group Term Loan A is secured by a letter ofcredit. To secure the reimbursement obligations in the event of a draw on theletter of credit, pursuant to the terms and conditions of an Application andAgreement for Standby Letter of Credit, the Company pledged $25 million of U.S.Government Securities. To the****extent thatprincipal payments are made on the Term Loan A, the letter of credit shall beproportionately reduced and the Company shall be permitted to proportionatelyreduce the amount of the pledged U.S. Government Securities.  The $25 million Malara Broadcast Group TermLoan B and the $5 million revolving loan are secured by the assets of WPTA-TVand KDLH-TV, and guaranteed on an unsecured basis by the Company pursuant to aguaranty agreement (the “Granite Guaranty”).

 

The Malara Broadcast Group Senior Credit Facility contains covenants restricting the ability of Malara Broadcast Group and its subsidiaries to, among other things, (i) incur additional debt, (ii) incur liens, (iii) make loans and investments, (iv) incur contingent obligations (including hedging arrangements), (v) declare dividends or redeem or repurchase capital stock or debt, (vi) engage in certain mergers, acquisitions and asset sales, (vii) engage in transactions with affiliates, (viii) engage in sale-leaseback transactions and (ix) change the nature of its business and the business conducted by its subsidiaries.  Malara Broadcast Group is also required to comply with financial covenants with respect to a minimum interest coverage ratio, minimum consolidated available cash flow, a maximum leverage ratio and minimum consolidated net revenue and limits on capital expenditures.

 

15

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Interest rates associatedwith the Term Loan A are based, at Malara Broadcast Group’s option, at either(i) the higher of the Prime Rate or the Federal Funds Effective Rate plus0.50% (the “Base Rate”) or (ii) the Adjusted Eurodollar Rate plus 0.60%per annum, as such terms are defined in the Malara Broadcast Group SeniorCredit Facility.  Interest ratesassociated with the Term Loan

B and Revolving Loan arebased, at Malara Broadcast Group’s option, at either (i) the Base Rateplus 4.625% per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% perannum.  In addition, Deferred Interest(as defined in the Malara Broadcast Group Senior Credit Facility) accrues withrespect to, and is added to the principal amount of, the Term Loan B andRevolving Loan at a rate of 3% per annum. Additionally, Malara Broadcast Groupis required to pay monthly commitment fees on the unused portion of itsrevolving loan commitment at a rate of 0.50% per annum.  Cash interest payments are payable monthly.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan B as follows:(i) $125,000 payable at the end of each month from June 1, 2006through March 31, 2007, (ii) $158,333 payable at the end of each monthfrom April 1, 2007, through March 31, 2008, and (iii) $216,667payable at the end of each month from April 1, 2008, throughFebruary 1, 2010.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan A and theRevolving Loan equal

to the product of(i) the Repayment Percentage (which is 25% unless there is an Event ofDefault or the Consolidated Loan to Stick Value is less than 70%, in which casethe Repayment Percentage is 100%) and (ii) the Consolidated Excess FreeCash Flow for the month preceding the month in which such installment is due,as such terms are defined in the Malara Broadcast Group Senior CreditFacility.  All such payments shall beapplied first to repay the outstanding Revolving Loan to the full extentthereof (without a corresponding reduction in the Revolving Loan CommitmentAmount) and second to repay the outstanding Term Loan A to the full extentthereof; provided that, if the Repayment Percentage for such monthlyinstallment is 100%, the excess 75% of such monthly installment shall beapplied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Term Loan B to the full extentthereof. For the three and nine months ended September 30, 2005, the totalprincipal payments made on the Revolving Loan approximated $309,000 and$692,000, respectively.

** **

**Note 7 – DiscontinuedOperations**

 

In accordance with theprovisions of Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets,*the operating results of KBWB-TV, San Francisco, California and WDWB-TV,Detroit, Michigan are reported as discontinued operations in the accompanyingconsolidated balance sheets and statements of operations for the periods endedSeptember 30, 2005 and 2004, since the asset sale agreements for KBWB-TV, SanFrancisco, California and WDWB-TV, Detroit, Michigan, each met all of thecriteria for a qualifying plan of sale as of September 30, 2005.  The respective assets and liabilities beingdisposed of have been classified as “held for sale” on the accompanying balancesheets presented and their operations have been recorded as discontinuedoperations. Discontinued operations have not been segregated in theconsolidated statement of cash flows and, therefore, amounts for certaincaptions will not agree with the accompanying consolidated balance sheets andstatements of operations.

 

**KBWB and WDWB Disposition**

 

On September 8, 2005, theCompany entered into separate definitive agreements to sell KBWB-TV in SanFrancisco, California, including the related FCC license and WDWB-TV inDetroit, Michigan, including the FCC license to affiliates of AM MediaHoldings, LLC. The agreements contain covenants by the Company not to competein the San Francisco, California and Detroit, Michigan markets for a period offive years. The aggregate consideration to be received by the Company for thesale of KBWB-TV is $72,500,000, before closing adjustments, which is payable$71,250,000 in cash and $1,250,000 in equity in AM Media Holdings, LLC. Theaggregate consideration to be received by the Company for the sale of WDWB-TVis $87,500,000, before closing adjustments, which is payable $86,250,000 incash and $1,250,000 in equity in AM Media Holdings, LLC. The consideration foreach covenant not to compete in the San Francisco and Detroit markets is $10million, respectively. The Company anticipates both transactions, each of whichis subject to customary closing conditions, to close in the fourth quarter of2005. As of September 30, 2005 the aggregate assets held for sale totaled$148,256,000 and the aggregate liabilities held for sale totaled $36,408,000.At December 31, 2004, the aggregate assets held for sale totaled $158,143,000and the aggregate liabilities held for sale totaled $46,057,000.

 

16

----

 

Cash related todiscontinued operations, which the Company will retain the rights to, isincluded in cash and cash equivalents in the accompanying consolidated balancesheets for all periods presented. Such amounts totaled $397,000 as of September30, 2005 and $649,000 as of December 31, 2004. Accounts receivable related todiscontinued operations, which the Company will retain the rights to andcollect, is included in accounts receivable, net of allowance for doubtfulaccounts, in the accompanying consolidated balance sheets for all periodspresented. Such amounts totaled $4,667,000 (net of allowance of $226,000) as ofSeptember 30, 2005 and $6,091,000 (net of allowance of $415,000) as of December31, 2004. Net loss from discontinued operations was $2,166,000 and $4,045,000for the three and nine months ended September 30, 2005, respectively. Net lossfrom discontinued operations was $5,307,000 and $7,612,000 for the three and ninemonths ended September 30, 2004, respectively. Net revenues from discontinuedoperations were $7,334,000 and $23,203,000 for the three and nine months endedSeptember 30, 2005, respectively. Net revenues from discontinued operationswere $7,609,000 and $24,880,000 for the three and nine months ended September30, 2004, respectively.

 

Summarized financial datafor assets and liabilities held for sale are as follows:

 
| ** **                       | ** ** | **Balance Sheet Data** | ** **  |
|----------------------------------|------------|------------------------|-------------|
| ** **                       | ** ** | **September 30,**      | ** **  | **December 31,** | ** ** |
| ** **                       | ** ** | **2005**               | ** **  | **2004** | ** ** |
| Film  contract rights            |       | $                      | 7,750,000   |   | $ | 12,851,000 |   |
| Property  and equipment, net     |       | 7,883,000              |        | 8,510,000 |   |
| Intangible  and other assets     |       | 132,623,000            |        | 136,782,000 |   |
| Total  assets held for sale      |       | $                      | 148,256,000 |   | $ | 158,143,000 |   |
|                             |       |                   |        |   |   |
| Film  contract rights payable    |       | $                      | 29,296,000  |   | $ | 37,118,000 |   |
| Accrued  and other liabilities   |       | 7,112,000              |        | 8,939,000 |   |
| Total  liabilities held for sale |       | $                      | 36,408,000  |   | $ | 46,057,000 |   |

 

17

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**Note 8 – CondensedConsolidating Financial Information**

 

The Granite BroadcastingCorporation column represents the registrant’s financial information. TheMalara Broadcast Group column represents the consolidated financial informationof Malara Broadcast Group, an independently owned entity in which the Companyis deemed to be the primary beneficiary (see Note 3) and is required to beconsolidated as a variable interest entity in accordance with Interpretation46.

 

**BALANCESHEET**

**September30, 2005**

 
| ** **                                        | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|---------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                        | ** ** | ** **                            | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                            |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current  assets:                                  |       |                                  |        |                        |       |             |       |                      |        |
| Cash  and cash equivalents                        |       | $                                     | 20,456,902  |                        | $          | 1,520,125        |       | $                         | —      |   | $ | 21,977,027 |   |
| Accounts  receivable, net                         |       | 17,292,898                            |        | 2,513,244                   |       | —           |       | 19,806,142                |        |
| Other  current assets                             |       | 6,294,042                             |        | 1,136,867                   |       | —           |       | 7,430,909                 |        |
| Assets  held for sale                             |       | 148,255,779                           |        | —                      |       | —           |       | 148,255,779               |        |
| Due  from consolidated entity                     |       | 10,040,390                            |        | 130,186                     |       | (10,170,576      | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total  current assets                             |       | 202,340,011                           |        | 5,300,422                   |       | (10,170,576      | )          | 197,469,857               |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Restricted  cash equivalents                      |       | 24,997,500                            |        | —                      |       | —           |       | 24,997,500                |        |
| Property  and equipment, net                      |       | 33,070,842                            |        | 8,828,292                   |       | —           |       | 41,899,134                |        |
| Other  non current assets                         |       | 19,519,140                            |        | 1,307,628                   |       | (3,646,668       | )          | 17,180,100                |        |
| Intangibles,  net                                 |       | 153,624,776                           |        | 44,782,741                  |       | (27,731,100      | )          | 170,676,417               |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total  assets                                     |       | $                                     | 433,552,269 |                        | $          | 60,219,083       |       | $                         | (41,548,344 | ) | $ | 452,223,008 |   |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Liabilities  and stockholders’ deficit       |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current  liabilities:                             |       |                                  |        |                        |       |             |       |                      |        |
| Accounts  payable and other accrued liabilities   |       | $                                     | 19,035,970  |                        | $          | 365,971          |       | $                         | —      |   | $ | 19,401,941 |   |
| Current  portion of long-term debt                |       | —                                |        | 2,800,000                   |       | —           |       | 2,800,000                 |        |
| Other  current liabilities                        |       | 6,526,045                             |        | 1,200,040                   |       | —           |       | 7,726,085                 |        |
| Liabilities  held for sale                        |       | 36,407,836                            |        | —                      |       | —           |       | 36,407,836                |        |
| Due  to consolidated entity                       |       | 130,186                               |        | 10,040,390                  |       | (10,170,576      | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total  current liabilities                        |       | 62,100,037                            |        | 14,406,401                  |       | (10,170,576      | )          | 66,335,862                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Long-term  debt, less current portion             |       | 401,319,823                           |        | 50,522,358                  |       | —           |       | 451,842,181               |        |
| Other  non current liabilities                    |       | 32,391,442                            |        | 3,940,513                   |       | (3,646,668       | )          | 32,685,287                |        |
| Redeemable  preferred stock                       |       | 199,102,319                           |        | —                      |       | —           |       | 199,102,319               |        |
| Accrued  dividends on redeemable preferred stock  |       | 89,417,456                            |        | —                      |       | —           |       | 89,417,456                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Stockholders’  deficit:                      |       |                                  |        |                        |       |             |       |                      |        |
| Common  stock                                     |       | 195,783                               |        | —                      |       | —           |       | 195,783                   |        |
| Additional  paid-in capital                       |       | 370,246                               |        | —                      |       | —           |       | 370,246                   |        |
| Accumulated  deficit                              |       | (350,384,037                          | )           | (8,650,189                  | )          | (27,731,100      | )          | (386,765,326              | )           |
| Less:  Unearned compensation                      |       | (85,125                               | )           | —                      |       | —           |       | (85,125                   | )           |
| Treasury  stock, at cost                          |       | (875,675                              | )           | —                      |       | —           |       | (875,675                  | )           |
| Total  stockholders’ deficit                 |       | (350,778,808                          | )           | (8,650,189                  | )          | (27,731,100      | )          | (387,160,097              | )           |
| Total  liabilities and stockholders’ deficit |       | $                                     | 433,552,269 |                        | $          | 60,219,083       |       | $                         | (41,548,344 | ) | $ | 452,223,008 |   |

 

18

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**STATEMENTOF OPERATIONS**

**For thethree months ended September 30, 2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net  revenues                                                                                                               |       | $                                      | 21,147,355  |                        | $          | 1,625,665        |       | $                         | (1,950,000 | ) | $ | 20,823,020 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct  operating expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 8,567,349                              |        | 415,625                     |       |             |       | 8,982,974                 |       |
| Selling,  general and administrative expenses (exclusive of depreciation and  amortization expenses shown separately below) |       | 6,027,611                              |        | 2,381,470                   |       | (1,950,000       | )          | 6,459,081                 |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,558,465                              |        | —                      |       |             |       | 2,558,465                 |       |
| Depreciation  and amortization                                                                                              |       | 1,697,619                              |        | 339,609                     |       |             |       | 2,037,228                 |       |
| Performance  award expense                                                                                                  |       | 319,797                                |        | —                      |       |             |       | 319,797                   |       |
| Non-cash  compensation expense                                                                                              |       | 94,146                                 |        | —                      |       |             |       | 94,146                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating  income (loss)                                                                                                    |       | 1,882,368                              |        | (1,511,039                  | )          |             |       | 371,329                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other  expenses (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest  expense                                                                                                           |       | 9,872,456                              |        | 1,300,064                   |       |             |       | 11,172,520                |       |
| Interest  income                                                                                                            |       | (574,854                               | )           | —                      |       |             |       | (574,854                  | )          |
| Non-cash  interest expense                                                                                                  |       | 939,927                                |        | 68,952                      |       |             |       | 1,008,879                 |       |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                      |       |             |       | 6,386,961                 |       |
| Other                                                                                                                       |       | (1,324,550                             | )           | 1,346,630                   |       |             |       | 22,080                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from continuing operations before income taxes                                                                        |       | (13,417,572                            | )           | (4,226,685                  | )          |             |       | (17,644,257               | )          |
| Benefit  for income taxes                                                                                                   |       | (156,086                               | )           | —                      |       |             |       | (156,086                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from continuing operations                                                                                            |       | (13,261,486                            | )           | (4,226,685                  | )          |             |       | (17,488,171               | )          |
| Discontinued  operations:                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from discontinued operations, net of taxes                                                                            |       | (2,166,190                             | )           | —                      |       |             |       | (2,166,190                | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net  loss                                                                                                                   |       | $                                      | (15,427,676 | )                           | $          | (4,226,685       | )          |                      |       | $ | (19,654,361 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic  and diluted net loss per share from continuing operations                                                            |       | $                                      | (0.68       | )                           | N/A        |             |       |                      | $          | (0.89 | ) |
| Basic  and diluted net loss per share from discontinued operations                                                          |       | $                                      | (0.11       | )                           | N/A        |             |       |                      | $          | (0.11 | ) |
| Basic  and diluted net loss per share                                                                                       |       | $                                      | (0.79       | )                           | N/A        |             |       |                      | $          | (1.00 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted  average common shares outstanding                                                                                 |       | 19,578,392                             |        | N/A                         |       |             |       | 19,578,392                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

19

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**STATEMENTOF OPERATIONS**

**For thenine months ended September 30, 2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net  revenues                                                                                                               |       | $                                      | 61,859,615  |                        | $          | 4,245,044        |       | $                         | (4,403,226 | ) | $ | 61,701,433 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct  operating expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 25,335,514                             |        | 965,304                     |       |             |       | 26,300,818                |       |
| Selling,  general and administrative expenses (exclusive of depreciation and  amortization expenses shown separately below) |       | 17,624,348                             |        | 5,137,479                   |       | (4,403,226       | )          | 18,358,601                |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 7,981,523                              |        | —                      |       |             |       | 7,981,523                 |       |
| Depreciation  and amortization                                                                                              |       | 5,379,388                              |        | 743,628                     |       |             |       | 6,123,016                 |       |
| Performance  award expense                                                                                                  |       | 959,391                                |        | —                      |       |             |       | 959,391                   |       |
| Non-cash  compensation expense                                                                                              |       | 282,296                                |        | —                      |       |             |       | 282,296                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating  income (loss)                                                                                                    |       | 4,297,155                              |        | (2,601,367                  | )          |             |       | 1,695,788                 |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other  expenses (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest  expense                                                                                                           |       | 29,625,162                             |        | 2,878,480                   |       |             |       | 32,503,642                |       |
| Interest  income                                                                                                            |       | (1,312,653                             | )           | —                      |       |             |       | (1,312,653                | )          |
| Non-cash  interest expense                                                                                                  |       | 2,787,713                              |        | 155,085                     |       |             |       | 2,942,798                 |       |
| Non-cash  preferred stock dividend                                                                                          |       | 19,160,883                             |        | —                      |       |             |       | 19,160,883                |       |
| Other                                                                                                                       |       | (2,822,845                             | )           | 3,015,257                   |       |             |       | 192,412                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from continuing operations before income taxes                                                                        |       | (43,141,105                            | )           | (8,650,189                  | )          |             |       | (51,791,294               | )          |
| Benefit  for income taxes                                                                                                   |       | (481,479                               | )           | —                      |       |             |       | (481,479                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from continuing operations                                                                                            |       | (42,659,626                            | )           | (8,650,189                  | )          |             |       | (51,309,815               | )          |
| Discontinued  operations:                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Loss  from discontinued operations, net of taxes                                                                            |       | (4,045,227                             | )           | —                      |       |             |       | (4,045,227                | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net  loss                                                                                                                   |       | $                                      | (46,704,853 | )                           | $          | (8,650,189       | )          |                      |       | $ | (55,355,042 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic  and diluted net loss per share from continuing operations                                                            |       | $                                      | (2.18       | )                           | N/A        |             |       |                      | $          | (2.62 | ) |
| Basic  and diluted net loss per share from discontinued operations                                                          |       | $                                      | (0.21       | )                           | N/A        |             |       |                      | $          | (0.21 | ) |
| Basic  and diluted net loss per share                                                                                       |       | $                                      | (2.39       | )                           | N/A        |             |       |                      | $          | (2.83 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted  average common shares outstanding                                                                                 |       | 19,552,211                             |        | N/A                         |       |             |       | 19,552,211                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

20

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**STATEMENTOF CASH FLOWS**

**For thenine months ended September 30, 2005**

 
| ** **                                                       | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                            | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash flows (used in) provided by operating  activities**       |       | $                                     | (13,920,836 | )                            | $          | 2,400,270        |       | $                         | (31,716    | ) | $ | (11,552,282 | ) |
|                                                             |       |                                  |        |                         |       |             |       |                      |       |
| **Cash flows from investing activities:**                        |       |                                  |        |                         |       |             |       |                      |       |
| Sales  (purchase) of marketable securities and other investments |       | 5,600,506                             |        | —                       |       | —           |       | 5,600,506                 |       |
| Proceeds  from sale of assets                                    |       | 45,417,485                            |        | —                       |       | (45,417,485      | )          | —                    |       |
| Payment  for acquisition of assets                               |       | (45,878,642                           | )           | (55,312,983                  | )          | 45,449,201       |       | (55,742,424               | )          |
| Proceeds  (payments) from option agreements                      |       | (3,646,668                            | )           | 3,646,668                    |       | —           |       | —                    |       |
| Purchase  of U.S. Government Securities                          |       | (24,997,500                           | )           | —                       |       | —           |       | (24,997,500               | )          |
| Capital  expenditures                                            |       | (2,111,752                            | )           | (643,946                     | )          | —           |       | (2,755,698                | )          |
| Net  cash used in investing activities                           |       | (25,616,571                           | )           | (52,310,261                  | )          | 31,716           |       | (77,895,116               | )          |
|                                                             |       |                                  |        |                         |       |             |       |                      |       |
| **Cash flows from financing activities:**                        |       |                                  |        |                         |       |             |       |                      |       |
| Proceeds  from senior credit facility                            |       | —                                |        | 53,500,000                   |       |             |       | 53,500,000                |       |
| Payment  of senior credit facility                               |       | —                                |        | (691,884                     | )          |             |       | (691,884                  | )          |
| Payment  of deferred financing fees                              |       | (864,401                              | )           | (1,378,000                   | )          |             |       | (2,242,401                | )          |
| Net  cash (used in) provided by financing activities             |       | (864,401                              | )           | 51,430,116                   |       |             |       | 50,565,715                |       |
|                                                             |       |                                  |        |                         |       |             |       |                      |       |
| Net  (decrease) increase in cash and cash equivalents            |       | (40,401,808                           | )           | 1,520,125                    |       |             |       | (38,881,683               | )          |
| Cash  and cash equivalents, beginning of period                  |       | 60,858,710                            |        | —                       |       |             |       | 60,858,710                |       |
| Cash  and cash equivalents, end of period                        |       | $                                     | 20,456,902  |                         | $          | 1,520,125        |       |                      |       | $ | 21,977,027 |   |
|                                                             |       |                                  |        |                         |       |             |       |                      |       |
| Supplemental  information:                                       |       |                                  |        |                         |       |             |       |                      |       |
| Cash  paid for interest                                          |       | $                                     | 19,743,750  |                         | $          | 2,352,624        |       |                      |       | $ | 22,096,374 |   |
| Cash  paid for income taxes                                      |       | 116,766                               |        | —                       |       |             |       | 116,766                   |       |
| Non-cash  capital expenditures                                   |       | 258,833                               |        | —                       |       |             |       | 258,833                   |       |
|                                                                  |            |                                       |             |                              |            |                  |            |                           |            |  |  |  |  |

 

***OtherHistorical Consolidation Information***

 

At December 31, 2004, theCompany’s consolidated Balance Sheets included in “other non-current assets”and “deferred financing fees” of $130,000 and $32,500, respectively, as aresult of the consolidation of Malara Broadcast Group.

 

For the three and ninemonths ended September 30, 2004, consolidation of variable interest entity inaccordance with Interpretation 46 was not applicable for the Company’sStatement of Operations and Statement of Cash Flows.

 

**Note 9 – Intangibles**

 

*Intangibles*

 

Intangible assets aresummarized as follows:

 
| ** **                | ** ** | **September 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|---------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                | ** ** | **Unaudited**          | ** **  | ** **            | ** ** |
| ** **                | ** ** | ** **             | ** **  | ** **            | ** ** |
| Goodwill                  |       | $                      | 64,340,000  |                  | $          | 42,706,000 |   |
| Network affiliations      |       | 103,267,000            |        | 79,591,000            |       |
| Broadcast licenses        |       | 54,230,000             |        | 46,807,000            |       |
|                      |       | 221,837,000            |        | 169,104,000           |       |
| Accumulated  amortization |       | (51,161,000            | )           | (48,817,000           | )          |
|                      |       |                   |        |                  |       |
| Net intangible assets     |       | $                      | 170,676,000 |                  | $          | 120,287,000 |   |

 

21

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The Company amortizes itsnetwork affiliation agreements for which it does not make contractual paymentsusing an estimated useful life of 25 years and amortizes its networkaffiliation agreements for which it makes contractual payments over the life ofthe contract.  The Company recordedamortization expense from continuing operations of $2,426,000 for the yearended December 31, 2004 and $2,344,000 for the nine months ended September30, 2005.

 

***Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations***

 

The following informationshould be read in conjunction with the unaudited consolidated financialstatements and notes thereto in this Quarterly Report and the audited financialstatements and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Form 10-K for the year ended December31, 2004.

 

*ExecutiveSummary*

 

We own and operate eightnetwork affiliated television stations in geographically diverse marketsreaching over 6% of the nation’s television households.  As of September 30, 2005, four stations areaffiliated with NBC, one with ABC and one with CBS, our Big Three Affiliates,and two stations are affiliated with the Warner Bros. Television Network, ourWB Affiliates.  The NBC affiliates areKSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois,KBJR-TV, Duluth, Minnesota - Superior, Wisconsin and WISE-TV, Fort Wayne,Indiana.  The ABC affiliate is WKBW-TV,Buffalo, New York. The CBS affiliate is WTVH-TV, Syracuse, New York.  The WB affiliates are KBWB-TV, San Francisco,California and WDWB-TV, Detroit, Michigan. As discussed in further detailbelow, in March 2005, we completed the sale of WPTA-TV, the ABC affiliateserving Fort Wayne, Indiana to Malara Broadcast Group and the acquisition ofWISE-TV, the NBC affiliate serving Fort Wayne, Indiana from New Vision Group,LLC.

 

Through shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) with Malara Broadcast Group, we currentlyprovide advertising, sales promotion, administrative and selected programmingto two stations owned and operated by Malara Broadcast Group. Malara BroadcastGroup is owned by an independent third party who owns and operates twotelevision stations as of September 30, 2005. We do not own Malara BroadcastGroup or its television stations. In order for both us and Malara BroadcastGroup to continue to comply with FCC regulations, Malara Broadcast Group mustmaintain complete responsibility for and control over programming, finances,personnel and operations of its television stations.  However, as a result of our guarantee of theobligations incurred under Malara Broadcast Group’s senior secured creditfacility and the revolving loan, arrangements under the local serviceagreements and put or call option agreements, under United States generallyaccepted accounting principles (“U.S. GAAP”), specifically, FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidation of Variable Interest Entities* (“Interpretation46”) we are required to consolidate Malara Broadcast Group’s financialposition, results of operations and statement of cash flows in our consolidatedresults. In addition, in accordance with the provisions of Interpretation 46,the Company did not account for the sale of the assets of WPTA-TV and no gainthere from was recognized in the consolidated statements of operations.  In addition, we did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

On September 8, 2005, weentered into separate definitive agreements to sell KBWB-TV serving SanFrancisco, California and WDWB-TV serving Detroit, Michigan, to affiliates ofAM Media Holdings, LLC.  The agreementscontain covenants by us not to compete in the San Francisco, California andDetroit, Michigan markets for a period of five years. The aggregateconsideration to be received by us for the sale of KBWB-TV is $72,500,000,before closing adjustments, which is payable $71,250,000 in cash and $1,250,000in equity in AM Media Holdings, LLC. The aggregate consideration to be receivedby us for the sale of WDWB-TV is $87,500,000, before closing adjustments, whichis payable $86,250,000 in cash and $1,250,000 in equity in AM Media Holdings,LLC. The consideration for each covenant not to compete in the San Franciscoand Detroit markets is $10 million, respectively. We anticipate bothtransactions, each of which is subject to customary closing conditions, toclose in the fourth quarter of 2005. We have reclassified the operations ofthese stations as discontinued operations and the assets and liabilities asheld for sale in our consolidated balance sheets and statements of operationsin accordance with the provisions of Statement of Financial AccountingStandards No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*(See Note 7. *Discontinued Operations*in the Notes to our ConsolidatedFinancial Statements.)

 

We believe that inflationhas not had a material impact on our results of operations for the three andnine months ended September 30, 2005. However, there can be no assurance that future inflation would not havean adverse impact on our operating results and financial condition.

 

Our operating revenuesare generally lower in the first calendar quarter and generally higher in thefourth calendar quarter than in the other two quarters, due in part toincreases in retail advertising in the fall months in preparation for theholiday season, and in election years due to increased political advertising.

 

Our revenues are derivedprincipally from local and national advertising, political advertising in anelection year and, to a

 

22

----

 

lesser extent, from networkcompensation for the broadcast of programming and revenues from studio rentaland commercial

productionactivities.  The primary operatingexpenses involved in owning and operating television stations are employeesalaries, depreciation and amortization, programming, advertising andpromotion.  Amounts referred to in thefollowing discussion have been rounded to the nearest thousand.

 

###### ***Critical AccountingPolices***

 

We prepare ourconsolidated financial statements in conformity with United States generallyaccepted accounting principles which require us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the period.  Actualresults could differ from those estimates. Results of operations for interim periods are not necessarily indicativeof results for the full year.

 

Information with respectto our critical accounting policies which we believe could affect our reportedresults require subjective judgments by management and is contained in Item 7,Management’s Discussion and Analysis of Financial Condition and Result ofOperations, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2004. We believe that as of September 30, 2005, the following isthe only material change to this information.

 

*Consolidation of Variable Interest Entities*

 

Ourfinancial statements include the accounts of independently-owned MalaraBroadcast Group since it has been determined that we are the primarybeneficiary of a variable interest entity (“VIE”) in accordance with FASBInterpretation 46, as revised in December 2003, Interpretation 46(R). UnderU.S. GAAP a company must consolidate an entity when it has a “controllingfinancial interest” in such entity resulting from the company’s ownership of amajority of the entity’s voting rights. Interpretation 46(R) expands thedefinition of controlling financial interest to include factors other thanequity ownership and voting rights.

 

In applying Interpretation 46(R), we base our decisionto consolidate an entity on quantitative and qualitative factors that indicatewhether or not we are responsible for a majority of the entity’s economic risksand receive a majority of the entity’s economic rewards, or “primarybeneficiary.” Our evaluation of whether or not we are deemed to be the primarybeneficiary is an ongoing process and may alter as facts and circumstanceschange.

 

Malara Broadcast Group is included in our consolidatedfinancial statements because we believe we are the primary beneficiary ofMalara Broadcast Group as a result of local service agreements we have witheach of the Malara stations, our guarantee of the obligations incurred underthe Malara Broadcast Group Senior Credit Facility and the put/call optionagreements between us and Malara Broadcast Group. However, we do not own MalaraBroadcast Group or its television stations.

** **

**RESULTSOF OPERATIONS**

** **

*ThreeMonths Ended September 30, 2005 and 2004*

 

***ContinuingOperations***

 

Set forth below aresignificant factors that contributed to our operating results from continuingoperations for the three months ended September 30, 2005 and 2004,respectively.

 

**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDCONTINUING OPERATIONS**

 
| ** **           | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **2005**                             | ** ** | **2004** | ** ** | **% Change** | ** ** |
| Local/Regional       |       | $                                    | 13,167,000 |   | $ | 11,125,000 |   | 18.4 | % |
| National             |       | 9,005,000                            |       | 8,392,000 |   | 7.3 | % |
| Network Compensation |       | 510,000                              |       | 741,000 |   | (31.2 | )% |
| Political            |       | 672,000                              |       | 1,568,000 |   | (57.1 | )% |
| Other                |       | 1,030,000                            |       | 986,000 |   | 4.5 | % |
| Gross Revenue        |       | 24,384,000                           |       | 22,812,000 |   | 6.9 | % |
| Agency Commissions   |       | 3,561,000                            |       | 3,375,000 |   | 5.5 | % |
| Net Revenue          |       | $                                    | 20,823,000 |   | $ | 19,437,000 |   | 7.1 | % |

 

23

----

 

The following discussionis related to the results of our continuing operations, except for discussionsregarding our statements of cash flows which include the results of ourdiscontinued operations.

 

Net revenues consist primarilyof local, national and political airtime sales, net of sales adjustments andagency commissions. Additional, but less significant, amounts are generatedfrom network compensation, internet revenues, barter/trade revenues, productionrevenues and other revenues.

 

Net revenue increased$1,386,000 or 7.1% to $20,823,000 for the three months ended September 30,2005, from $19,437,000 for the three months ended September 30, 2004.  The increase was due to healthy increases innon-political local revenues of $2,042,000 or 18% and non-political nationalrevenues of $613,000 or 7% offset by decreases in political advertising revenueduring a non-election year of $896,000 or 57% and network compensation revenueof $231,000 or 31%. The increases in both non-political local and non-politicalnational revenues were primarily due to the inclusion of two additionalstations, WISE-TV and KDLH-TV in our consolidated results during the threemonths ended September 30, 2005 which were not in our consolidated results duringthe same period last year. Malara Broadcast Group’s net revenues totaled $1,626,000 or 7.8% of the total net revenues during the three months endedSeptember 30, 2005.

 

Direct operatingexpenses, consisting primarily of programming, news and engineering increased$681,000 or 8.2% to $8,983,000 for the three months ended September 30, 2005from $8,302,000 for the same period in 2004. The increase was primarily due toincreases in amortization of film contract rights, salaries and group healthinsurance as a result of the inclusion of two additional stations, WISE-TV andKDLH-TV in our consolidated results of during the three months ended September30, 2005 which were not in our consolidated results during the same period lastyear.  Selling, general andadministrative expenses increased $587,000 or 10% to $6,459,000 for the threemonths ended September 30, 2005 from $5,872,000 for the same period in 2004.The increase was primarily due to increases salaries and commissions as aresult of the inclusion of two additional stations, WISE-TV and KDLH-TV in ourconsolidated results of during the three months ended September 30, 2005 whichwere not in our consolidated results during the same period last year. MalaraBroadcast Group’s direct operating expenses and selling, general andadministrative expenses totaled $847,000 of the total station expenses, afterelimination of expenses relating to various local service agreements between usand Malara Broadcast Group.

 

***OtherConsolidated Expenses***

 

Amortization expenseincreased $237,000 or 39% during the three months ended September 30, 2005 ascompared to the same period a year earlier. This increase was primarily due tothe incremental amortization expense of two additional television stations,KDLH and WISE, which were acquired in March 2005. Depreciation expensedecreased $191,000 or 14% during the three months ended September 30, 2005compared to the same period a year earlier. The decrease was primarily due to the effect of the change in usefullives assigned to our fixed assets as of January 1, 2005 in addition to fixedassets written off in the third and fourth quarters of 2004 and first twoquarters of 2005, thereby resulting in lower depreciation expense during 2005.This decrease was offset, in part, by increased depreciation expense due to theincremental depreciation expense of two additional television stations, KDLHand WISE, which were acquired in March 2005.

 

Corporate expense totaled$2,558,000; a decrease of $179,000 or 7% compared to $2,737,000 for the threemonths ended September 30, 2004. The decrease was primarily due to plannedreduction in compensation and other non-personnel related expenses, offset inpart by increases in professional fees related to the sale of WPTA-TV andcompliance with the Sarbanes-Oxley Act. The performance award expense for thethree months ended September 30, 2005 totaled $320,000; a decrease of$1,592,000 compared to $1,912,000 for the three months ended September 30,2004. The decrease was primarily due to the separation of a company executivefor which the unvested portion of the executive’s performance award expense wasaccelerated during the third quarter of 2004 pursuant to a Separation Agreementdated September 21, 2004. Corporate separation agreement expense decreased$1,251,000 compared to the same period in 2004 due primarily to the separationof a company executive during the third quarter of 2004 pursuant to aSeparation Agreement dated September 21, 2004. Non-cash compensation expensedecreased $16,000 or 14% primarily due to the forfeitures of stock awardsgranted to certain personnel in prior years who are no longer employed by us asof September 30, 2005.

 

Interest expense totaled$11,173,000; an increase of $1,301,000 or 13% compared to $9,872,000 for thethree months ended September 30, 2004. The increase was primarily due to the incremental interest expense onMalara Broadcast Group’s Senior Credit Facility which totaled approximately$1,300,000.  Interest income totaled$575,000; an increase of $226,000, or 65% compared to $349,000 for the threemonths ended September 30, 2004. The increase was primarily due to interestearned on the company’s restricted cash used as collateral for the MalaraBroadcast Group Term Loan A, offset by the decreased average cash balanceinvested during the three months ended September 30, 2005 as compared to thesame period in 2004. Non-cash interest expense totaled $1,009,000; an increaseof $52,000 or 5% compared to $957,000 for the three months ended September 30,2004.

 

24

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We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $6,387,000 during the three months ended September 30, 2005 and 2004,respectively as required by Statement of Financial Accounting Standards No.150.

 

During the three monthsended September 30, 2005, we recorded a deferred tax benefit of $156,000,compared to a deferred tax benefit of $4,959,000 for the three months endedSeptember 30, 2004.  The decline in thetax benefit is primarily due to an increase in the valuation allowance againstnet operating loss carry forwards, which may not be utilized in future periods.

 

***DiscontinuedOperations***

 

Set forth below aresignificant factors that contributed to our operating results from discontinuedoperations for the three months ended September 30, 2005 and 2004,respectively.

 

**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDDISCONTINUED OPERATIONS**

 
| ** **         | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **2005**                             | ** ** | **2004** | ** ** | **% Change** | ** ** |
|               |       |                                 |       |   |   |   |   |
| Local/Regional     |       | $                                    | 4,433,000  |   | $ | 4,564,000 |   | (2.9 | )% |
| National           |       | 3,826,000                            |       | 4,431,000 |   | (13.7 | )% |
| Political          |       | 117,000                              |       | 74,000 |   | 58.1 | % |
| Other              |       | 258,000                              |       | 12,000 |   | 2050 | % |
| Gross Revenue      |       | 8,634,000                            |       | 9,081,000 |   | (4.9 | )% |
| Agency Commissions |       | 1,300,000                            |       | 1,472,000 |   | (11.7 | )% |
| Net Revenue        |       | $                                    | 7,334,000  |   | $ | 7,609,000 |   | (3.6 | )% |
|               |       |                                 |       |   |   |   |   |

Net revenue fromour discontinued operations decreased $275,000 or 3.6% to $7,334,000 from$7,609,000 due primarily to decreases in non-political national revenues of$605,000 and non-political local revenues of $131,000.  The non-political national revenue decreaseswere primarily due to declines in the automotive, paid programming,entertainment/movie and telecommunications categories.  The non-political local revenue decreaseswere primarily due to declines in the automotive, department stores, andeducational schools categories.

 

Direct operating expensesfrom our discontinued operations, consisting primarily of programming andengineering expenses, decreased $2,811,000 or 36% to $5,088,000 for the threemonths ended September 30, 2005 from $7,899,000 for the same period in 2004.The decrease was primarily due to lower amortization of film contract rightsdue to the effects of write-downs taken in 2004, and the replacement ofexpensive, unprofitable programs with less expensive, profitable programming.There were approximately $1,600,000 and $3,600,000 of film asset write-downsduring the three months ended September 30, 2005 and 2004, respectively.Selling, general and administrative expenses from our discontinued operationsdecreased $106,000 or 3% to $2,948,000 for the three months ended September 30,2005 from $3,054,000 for the same period in 2004. The decrease was primarilydue to lower advertising and promotion expenses.

 

*NineMonths Ended September 30, 2005 and 2004*

 

***ContinuingOperations***

 

Set forth below aresignificant factors that contributed to our operating results from continuingoperations for the nine months ended September 30, 2005 and 2004, respectively.

 

25

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**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDCONTINUING OPERATIONS**

 
| ** **           | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2005**                            | ** ** | **2004** | ** ** | **% Change** | ** ** |
|                 |       |                                |       |   |   |   |   |
| Local/Regional       |       | $                                   | 38,780,000 |   | $ | 33,027,000 |   | 17.4 | % |
| National             |       | 26,597,000                          |       | 25,513,000 |   | 4.2 | % |
| Network Compensation |       | 2,176,000                           |       | 2,329,000 |   | (6.6 | )% |
| Political            |       | 1,362,000                           |       | 3,613,000 |   | (62.3 | )% |
| Other                |       | 3,244,000                           |       | 2,797,000 |   | 15.9 | % |
| Gross Revenue        |       | 72,159,000                          |       | 67,279,000 |   | 7.3 | % |
| Agency Commissions   |       | 10,458,000                          |       | 9,949,000 |   | 5.1 | % |
| Net Revenue          |       | $                                   | 61,701,000 |   | $ | 57,330,000 |   | 7.6 | % |

 

The following discussionis related to the results of our continuing operations, except for discussionsregarding our statements of cash flows which include the results of ourdiscontinued operations.

 

Net revenues consistprimarily of local, national and political airtime sales, net of salesadjustments and agency commissions. Additional, but less significant, amountsare generated from network compensation, internet revenues, barter/traderevenues, production revenues and other revenues.

 

Net revenue increased$4,371,000 or 7.6% to $61,701,000 for the nine months ended September 30, 2005,from $57,330,000 for the nine months ended September 30, 2004.  The increase on a consolidated basis wasprimarily due to healthy increase in non-political local revenue of $5,753,000or 17.4%, and non-political national revenue of $1,084,000 or 4.2%, offset bydecreases in political advertising revenue during a non-presidential electionyear of $2,251,000 or 62.3%. The increases in both non-political local andnon-political national revenues was primarily due to the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results during thenine months ended September 30, 2005 which were not in our consolidated resultsduring the same period last year. Malara Broadcast Group’s net revenues totaled$4,245,000 or 6.9% of the total net revenues during the nine months endedSeptember 30, 2005.

 

Direct operatingexpenses, consisting primarily of programming, news and engineering expenses,increased $1,651,000 or 7% to $26,301,000 for the nine months ended September30, 2005 from $24,650,000 for the same period in 2004. The increase wasprimarily due to increases in amortization of film contract rights, salariesand group health insurance as a result of the inclusion of two additionalstations, WISE-TV and KDLH-TV in our consolidated results of during the ninemonths ended September 30, 2005 which were not in our consolidated resultsduring the same period last year. Selling, general and administrative expenses increased $1,414,000 or 8%to $18,359,000 for the nine months ended September 30, 2005 from $16,945,000for the same period in 2004. The increase was primarily due to increasessalaries, commissions, sales and promotions expenses as a result of theinclusion of two additional stations, WISE-TV and KDLH-TV in our consolidatedresults of during the nine months ended September 30, 2005 which were not inour consolidated results during the same period last year. Malara BroadcastGroup’s direct operating expenses and selling, general and administrativeexpenses totaled $1,700,000 of the total station expenses, after elimination ofexpenses relating to various local service agreements between us and MalaraBroadcast Group.

 

***OtherConsolidated Expenses***

 

Amortization expenseincreased $525,000 or 29% during the nine months ended September 30, 2005 ascompared to the same period a year earlier. This increase was primarily due tothe incremental amortization expense of two additional television stations,KDLH and WISE, which were acquired in March 2005. Depreciation expensedecreased $481,000 or 11% during the nine months ended September 30, 2005compared to the same period a year earlier. The decrease was primarily due to the effect of the change in usefullives assigned to our fixed assets as of January 1, 2005 in addition to fixedassets written off in the third and fourth quarters of 2004 and first andsecond quarters of 2005, thereby resulting in lower depreciation expense during2005. This decrease was offset, in part, by increased depreciation expense dueto the incremental depreciation expense of two additional television stations,KDLH and WISE, which were acquired in March 2005.

 

26

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Corporate expense totaled$7,982,000; a decrease of $728,000 or 8% compared to $8,710,000 for the ninemonths ended September 30, 2004. The decrease was primarily due to plannedreduction in compensation and other non-personnel related expenses, offset inpart by increases in professional fees related to the sale of WPTA-TV andcompliance with the Sarbanes-Oxley Act. The performance award expense for thenine months ended September 30, 2005 totaled $959,000; a decrease of $2,001,000compared to $2,960,000 for the nine months ended September 30, 2004. Thedecrease was primarily due to the separation of a company executive for whichthe unvested portion of the executive’s performance award expense wasaccelerated during the third quarter of 2004 pursuant to a Separation Agreementdated September 21, 2004. Corporate separation agreement expense for the ninemonths ended September 30, 2005 decreased $1,251,000 compared to the sameperiod in 2004 due primarily to the separation of a company executive duringthe third quarter of 2004 pursuant to a Separation Agreement dated September21, 2004. Non-cash compensation expense for the nine months ended September 30,2005 decreased $262,000 or 48% primarily due to the forfeitures of stock awardsgranted to certain personnel in prior years who are no longer employed by us asof September 30, 2005.

 

Interest expense totaled$32,504,000; an increase of $2,887,000 or 10% compared to $29,617,000 for thenine months ended September 30, 2004. The increase was primarily due to interest expense on Malara BroadcastGroup’s Senior Credit Facility which totaled approximately $2,878,000.  Interest income totaled $1,313,000; anincrease of $447,000, or 52% compared to $866,000 for the nine months endedSeptember 30, 2004. The increase was primarily due to the interest earned onthe company’s restricted cash used as collateral for the Malara Broadcast GroupTerm Loan A, offset by the decreased average cash balance invested during thenine months ended September 30, 2005 as compared to the same period in 2004.Non-cash interest expense totaled $2,943,000; a decrease of $26,000 or 1%compared to $2,969,000 for the nine months ended September 30, 2004.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $19,161,000 during the nine months ended September 30, 2005 and 2004,respectively as required by Statement of Financial Accounting Standards No.150.

 

During the nine monthsended September 30, 2005, we recorded a deferred tax benefit of $481,000,compared to a deferred tax benefit of $9,637,000 for the nine months endedSeptember 30, 2004.  The decline in thetax benefit is primarily due to an increase in the valuation allowance againstnet operating loss carry forward s, which may not be utilized in futureperiods.

 

***DiscontinuedOperations***

 

Set forth below aresignificant factors that contributed to our operating results from discontinuedoperations for the three months ended September 30, 2005 and 2004,respectively.

 

**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDDISCONTINUED OPERATIONS**

 
| ** **         | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **2005**                             | ** ** | **2004** | ** ** | **% Change** | ** ** |
|               |       |                                 |       |   |   |   |   |
| Local/Regional     |       | $                                    | 14,589,000 |   | $ | 15,494,000 |   | (5.8 | )% |
| National           |       | 11,780,000                           |       | 13,836,000 |   | (14.9 | )% |
| Political          |       | 139,000                              |       | 109,000 |   | 27.5 | % |
| Other              |       | 715,000                              |       | 231,000 |   | 209.5 | % |
| Gross Revenue      |       | 27,223,000                           |       | 29,670,000 |   | (8.2 | )% |
| Agency Commissions |       | 4,019,000                            |       | 4,790,000 |   | (16.1 | )% |
| Net Revenue        |       | $                                    | 23,204,000 |   | $ | 24,880,000 |   | (6.7 | )% |

 

Net revenue fromour discontinued operations decreased $1,676,000 or 6.7% to $23,204,000 from$24,880,000 due primarily to decreases in non-political national revenues of$2,056,000 and non-political local revenues of $905,000.  The non-political national revenue decreaseswere primarily due to declines in the automotive, entertainment/movie,pharmaceuticals and educational/instructional schools categories.  The non-political local revenue decreaseswere primarily due to declines in the automotive, department stores, andeducational/instructional schools categories.

 

27

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Direct operating expensesfrom our discontinued operations, consisting primarily of programming andengineering expenses, decreased $4,653,000 or 27% to $12,588,000 for the ninemonths ended September 30, 2005 from $17,241,000 for the same period in 2004.The decrease was primarily due to lower amortization of film contract rightsdue to the effects of write-downs taken in 2004, and the replacement of expensive,unprofitable programs with less expensive, profitable programming. There wereapproximately $1,600,000 and $3,600,000 of film asset write-downs during thenine months ended September 30, 2005 and 2004, respectively. Selling, generaland administrative expenses from our discontinued operations decreased $404,000or 4% to $9,291,000 for the nine months ended September 30, 2005 from$9,695,000 for the same period in 2004. The decrease was primarily due to loweradvertising and promotion expenses.

 

***Restructuringand Severance Charges***

 

*RestructuringCharges*

 

During 2004, werecognized a $2,027,000 restructuring charge relating to employee separationsat both our corporate office and our Buffalo, New York television station.  Of the total $2,027,000, approximately$1,406,000 related to severance and other benefits, associated with thedeparture of Stuart J. Beck (see Note 4, Related Parties) and administrativesupport staff at the corporate office which is being paid over an eighteenmonth period from date of separation, September 21, 2004. The remaining$621,000 restructuring charge includes severance and other benefits resultingfrom a reduction in the workforce at the Buffalo, New York television station.As of September 30, 2005, we completed the separation payments related to theBuffalo, New York restructuring charges, and reduced its accrual byapproximately $10,000 to adjust for payments of benefits and amounts originallyaccrued for.

 

During the threemonths and nine months ended September 30, 2005, we recorded restructuringcharges totaling $34,000 and $447,000, respectively, related to employeeseparations, which included severance, other benefits and stay-bonuses awardedto transitional employees at its Duluth, Minnesota and Fort Wayne, Indiana televisionstations. We anticipate minimal restructuring charges in future periodsrelating to stay-bonuses awarded to transitional employees at both of ourDuluth, Minnesota and Fort Wayne, Indiana television stations upon separation.

 

At September 30, 2005,the accruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the television stations is included in “station operating expenses”and the related expense for the corporate charges are included in “corporateseparation agreement expenses” on the consolidated Statement ofOperations.  These costs were recognizedin accordance with the provisions of Statement of Financial AccountingStandards No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*.

 

*AcquisitionCharges*

 

During the threeand nine months ended September 30, 2005, the Company accrued $5,000 and$627,000 related to employee separations, which included severance and otherbenefits as part of the Company’s purchase accounting. These accrued costs werea result of employees not retained by the Company subsequent to its acquisitionof its Fort Wayne, Indiana television station, which included line throughmanagement employees.

 

At September 30,2005, the accruals for acquisition activities of the television station areincluded in “other accrued liabilities” on the consolidated Balance Sheets.These charges were recognized in accordance with the provisions of EmergingIssues Task Force Issue No. 95-3 *Recognition of Liabilitiesin Connection with a Purchase Business Combination*.

 

The following is areconciliation of the aggregate liability recorded for restructuring andacquisition charges as of September 30, 2005:

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three Months Ended September 30, 2005**                                                     | ** ** |
| ** **         | ** ** | **June 30,  2005**                                                                            | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Television station |       | $                                                                                             | 273,000    |   | $ | 29,000 |   | $ | 180,000 |   | $ | 122,000 |   |
| Corporate          |       | 575,000                                                                                       |       | — |   | 192,000 |   | 383,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 848,000    |   | $ | 29,000 |   | $ | 372,000 |   | $ | 505,000 |   |

 

28

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| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Nine Months Ended September 30, 2005**                                                      | ** ** |
| ** **         | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Television station |       | $                                                                                             | 250,000    |   | $ | 1,064,000 |   | $ | 1,192,000 |   | $ | 122,000 |   |
| Corporate          |       | 1,214,000                                                                                     |       | — |   | 831,000 |   | 383,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,464,000  |   | $ | 1,064,000 |   | $ | 2,023,000 |   | $ | 505,000 |   |

 

The liability for therestructuring and acquisition charges will be paid in accordance with theprovisions of the severance agreements and payments are expected to becompleted at various times through March 2006.

 

**Recent Developments**

 

On March 7, 2005, wecompleted the sale of WPTA-TV, the ABC affiliate serving Fort Wayne, Indiana (“WPTA-TV”),to a subsidiary of Malara Broadcast Group for approximately $45.4 million,pursuant to the terms and conditions of an asset purchase agreement, datedApril 23, 2004.  In addition, on March 8, 2005, we completed thepurchase of WISE-TV, the NBC affiliate serving Fort Wayne, Indiana, from NewVision Group, LLC (“New Vision Television”) for approximately $43.5 million,pursuant to the terms and conditions of a stock purchase agreement, datedApril 23, 2004.

 

In addition, a subsidiaryof Malara Broadcast Group on March 8, 2005, acquired CBS affiliateKDLH-TV, Duluth, Minnesota-Superior, Wisconsin (“KDLH-TV”) from New VisionTelevision for approximately $9.5 million, pursuant to the terms and conditionsof an asset purchase agreement, dated April 23, 2004. We currently own andoperate KBJR-TV, the NBC affiliate serving Duluth-Superior.

 

On March 8,2005, we entered into a strategic arrangement with Malara Broadcast Group,under which we provide advertising sales, promotion and administrativeservices, and selected programming to Malara Broadcast Group-owned stationsWPTA-TV and KDLH-TV in return for certain fees that will be paid by MalaraBroadcast Group to us.  The fees payable to us will be paid after currentdebt service as well as certain other expenses Malara Broadcast Group incursdirectly are satisfied. During the three and nine months ended September 30,2005, Malara Broadcast Group paid us approximately $996,000 and $1,796,000,respectively, owed under the strategic arrangements for both WPTA-TV andKDLH-TV. As of September 30, 2005, the total amount owed to us from MalaraBroadcast Group totaled approximately $9,998,000.

 

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV with the proceeds of borrowingspursuant to the Malara Broadcast Group Senior Credit Facility.  The MalaraBroadcast Group Senior Credit Facility provides for two term loans totaling$48.5 million and a revolving loan of $5 million.  The $23.5 millionMalara Broadcast Group Term Loan A is secured by a letter of credit.  Tosecure the reimbursement obligation in the event of a draw on the letter ofcredit, we pledged $25 million of U.S. Government Securities which arerestricted and not available for working capital or any other purposes. To the****extent that principal payments aremade on the Term Loan A, the letter of credit shall be proportionately reducedand we shall be permitted to proportionately reduce the amount of the pledgedU.S. Government Securities.  The $25million Malara Broadcast Group Term Loan B and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on an unsecuredbasis by us. For the three and nine months ended September 30, 2005, the totalprincipal payments made on the Revolving Loan approximated $309,000 and$692,000, respectively.

 

On September 8, 2005, weentered into separate definitive agreements to sell KBWB-TV in San Francisco,California, including the related FCC license and WDWB-TV in Detroit, Michigan,including the related FCC license, to affiliates of AM Media Holdings, LLC. Theagreements contain covenants by us not to compete in the San Francisco,California and Detroit, Michigan markets for a period of five years. Theaggregate consideration to be received by us for the sale of KBWB-TV is$72,500,000, before closing adjustments, which is payable $71,250,000 in cashand $1,250,000 in equity in AM Media Holdings, LLC. The aggregate considerationto be received by us for the sale of WDWB-TV is $87,500,000, before closingadjustments, which is payable $86,250,000 in cash and $1,250,000 in equity inAM Media Holdings, LLC. The consideration for each covenant not to compete inthe San Francisco and Detroit markets is $10 million, respectively. Weanticipate both transactions, each of which is subject to customary closingconditions, to close in the fourth quarter of 2005. As of September 30, 2005 theaggregate assets held for sale totaled $148,256,000 and the aggregateliabilities held for sale totaled $36,408,000. At December 31, 2004, theaggregate assets held for sale totaled $158,143,000 and the aggregateliabilities held for sale totaled $46,057,000. Pursuant to the agreements, wewill retain

 

29

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the rights to theexisting cash and cash equivalents as well as the accounts receivable which wewill retain the rights to collect. Cash and cash equivalents totaled $397,000as of September 30, 2005 and $649,000 as of December 31, 2004 are included inour consolidated balance sheets. Accounts receivable totaled $4,667,000 (net ofallowance of $226,000) as of September 30, 2005 and $6,091,000 (net of allowanceof $415,000) as of December 31, 2004 and are included in our consolidatedbalance sheets. Net loss from discontinued operations was $2,166,000 and$4,045,000 for the three and nine months ended September 30, 2005,respectively. Net loss from discontinued operations was $5,307,000 and$7,612,000 for the three and nine months ended September 30, 2004,respectively. Net revenues from discontinued operations were $7,334,000 and$23,203,000 for the three and nine months ended September 30, 2005, respectively.Net revenues from discontinued operations were $7,609,000 and $24,880,000 forthe three and nine months ended September 30, 2004, respectively.

 

**Liquidityand Capital Resources**

 

We anticipate having sufficient unrestricted cash onhand to make the December 1, 2005 interest payment on our Notes.  Absent changes to our capital structure andstation ownership mix we will not have enough liquidity to service our existingobligations over the next twelve months. In order to improve our existingliquidity position and to further our business strategy, we entered intoseparate definitive agreements to sell our two WB affiliates (as discussed inthe following paragraph) and are currently exploring additional changes in ourstation ownership mix and the raising of additional capital.  However, under our Indenture, our use of thenet proceeds from the sale of assets is restricted.  Of the net proceeds received in an assetsale, $5 million may be used for working capital purposes and the remaindermust be used to either:

 

•      to make an investment in properties andassets that replace the properties and assets that were the subject of suchasset to make an investment in properties and assets that replace theproperties and assets that were the subject of such asset sale or in propertiesand assets that will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, a PermittedBusiness Acquisition or enter into a definitive agreement to effectuate suchacquisition; provided that (A) the primary purpose of such acquisition ofReplacement Assets or Permitted Business Acquisition is to acquire, and thereis acquired, a television station with a Big-4 (ABC, CBS, NBC or Fox) networkaffiliation agreement in place or the creation (through ownership by theCompany and its Restricted Subsidiaries) of a “duopoly” in a market and (B)that the Company shall use all reasonable best efforts to promptly dispose ofany other assets acquired in such acquisition or Permitted Business Acquisition(as such terms are defined in the Indenture); or

 

•      to make an offer to all holders of theNotes to purchase such amount of the Notes less any such net proceeds used toacquire qualifying Replacement Assets or to make a Permitted BusinessAcquisition.

 

On September 8, 2005, wereached separate definitive agreements to sell our two WB affiliates, KBWB-TVserving San Francisco, California and WDWB-TV serving Detroit, Michigan toaffiliates of AM Media Holdings, LLC. The agreements contain covenants by usnot to compete in the San Francisco, California and Detroit, Michigan marketsfor a period of five years.  The aggregateconsideration to be received by us for the sale of KBWB-TV is $72,500,000,before closing adjustments, which is payable $71,250,000 in cash and $1,250,000in equity in AM Media Holdings, LLC. The aggregate consideration to be receivedby us for the sale of WDWB-TV is $87,500,000, before closing adjustments, whichis payable $86,250,000 in cash and $1,250,000 in equity in AM Media Holdings,LLC. The consideration for each covenant not to compete in the San Franciscoand Detroit markets is $10 million, respectively.

 

We anticipate that we willretain approximately $30 million of the aggregate proceeds from thetransactions to be used for working capital purposes, consisting of $5 millionper asset sale as permitted under our Indenture and $10 million for eachcovenant not to compete. The remaining net proceeds, after closing adjustments,will be used to make investments in property or assets that replace theproperty and assets that were subject of such asset sale and/or make an offerto all of the holders of the Notes. We anticipate both transactions, each ofwhich is subject to customary closing conditions, to close in the fourthquarter of 2005. In addition, we continue to explore the raising of additionalcapital and changes in our station ownership mix.

 

Assuming we aresuccessful in selling KBWB-TV and WDWB-TV and / or raising additional capital,we believe that the available proceeds together with the cash and cashequivalents on hand and internally generated funds from operations will besufficient to satisfy our cash requirements for our existing operations for thenext twelve months.  There can be noassurance that we will be successful in selling assets and raising additionalcapital and a lack of liquidity would have a material adverse effect on ourbusiness strategy and therefore affect our ability to continue as a goingconcern. The 2005 quarterly financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

30

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As of September 30, 2005,we had approximately $21,997,000 of cash and cash equivalents on hand, whichexcludes $24,997,500 in U.S. Government Securities which is pledged to supportthe reimbursement obligations in the event of a draw on the letter of creditthat serves as collateral for the Term Loan A under Malara Broadcast Group’sSenior Credit Facility, which is described below and is restricted and notavailable for working capital or any other purposes. To the****extentthat principal payments are made on the Term Loan A, the letter of credit shallbe proportionately reduced and we shall be permitted to proportionately reducethe amount of the U.S. Government Securities pledged against the letter ofcredit.  At September 30, 2005, therestricted U.S. Government Securities totaled $24,997,500.

 

We have established aninvestment policy for investing cash that is not immediately required forworking capital purposes.  Our investmentobjectives are to preserve capital, maximize our return on investment and to ensurewe have appropriate liquidity for our cash needs. The investments areconsidered to be available-for-sale as defined under Statement of FinancialAccounting Standards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. As of September 30, 2005,we had approximately $21,977,000 of cash and cash equivalents (which excludes$24,997,500 of restricted U.S. Government Securities cash equivalents). As ofSeptember 30, 2005, we have no marketable securities.

 

Net cash used inoperating activities was $11,552,000 during the nine months ended September 30,2005 compared to $3,454,000 during the nine months ended September 30,2004.  The change in 2005 from 2004 wasprimarily due to the receipt of a $16,000,000 income tax refund during June2004 and changes in net assets.

 

Net cash used in investing activities was $77,895,000during the nine months ended September 30, 2005 compared to $10,322,000 duringthe nine months ended September 30, 2004. The change in 2005 from 2004 was primarily due to the acquisition ofassets and the purchase of U.S. Government Securities during March 2005, offsetby a reduction in capital expenditures due to the completion of our conversionto digital technology.

 

Net cash provided byfinancing activities was $50,566,000 during the nine months ended September 30,2005 compared to net cash used in financing activities of $226,000 during thenine months ended September 30, 2004. The change in 2005 from 2004 is primarily due to the proceeds from theMalara Broadcast Group Senior Credit Facility, offset in part by increasedpayments of deferred financing fees.

 

***Our 93/4 % Senior Secured Notes***

 

On December 22,2003, we completed a $405,000,000 offering of our 9 3/4 % Senior Secured Notes(the “Notes”) due December 1, 2010, at a discount, resulting in proceedsto us of $400,067,100.  Interest on theNotes is payable on December 1 and June 1 of each year, whichcommenced on June 1, 2004.  We usedthe net proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under our senior credit agreement,(ii) redeem at par, plus accrued interest, all of our 9 3/8 % and 10 3/8 %senior subordinated notes due May and December 2005, respectively,and (iii) to repurchase at par, plus accrued interest, all of our 8 7/8 %senior subordinated notes due May 2008. The remaining proceeds were invested in short-term securities as well asbeing used for general working capital purposes.

 

The Notes are guaranteedby each of our domestic restricted subsidiaries and are secured by substantiallyall of our assets.  We may redeem some orall of the Notes at any time on or after December 1, 2006. We may alsoredeem up to 35% of the aggregate principal amount of the Notes using theproceeds of one or more equity offerings on or before December 1, 2005.

 

The Indenture, whichgoverns our Notes, restricts our ability and the ability of our restrictedsubsidiaries to, among other things: (i) incur additional debt and issuepreferred stock; (ii) make certain distributions, investments and otherrestricted payments; (iii) create certain liens; (iv) enter intotransactions with affiliates; (v) enter into agreements that restrict ourrestricted subsidiaries from making payments to us; (vi) merge,consolidate or sell substantially all of our assets; (vii) sell or acquireassets; and (viii) enter into new lines of business.

 

Under the Indenture, theMalara Broadcast Group companies to which we provides services pursuant to thelocal services agreements are subject to the terms of the Indenture applicableto Restricted Subsidiaries that are not Guarantors, as such terms are definedin the Indenture.

 

***MalaraBroadcast Group’s Senior Credit Facility***

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV in March 2005 with the proceeds of the MalaraBroadcast Group Senior Credit Facility, consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Term Loan A is secured by a letter of credit. To secure thereimbursement

 

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obligations in the eventof a draw on the letter of credit, pursuant to the terms and conditions of anApplication and Agreement for Standby Letter of Credit, we pledged $25 millionof U.S. Government Securities.  The $25million Malara Broadcast Group Term Loan B and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on anunsecured basis by Granite Broadcasting Corporation pursuant to a guarantyagreement (the “Granite Guaranty”).

 

The Malara BroadcastGroup Senior Credit Facility contains covenants restricting the ability ofMalara Broadcast Group and its subsidiaries to, among other things,(i) incur additional debt, (ii) incur liens, (iii) make loansand investments, (iv) incur contingent obligations (including hedgingarrangements), (v) declare dividends or redeem or repurchase capital stockor debt, (vi) engage in certain mergers, acquisitions and asset sales,(vii) engage in transactions with affiliates, (viii) engage insale-leaseback transactions

and (ix) change the nature of its business and the business conducted by its subsidiaries.  Malara Broadcast Group is also required to comply with financial covenants with respect to a minimum interest coverage ratio, minimum consolidated available cash flow, a maximum leverage ratio and minimum consolidated net revenue and limits on capital expenditures.

 

Interest rates associatedwith the Term Loan A are based, at Malara Broadcast Group’s option, at either(i) the higher of the Prime Rate or the Federal Funds Effective Rate plus0.50% (the “Base Rate”) or (ii) the Adjusted Eurodollar Rate plus 0.60%per annum, as such terms are defined in the Malara Broadcast Group SeniorCredit Facility.  Interest ratesassociated with the Term Loan B and Revolving Loan are based, at MalaraBroadcast Group’s option, on either (i) the Base Rate plus 4.625% perannum or (ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Term Loan B and Revolving Loan at arate of 3% per annum. Additionally, Malara Broadcast Group is required to paymonthly commitment fees on the unused portion of its revolving loan commitmentat a rate of 0.50% per annum.  Cashinterest payments are payable monthly.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan B as follows:(i) $125,000 payable at the end of each month from June 1, 2006through March 31, 2007, (ii) $158,333 payable at the end of eachmonth from April 1, 2007, through March 31, 2008, and(iii) $216,667 payable at the end of each month from April 1, 2008,through February 1, 2010.

 

Malara Broadcast Group isrequired to make monthly principal payments on the Term Loan A and theRevolving Loan equal to the product of (i) the Repayment Percentage (whichis 25% unless there is an Event of Default or the Consolidated Loan to StickValue is less than 70%, in which case the Repayment Percentage is 100%) and(ii) the Consolidated Excess Free Cash Flow for the month preceding themonth in which such installment is due, as such terms are defined in the MalaraBroadcast Group Senior Credit Facility. All such payments shall be applied first to repay the outstandingRevolving Loan to the full extent thereof (without a corresponding reduction inthe Revolving Loan Commitment Amount) and second to repay the outstanding TermLoan A to the full extent thereof; provided that, if the Repayment Percentagefor such monthly installment is 100%, the excess 75% of such monthlyinstallment shall be applied first to repay the outstanding Revolving Loan tothe full extent thereof and second to repay the outstanding Term Loan B to thefull extent thereof. For the three and nine months ended September 30, 2005,the total principal payments made on the Revolving Loan approximated $309,000and $692,000, respectively.

 

***Our12 3/4 % Cumulative Exchangeable Preferred Stock***

 

Under the terms of theCertificate of Designations for our 12 3/4 % Cumulative Exchangeable PreferredStock (the “Preferred Stock”), we were required to make the semi-annualdividends on such shares in cash beginning October 1, 2002.  The cash payment of dividends had beenrestricted by the terms of our previous senior credit agreement and indenturesand is prohibited under the Indenture, which governs our Notes.  Consequently we have not paid the semi-annualdividend due to the holders since October 1, 2002.  During the three and nine months endedSeptember 30, 2005 a dividend payment of $6,386,961 and $19,160,883,respectively, accrued on our Preferred Stock. As of September 30, 2005, we haverecorded an aggregate of $89,417,456 in accrued dividends on our PreferredStock. Since three or more semi-annual dividend payments have not been paid,the holders of the Preferred Stock have the right to elect the lesser of twodirectors or that number of directors constituting 25% of the members of theBoard of Directors. Effective October 24, 2005, the holders of the majority ofthe Preferred Stock exercised their right to elect two directors to the Boardof Directors of the Company. We are restricted from paying cash dividends underthe Indenture, which governs our Notes, and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.

 

***FilmPayments***

 

As part of an overalleffort to reduce station operating expenses, we have made substantial progressreplacing unprofitable programming with competitive, profitable programming.

 

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Film payments from ourcontinuing operations for the three and nine months ended September 30, 2005totaled $1.6 million and $4.6 million, respectively, as compared to the threeand nine months ended September 30, 2004 totaling $1.3 million and $3.9million, respectively. Film payments for the year ended December 31, 2005 willapproximate $6.1 million as compare to $5.3 million at December 31, 2004. Theincrease in film payments from our continuing operations is related to the twoadditional television stations, WISE-TV, which we acquired in March 2005 andKDLH-TV, which was acquired by Malara Broadcast Group in March 2005. Based oncompleted negotiations and current market conditions for the purchase ofprogramming, we expect annual film payments to continue to decline based on asame station basis.

 

Film payments from ourdiscontinued operations for the three and nine months ended September 30, 2005totaled $2.9 million and $11.2 million, respectively, as compared to the threeand nine months ended September 30, 2004 totaling $4.6 million and $14.3million, respectively. Film payments for the year ended December 31, 2005 willapproximate $16.5 million as compare to $18.8 million for the year endedDecember 31, 2004.

 

***NoOff-Balance Sheet Arrangements***

 

At September 30, 2005 and2004 we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structured financeor variable interest entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. All of our arrangements with Malara Broadcast Groupare on-balance sheet arrangements.

 

***Capitaland Commercial Commitments***

 

The following table anddiscussion reflect our significant contractual obligations and other commercialcommitments related to continuing operations as of September 30, 2005:

 
| ** **                                                                         | ** ** | **Payment Due by Period** | ** **    |
|------------------------------------------------------------------------------------|------------|---------------------------|---------------|
| **Capital  Commitment**                                                            | ** ** | **Total**                 | ** **    | **Remainder of 2005** | ** ** | **2006 - 2007** | ** ** | **2008 - 2009** | ** ** | **Thereafter** | ** ** |
|                                                                               |       |                      |          |   |   |   |   |   |   |   |   |
| 9  3/4% Senior Secured Notes due 2010                                              |       | $                         | 405,000,000   |   | $ | — |   | $ | — |   | $ | — |   | $ | 405,000,000 |   |
| Interest  on Senior Secured Notes                                                  |       | 213,891,000               |          | 19,744,000 |   | 78,975,000 |   | 78,975,000 |   | 36,197,000 |   |
| Malara  Broadcast Group Senior Credit Facility (b)                                 |       | 53,322,000                |          | 907,000 |   | 6,615,000 |   | 10,333,000 |   | 35,467,000 |   |
| Interest  on Senior Credit  Facility (c)                                           |       | 17,045,000                |          | 1,128,000 |   | 8,467,000 |   | 7,128,000 |   | 322,000 |   |
| Program  contract commitments - current                                            |       | 5,253,000                 |          | 2,145,000 |   | 3,034,000 |   | 74,000 |   | — |   |
| Program  contract commitments – future (d)                                    |       | 17,787,000                |          | 163,000 |   | 6,128,000 |   | 8,318,000 |   | 3,178,000 |   |
| Operating  leases                                                                  |       | 2,938,000                 |          | 159,000 |   | 1,098,000 |   | 994,000 |   | 687,000 |   |
| 12  3/4% Cumulative Exchangeable Preferred Stock, including accrued  dividends (a) |       | 377,670,000               |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring  and severance                                                       |       |                      |          | 313,000 |   | 192,000 |   | — |   | — |   |
|                                                                               |       |                      |          |   |   |   |   |   |   |   |   |
| Total  capital and commercial commitments                                          |       | $                         | 1,093,411,000 |   | $ | 24,559,000 |   | $ | 104,509,000 |   | $ | 483,492,000 |   | $ | 480,851,000 |   |

 

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(a)   As of September 30, 2005, the CumulativeExchangeable Preferred Stock, including accrued dividends totaled $288,520,000.The table above includes the balance as of September 30, 2005 and the expectedaccrued dividends through April 2009, the date of redemption. Payment ofcash dividends are restricted by the terms of the Indenture, which governs ourexisting Senior Secured Notes.

(b)   The amounts are our estimates of requiredcash payments under the Malara Senior Credit Facility. The Malara Senior CreditFacility consists of a revolver and two term loans. The required amortizationunder the revolver and one of the term loans is calculated based upon Malara’sstation performance; therefore, actual required amortization may vary from ourestimates above. The remaining term loan has a fixed amortization schedule, andsuch amounts are included above.

(c)   The amounts are our estimates of requiredinterest payments under the Malara Senior Credit Facility. The actual interestpayments may vary based upon the actual required amortization payments of theSenior Credit Facility (see (b) above).

(d)   Program contract commitments – future reflecta license agreement for program material that is not yet available for itsfirst broadcast and is therefore not recorded as an asset or liability on ourconsolidated balance sheet in accordance with the provisions of Statement ofFinancial Accounting Standards No. 63, *Financial Reporting forBroadcasters*.

 

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The following table anddiscussion reflect our significant contractual obligations and other commercialcommitments related to discontinued operations as of September 30, 2005:

 
| ** **                                      | ** ** | **Payment Due by Period** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|
| **Capital  Commitment**                         | ** ** | **Total**                 | ** ** | **Remainder of 2005** | ** ** | **2006 - 2007** | ** ** | **2008 - 2009** | ** ** | **Thereafter** | ** ** |
|                                            |       |                      |       |   |   |   |   |   |   |   |   |
| Program  contract commitments - current         |       | $                         | 29,296,000 |   | $ | 8,708,000 |   | $ | 16,977,000 |   | $ | 3,611,000 |   | $ | — |   |
| Program  contract commitments – future (a) |       | 26,269,000                |       | — |   | 4,716,000 |   | 11,330,000 |   | 10,223,000 |   |
| WB  Affiliation                                 |       | 5,900,000                 |       | 1,057,000 |   | 4,843,000 |   | — |   | — |   |
| Operating  leases                               |       | 10,084,000                |       | 338,000 |   | 2,229,000 |   | 2,330,000 |   | 5,187,000 |   |
|                                            |       |                      |       |   |   |   |   |   |   |   |   |
| Total  capital and commercial commitments       |       | $                         | 71,549,000 |   | $ | 10,103,000 |   | $ | 28,765,000 |   | $ | 17,271,000 |   | $ | 15,410,000 |   |

 

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(a)   Program contract commitments – future reflecta license agreement for program material that is not yet available for itsfirst broadcast and is therefore not recorded as an asset or liability on ourconsolidated balance sheet in accordance with the provisions of Statement ofFinancial Accounting Standards No. 63, *Financial Reporting forBroadcasters*.

 

*RecentAccounting Pronouncements*

 

In May 2005, FASB issuedStatement of Financial Accounting Standards No. 154, *AccountingChanges and Error Corrections – a replacement of APB No. 20 and FASB StatementNo. 3,*or Statement 154. Statement 154 changes the requirements ofaccounting for and reporting a change in accounting principle and applies toall voluntary changes in accounting principle and changes required by anaccounting pronouncement, in the event that the accounting pronouncement doesnot include specific transition provisions. Statement 154 requiresretrospective application of changes in accounting principle to prior periods’financial statements unless it is impracticable. Statement 154 also requiresthat a change in the method of depreciation, amortization or depletion oflong-lived, non-financial assets be accounted for as a change in accountingestimate affected by a change in accounting principle. The guidance containedin APB Opinion No. 20, *Accounting Changes*for reporting the correction of an error was carried forward in Statement 154without change. Statement 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.

 

In December 2004,FASB issued Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, or Statement 123(R). Statement 123(R)addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (i) equityinstruments of the enterprise or (ii) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Statement 123(R) requires an entity

to recognize thegrant-date fair-value expense of stock options or other equity basedcompensation issued to employees in the statement of operations. The revisedStatement generally requires that an entity account for those transactionsusing the fair-value-based method, and eliminates the intrinsic value method ofaccounting in Accounting Principles Board No. 25, *Accountingfor Stock Issued to Employees*, or APB 25.  The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial position, results ofoperations or cash flows.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first annual reporting period that begins afterJune 15, 2005. All public companies must use either the modifiedprospective or modified retrospective transition method. Early adoption ofStatement 123(R) for interim or annual periods for which financial statementsor interim reports have not been issued is encouraged but not required. We havenot fully evaluated the impact, if any, of adopting this pronouncement whichmust be adopted in the first quarter of 2006, but we believe that the adoptionof this Statement will not have a significant accounting impact.

 

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***Item3.  Quantitative and Qualitative Disclosuresabout Market Risk***

 

The interest rate on ouroutstanding Senior Secured Notes is fixed at 9.75%.  Consequently, our earnings will not beaffected by changes in short-term interest rates.

 

Interest rates associatedwith Malara Broadcast Group’s March 8, 2005, Term Loan A are based, atMalara Broadcast Group’s option, at either (i) the higher of the PrimeRate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with MalaraBroadcast Group’s March 8, 2005, Term Loan B and Revolving Loan are based,at Malara Broadcast Group’s option, at either (i) the Base Rate plus4.625% per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% perannum.  In addition, Deferred Interest(as defined in the Malara Broadcast Group Senior Credit Facility) accrues withrespect to, and is added to the principal amount of, the Term Loan B and RevolvingLoan at a rate of 3% per annum.  As ofMarch 31, 2005, the six-month Adjusted Eurodollar Rate was 3.21%.  Malara Broadcast Group has not entered intoany agreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding as ofSeptember 30, 2005, a 2% increase in the Adjusted Eurodollar Rate wouldincrease interest expense on an annual basis by approximately $1,070,000.

 

***Item4.  Controls and Procedures***

 

As of September 30, 2005,an evaluation was carried out under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934).Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof September 30, 2005.  There was nochange in our internal control over financial reporting (as defined in Rule13a-15(f) under the Securities Exchange Act of 1934) that occurred during theperiod covered by this Quarterly Report on Form 10-Q that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

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

 

None.

 

***Item5.  Other Information***

 

None.

 

***Item 6.  Exhibits***

 
| **Exhibit  No.** | ** ** | **Description of Exhibit**                                                                                                                               |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                     |
| 31.1             |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (15 U.S.C. §7241)                              |
|             |       |                                                                                                                                                     |
| 31.2             |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (15 U.S.C. §7241)                              |
|             |       |                                                                                                                                                     |
| 32               |       | Certifications of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350) |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the Registrant has caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |              | GRANITE  BROADCASTING CORPORATION |
|--------|-------------------|-----------------------------------|
|   |              | Registrant                        |
|   |              |                              |
|   |              |                              |
| Date:  | November 10, 2005 | /s/                               | W. DON CORNWELL |
|   |              |                              | (W. Don  Cornwell) |
|   |              |                              | Chief Executive  Officer |
|   |              |                              |   |
|   |              |                              |   |
| Date:  | November 10, 2005 | /s/                               | LAWRENCE I.  WILLS |
|   |              |                              | (Lawrence I.  Wills) |
|   |              |                              | Senior Vice  President – Chief Financial Officer |
|   |              |                              | (Principal  Financial Officer) |

 

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