**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

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

 

**For the quarterly period ended March 31, 2005**

 

**OR**

 

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

 

**For the transition period from                     to                    **

 

**Commission File Number 0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrantas specified in its charter)

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

 

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

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes   ý   No   o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the act).  Yes   o   No   ý

 

(APPLICABLE ONLYTO CORPORATE ISSUERS:)

 

As of May 3, 2005, theRegistrant had 98,250 shares of Class A Voting Common Stock, par value $.01 pershare outstanding; and 19,478,436 shares of Common Stock (Nonvoting), par value$.01 per share outstanding.

 

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**DOCUMENTS INCORPORATED BYREFERENCE:  None**

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
|       |                  | **Page**                                                                                                    |
|------------|-----------------------|-------------------------------------------------------------------------------------------------------------|
| PART I     | FINANCIAL INFORMATION | 3                                                                                                           |
|       |                  |                                                                                                        |   |
|       | Item 1.               | Financial Statements                                                                                        | 3 |
|       |                  | Consolidated Balance Sheets  as of March 31, 2005 (unaudited) and December 31, 2004                         | 3 |
|       |                  | Consolidated  Statements of Operations for the Three Months Ended March 31, 2005 and 2004  (unaudited)      | 4 |
|       |                  | Consolidated Statement of  Stockholders’ Deficit for the Three Months Ended March 31, 2005 (unaudited) | 5 |
|       |                  | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 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                 | 17 |
|       | Item 3.               | Quantitative and Qualitative Disclosures About  Market Risk                                                 | 27 |
|       | Item 4.               | Controls and  Procedures                                                                                    | 27 |
|       |                  |                                                                                                        |   |
| PART II    | OTHER INFORMATION     | 28                                                                                                          |
|       |                  |                                                                                                        |   |
|       | Item 4.               | Submission of Matters to a Vote of Security  Holders                                                        | 28 |
|       | Item 5.               | Other Information                                                                                           | 28 |
|       | Item 6.               | Exhibits                                                                                                    | 28 |
|       |                  |                                                                                                        |   |
| SIGNATURES | 29                    |

 

Granite BroadcastingCorporation is a Delaware corporation. As used in this Quarterly Report onForm 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 of March 8, 2005,we have shared services agreements and advertising representation agreements(which we generally refer to as local service agreements) relating to the twotelevision stations owned by Malara Broadcast Group, but do not own any of theequity interests in Malara Broadcast Group. For a description of the relationship between us and Malara BroadcastGroup, see Item 2.  “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Recent Developments.”

 

1

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

 

This report includes and incorporates forward-lookingstatements.  We have based theseforward-looking statements on our current expectations and projections aboutfuture events.  Generally, the words “anticipates,”“believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similarexpressions identify forward-looking statements. We believe that theforward-looking statements contained in this report are based upon reasonableassumptions, we can give no assurance that our goals will be achieved. Theseforward-looking statements are subject to risks, uncertainties and assumptionsabout 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

 

•      technological change andinnovation in the broadcasting industry.

 

Other matters set forth in this report, as well asrisk factors set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2004, filed with the Securities and Exchange Commission may alsocause actual results in the future to differ materially from those described inthe forward-looking statements.  Weundertake no obligation to update and revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  In light of these risks, uncertainties andassumptions, the forward-looking events discussed in this report might notoccur.

 

2

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**PART I. FINANCIAL INFORMATION**

 

***Item 1.****  **Financial Statement**s*

**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **March 31,**   | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2005**        | ** **  | **2004**         | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **(Unaudited)** | ** **  | ** **       | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                     |       |            |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                            |       |            |        |             |       |
| Cash and cash  equivalents (Excludes $24,997,500 of restricted cash equivalents at March 31,  2005, which is shown separately below.)                                                                                                                                                                                                                                      |       | $               | 37,951,592  |             | $          | 60,858,710 |   |
| Marketable  securities, at fair value                                                                                                                                                                                                                                                                                                                                      |       | 2,502,465       |        | 5,603,500        |       |
| Accounts  receivable, less allowance for doubtful accounts ($812,456 at March 31, 2005  and $896,465 at December 31, 2004)                                                                                                                                                                                                                                                 |       | 19,815,622      |        | 20,551,203       |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                      |       | 9,694,579       |        | 11,605,637       |       |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                      |       | 5,399,757       |        | 4,442,080        |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                      |       | 75,364,015      |        | 103,061,130      |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| Restricted cash  equivalents                                                                                                                                                                                                                                                                                                                                               |       | 24,997,500      |        | —           |       |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                               |       | 49,975,498      |        | 45,739,747       |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                      |       | 4,021,223       |        | 5,180,140        |       |
| Other non  current assets                                                                                                                                                                                                                                                                                                                                                  |       | 4,795,176       |        | 8,430,731        |       |
| Deferred  financing fees, less accumulated amortization ($2,509,582 at March 31, 2005  and $1,989,038 at December 31, 2004)                                                                                                                                                                                                                                                |       | 13,481,937      |        | 11,760,080       |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                              |       | 65,374,586      |        | 47,632,113       |       |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                   |       | 134,755,735     |        | 127,331,829      |       |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                 |       | 102,429,224     |        | 80,793,410       |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                               |       | $               | 475,194,894 |             | $          | 429,929,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                |       |            |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                           |       | $               | 1,741,470   |             | $          | 1,859,291 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                           |       | 13,162,500      |        | 3,290,625        |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 6,420,290       |        | 7,376,683        |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                              |       | 22,998,384      |        | 24,526,448       |       |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 4,975,230       |        | 3,785,399        |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 49,297,874      |        | 40,838,446       |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                             |       | 454,467,473     |        | 400,791,298      |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                              |       | 14,499,103      |        | 17,976,348       |       |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                    |       | 19,107,125      |        | 19,347,007       |       |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                |       | 198,924,682     |        | 198,835,862      |       |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                           |       | 76,643,534      |        | 70,256,573       |       |
| Other non  current liabilities                                                                                                                                                                                                                                                                                                                                             |       | 13,728,342      |        | 13,973,794       |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |            |        |             |       |
| 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 19,478,436 shares  of Common Stock (Nonvoting) (19,283,924 shares at December 31, 2004)  issued and outstanding at March 31, 2005. |       | 195,766         |        | 193,820          |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                |       | 364,812         |        | 361,088          |       |
| Accumulated  other comprehensive gain (loss)                                                                                                                                                                                                                                                                                                                               |       | 7,021           |        | (12,914          | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                       |       | (350,904,073    | )           | (331,410,284     | )          |
| Less: Unearned  compensation                                                                                                                                                                                                                                                                                                                                               |       | (261,090        | )           | (346,183         | )          |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                    |       | (875,675        | )           | (875,675         | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                          |       | (351,473,239    | )           | (332,090,148     | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                          |       | $               | 475,194,894 |             | $          | 429,929,180 |   |

 

See accompanying notes.

 

3

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Unaudited)**

** **
| ** **                                                                                                                  | ** ** | **Three Months Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                                                  | ** ** | **2005**                         | ** **  | **2004** | ** ** |
| ** **                                                                                                                  | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Net revenues                                                                                                                |       | $                                | 25,736,910  |   | $ | 26,000,641 |   |
| Operating  expenses:                                                                                                        |       |                             |        |   |   |
| Direct operating  expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 12,313,010                       |        | 13,001,237 |   |
| Selling, general  and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 8,835,437                        |        | 8,090,039 |   |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,697,899                        |        | 3,020,718 |   |
| Depreciation                                                                                                                |       | 1,828,660                        |        | 1,762,477 |   |
| Amortization of  intangible assets                                                                                          |       | 2,039,740                        |        | 1,882,238 |   |
| Performance  award expense                                                                                                  |       | 319,797                          |        | 524,271 |   |
| Non-cash  compensation expense (1)                                                                                          |       | 94,593                           |        | 302,824 |   |
|                                                                                                                        |       |                             |        |   |   |
| Operating loss                                                                                                              |       | (2,392,226                       | )           | (2,583,163 | ) |
|                                                                                                                        |       |                             |        |   |   |
| Other expenses  (income):                                                                                                   |       |                             |        |   |   |
| Interest expense                                                                                                            |       | 10,190,153                       |        | 9,872,593 |   |
| Interest income                                                                                                             |       | (448,754                         | )           | (232,527 | ) |
| Non-cash  interest expense                                                                                                  |       | 1,072,541                        |        | 1,146,441 |   |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                        |        | 6,386,961 |   |
| Other                                                                                                                       |       | 79,406                           |        | 139,938 |   |
| Loss before  income taxes                                                                                                   |       | (19,672,533                      | )           | (19,896,569 | ) |
| Benefit for  income taxes                                                                                                   |       | (178,744                         | )           | (2,483,672 | ) |
| Net loss                                                                                                                    |       | $                                | (19,493,789 | ) | $ | (17,412,897 | ) |
|                                                                                                                        |       |                             |        |   |   |
| Net loss  attributable to common shareholders                                                                               |       | $                                | (19,493,789 | ) | $ | (17,412,897 | ) |
|                                                                                                                        |       |                             |        |   |   |
| Basic and  diluted net loss per share                                                                                       |       | $                                | (1.00       | ) | $ | (0.90 | ) |
|                                                                                                                        |       |                             |        |   |   |
| Weighted average  common shares outstanding                                                                                 |       | 19,501,042                       |        | 19,319,460 |   |

 

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(1) Allocation ofnon-cash compensation expense to other operating expenses:

 
| Station expenses               |   | $      | 19,903 |    | $      | 28,536  |   |
|--------------------------------|--------|--------|--------|---------|--------|---------|--------|
| Corporate  expense             |   | 74,690 |   | 274,288 |   |
| Non-cash  compensation expense |   | $      | 94,593 |    | $      | 302,824 |   |

 

See accompanying notes.

 

4

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**GRANITEBROADCASTING CORPORATION**

**CONSOLIDATED 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) |       |                       |       | 1,946                          |       | (1,946                           | )          |                                    |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense  related to stock plans |       |                       |       |                           |       | 5,670                            |       |                                    |       |                     |       | 37,785                     |       |                |         | 43,455                                 |       |
| Discount on loans  to officers        |       |                       |       |                           |       |                             |       |                                    |       |                     |       | 47,308                     |       |                |         | 47,308                                 |       |
| Net loss                              |       |                       |       |                           |       |                             |       |                                    |       | (19,493,789              | )          |                       |       |                |         | (19,493,789                            | )          |
| Unrealized gain  on investment        |       |                       |       |                           |       |                             |       | 19,935                                  |       |                     |       |                       |       |                |         | 19,935                                 |       |
| Comprehensive  loss                   |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         | (19,473,854                            | )          |
|                                  |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         |                                   |       |
| Balance at March  31, 2005            |       | $                          | 982        |                           | $          | 194,784                          |       | $                                       | 364,812    |                     | $          | 7,021                      |       | $                   | (350,904,073 | )                                      | $          | (261,090 | ) | $ | (875,675 | ) | $ | (351,473,239 | ) |

 

Seeaccompanying notes.

 

5

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**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** **  |
|------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                         | ** **  | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Cash flows from  operating activities:                                       |       |                             |        |   |   |
| Net loss                                                                     |       | $                                | (19,493,789 | ) | $ | (17,412,897 | ) |
|                                                                         |       |                             |        |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                             |        |   |   |
| Amortization of  intangible assets                                           |       | 2,039,740                        |        | 1,882,238 |   |
| Depreciation                                                                 |       | 1,828,660                        |        | 1,762,477 |   |
| Performance  award expense                                                   |       | 319,797                          |        | 524,271 |   |
| Non-cash  compensation expense                                               |       | 94,593                           |        | 302,824 |   |
| Non-cash  interest expense                                                   |       | 1,072,541                        |        | 1,146,441 |   |
| Non-cash  preferred stock dividend                                           |       | 6,386,961                        |        | 6,386,961 |   |
| Deferred tax  benefit                                                        |       | (178,744                         | )           | (2,483,672 | ) |
| Change in assets  and liabilities:                                           |       |                             |        |   |   |
| Decrease in  accounts receivable                                             |       | 2,971,742                        |        | 3,176,124 |   |
| Increase in  accrued liabilities                                             |       | 8,502,920                        |        | 7,440,437 |   |
| (Decrease)  Increase in accounts payable                                     |       | (359,704                         | )           | 360,743 |   |
| WB affiliation  payment                                                      |       | (630,857                         | )           | (1,057,532 | ) |
| Decrease in film  contract rights and other assets                           |       | 5,886,462                        |        | 2,998,885 |   |
| Decrease in film  contract rights payable and other liabilities              |       | (4,958,525                       | )           | (5,409,536 | ) |
| Net cash  provided by (used in) operating activities                         |       | 3,481,797                        |        | (382,236 | ) |
|                                                                         |       |                             |        |   |   |
| Cash flows from  investing activities:                                       |       |                             |        |   |   |
| Sales  (purchases) of marketable securities and other investments            |       | 3,115,062                        |        | (8,749,003 | ) |
| Payment for  acquisition of assets                                           |       | (55,487,780                      | )           | — |   |
| Purchase of U.S.  Government Securities                                      |       | (24,997,500                      | )           | — |   |
| Capital  expenditures                                                        |       | (276,296                         | )           | (1,270,292 | ) |
| Net cash used in  investing activities                                       |       | (77,646,514                      | )           | (10,019,295 | ) |
|                                                                         |       |                             |        |   |   |
| Cash flows from  financing activities:                                       |       |                             |        |   |   |
| Proceed from  senior credit facility                                         |       | 53,500,000                       |        | — |   |
| Payment of  deferred financing fees                                          |       | (2,242,401                       | )           | (42,716 | ) |
| Net cash  provided by (used in) financing activities                         |       | 51,257,599                       |        | (42,716 | ) |
|                                                                         |       |                             |        |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (22,907,118                      | )           | (10,444,247 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 60,858,710                       |        | 90,213,995 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                | 37,951,592  |   | $ | 79,769,748 |   |
|                                                                         |       |                             |        |   |   |
| Supplemental  information:                                                   |       |                             |        |   |   |
| Cash paid for interest                                                       |       | $                                | 260,082     |   | $ | — |   |
| Cash paid for  income taxes                                                  |       | 19,000                           |        | 3,100 |   |
| Non-cash capital  expenditures                                               |       | 51,027                           |        | 33,622 |   |

 

See accompanying notes.

 

6

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**GRANITE BROADCASTING CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

**Note 1 –Operations of the Company**

 

The business operations of Granite BroadcastingCorporation and its wholly owned subsidiaries (the “Company”) consist of eightnetwork affiliated television stations in the United States, consisting of fourNBC-affiliated television stations, one ABC-affiliated station, oneCBS-affiliated television station and two WB Network stations. The Company’sstations are located in New York, California, Michigan, Indiana, Illinois andMinnesota. Through various local service agreements (as fully discussed below),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 discussed in Note 3, the Companycompleted the sale of its Fort Wayne, Indiana ABC affiliate, WPTA-TV, to MalaraBroadcast Group and acquired the Fort Wayne, Indiana NBC affiliate, WISE-TVfrom New Vision Group, LLC. in March 2005. Malara Broadcast Group also acquired KDLH-TV, the CBS affiliate servingDuluth, Minnesota from New Vision Group, LLC. The Company entered into astrategic arrangement with Malara Broadcast Group, under which the Companyprovides advertising sales, promotion and administrative services, and selectedprogramming to WPTA-TV and KDLH-TV under local services agreements. Althoughthe Company does not own Malara Broadcast Group or its television stations, theCompany is deemed to be the primary beneficiary of Malara Broadcast Group asdefined under Financial Accounting Standards Board Interpretation No. 46, *Consolidation of Variable Interest Entities* (“Interpretation46”). As a result, Interpretation 46 requires the Company to consolidate MalaraBroadcast Group’s financial position, results of operations and cash flows forthe period ended March 31, 2005.

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV with the proceeds of a Senior Credit Facility (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 obligations in the event of a draw on the letter of credit,pursuant to the terms and conditions of an Application and Agreement forStandby Letter of Credit, the Company pledged $25 million of U.S. GovernmentSecurities. The $25 million Malara Broadcast Group Term Loan B and the $5million revolving loan are secured by the assets of WPTA-TV and KDLH-TV, andguaranteed on an unsecured basis by the Company.

 

As of May 9, 2005, the Company had approximately$37,191,000 of cash, cash equivalents and marketable securities on hand, which excluded$24,997,500 in U.S. Government Securities which are pledged to secure thereimbursement obligations in the event of a draw on the letter of credit thatserves as collateral for the Term Loan A under Malara Broadcast Group’s SeniorCredit Facility and is restricted and not available for working capital or anyother 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. Absent changes to its capital structure and station ownership, theCompany may not have enough liquidity to service its existing obligations overthe next twelve months.  In order toimprove the Company’s existing liquidity position, the Company is currentlyexploring the sale of assets 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 net proceeds received in an assetsale, $5 million may be used for working capital purposes and the remaindermust 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.

 

Assuming the Company is successful in selling assetsand raising additional capital, it believes that the available proceedstogether with the cash, cash equivalents and marketable securities on hand andinternally generated funds from operations will be sufficient to satisfy 

 

7

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our cash requirements for our existing operations for the next twelvemonths. However, a lack of liquidity would have a material adverse effect onthe Company’s business strategy and therefore affect its ability to continue asa going concern. The 2005 quarterly financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

**Note 2 – Summary ofSignificant Accounting Policies**

 

*InterimFinancial Statements*

 

The accompanyingunaudited consolidated financial statements include the accounts of the Companyand have been prepared in accordance with the instructions to Form 10-Q and donot include all of the information and footnotes required by United Statesgenerally accepted accounting principles for complete financialstatements.  Operating results for thethree month period ended March 31, 2005 are not necessarily indicative of theresults that 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.

 

*Principlesof 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.

 

*Reclassification*

 

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

 

*MalaraBroadcast Group*

 

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 (1) the Company’s guarantee of the obligationsincurred under Malara Broadcast Group’s Senior Secured Credit Facility, (2)local service agreements the Company has with Malara Broadcast Group and (3)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 FCC approval (see Note 3 for furtherdetails on the aforementioned).

 

*RestrictedCash Equivalents*

 

The $23.5 million Term Loan A under the MalaraBroadcast Group Senior Credit Facility is secured by a letter of credit. To secure the reimbursement obligations in the event of a draw on the letter ofcredit and pursuant to the terms and conditions of an Application and Agreementfor Standby Letter of Credit, the Company pledged $25 million of U.S.Government Securities, which are not available for working capital or any otherpurposes and held in escrow. 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. As of March 31,2005, the restricted U.S. Government Securities totaled $24,997,500.

 

*CashEquivalents and Investments in Marketable Securities*

 

All highly liquid investments with a maturity ofninety days or less from the date of purchase are considered cash equivalents.The marketable securities are classified as available-for-sale in accordancewith the provisions of Statement of Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities.  These securities are carried at fair marketvalue based on current market quotes. Unrealized gains and losses are reportedin stockholders’ equity as a separate component of other comprehensive income /(loss) until realized.  Gains and losseson securities sold are based on the specific identification method. The Companydoes not hold these securities for speculative or trading purposes. As of March31, 2005, the Company’s unrealized holding gains totaled approximately$7,000.  For the three months ended March31, 2005, the Company recorded realized loss of approximately $11,000.

 

8

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*Stock-BasedCompensation*

 

The Company has adopted the disclosure provisions ofStatement of Financial Accounting Standards No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure*, orStatement 148, to require disclosure in the summary of accounting policies ofthe effects of an entity’s accounting policy with respect to stock-basedcompensation on reported net income / (loss) and earnings per share in annualand interim financial statements.

 

The Company accounts for stock option grants under therecognition and measurement principles of Accounting Principles Board (“APB”)No 25, *Accounting for Stock Issued to Employees*andrelated interpretations. Under APB No. 25, because the exercise price of theCompany’s stock options equals the market price (fair value) of the underlyingstock on the date of grant, no compensation expense is recorded.

 

The following table illustrates the effect on net lossand loss per share as if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123 *Accounting for Stock-Based Compensation,*, as amended byStatement 148, to stock-based compensation for the three months ended March 31,2005 and 2004 which may not berepresentative of the impact in future years.

 
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** **  |
|------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                 | ** ** | **2005**                         | ** **  | **2004** | ** ** |
|                                                       |       | **(unaudited)**                  |        | **(unaudited)** |   |
|                                                       |       |                             |        | ** ** |   |
| Net loss  attributable to common shareholders, as reported |       | $                                | (19,493,789 | ) | $ | (17,412,897 | ) |
| Add: pro forma  compensation expense                       |       | 104,000                          |        | 357,374 |   |
| Less: compensation  expense, as reported                   |       | 9,500                            |        | 12,000 |   |
| Pro forma net  loss attributable to common shareholders    |       | $                                | (19,588,289 | ) | $ | (17,758,271 | ) |
|                                                       |       |                             |        |   |   |
| Basic and  diluted net loss per share, as reported         |       | $                                | (1.00       | ) | $ | (0.90 | ) |
| Pro forma  compensation expense                            |       | (0.00                            | )           | (0.02 | ) |
| Pro forma basic  and diluted net loss per share            |       | $                                | (1.00       | ) | $ | (0.92 | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black-Scholes options pricing model. The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable.  In addition,option valuation models require the input of highly subjective assumptionsincluding the expected stock price volatility. The Company’s employee stock options have characteristics significantlydifferent from those of traded options and changes in the subjective inputassumptions can materially affect the fair value estimate.

 

*RecentAccounting Pronouncements*

 

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 (a) equityinstruments of the enterprise or (b) 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 torecognize the grant-date fair-value expense of stock options or other equitybased compensation issued to employees in the statement of operations. Therevised Statement generally requires that an entity account for thosetransactions using the fair-value-based method, and eliminates the intrinsicvalue method of accounting in Accounting Principles Board No. 25, *Accounting for 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).

 

9

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**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.

 

In addition, another subsidiary of Malara BroadcastGroup acquired CBS affiliate KDLH-TV, Duluth, Minnesota from New VisionTelevision on March 8, 2005 for approximately $9.5 million, pursuant to theterms and conditions of an asset purchase agreement, dated April 23, 2004.

 

On March 8, 2005,the Company entered into a strategic arrangement with Malara Broadcast Group,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.

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV with the proceeds of the Malara Broadcast Group SeniorCredit Facility (see Note 6).

 

The Company does not own Malara Broadcast Group or itstelevision stations. However, as a result of the Company’s guarantee of theobligations incurred under Malara Broadcast Group’s senior secured credit facilitywith respect to the Term Loan B and the revolving loan and due to itsarrangements under the local service agreements and put or call optionagreements, under Interpretation 46, the Company is required to consolidateMalara Broadcast Group’s financial position, results of operations and cashflows. In addition, in accordance with the provisions of Interpretation 46, theCompany did not account for the sale of the assets of WPTA-TV and no gaintherefrom was recognized in the consolidated statements of operations.Additionally, the Company did not apply the provisions of purchase accountingto Malara Broadcast Group’s acquisition of WPTA-TV.

 

In May 2004, an application was filed with the FederalCommunications Commission, of FCC, seeking consent to assign the license oftelevision station 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 theDuluth market asserting that the Company will have a prohibited ownershipinterest in KDLH by virtue of the operating arrangement between MalaraBroadcast Group and the Company.  The FCC’sMedia Bureau (“Bureau”) denied the petition and granted the assignmentapplication in December 2004.  In January2005, the petitioning broadcasters filed an application for review seekingCommission-level review of the Bureau’s decision.  Malara Broadcast Group filed an opposition tothe application for review, and the petitioning broadcasters filed a responseto that opposition.  The FCC has not yetruled on the application for review. Although the Company believes that the application for review is withoutmerit and anticipates that the FCC will affirm the grant of the assignmentapplication for KDLH, it is not possible to predict how the FCC will rule onthe application for review.  It also isnot possible 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 theacquisitions listed below was consummated during the three months ended March31, 2005. The Company’s acquisition of WISE and Malara Broadcast Group’sacquisition of KDLH were accounted for under the purchase method of accounting.The consolidated financial statements continue to include the operating resultsof WPTA as well as the operating results of WISE and KDLH from the date ofconsummation of the acquisition. In accordance with the provisions ofInterpretation 46, the Company did 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         |       |

 

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(1)   Operationsunder local service agreements, whereby, the Company provides advertising,sales, promotions, administrative services and selected programming services toMalara Broadcast Group television stations in return for certain fees that willbe paid to the Company by Malara Broadcast Group.

(2)   Inaccordance with Interpretation 46, the Company did not account for the sale ofthe assets of WPTA-TV and no gain therefrom was recognized in the consolidatedstatements of operations. In addition, the Company did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

10

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*WISE*

 

On March 8, 2005,the Company acquired the stock of WISE-TV from New Vision Group, LLC for $43.5million plus approximately $2,100,000 of transactions costs. The acquisitionwas accounted for under the purchase method of accounting and accordingly, thepurchase price was allocated to assets acquired based on their estimated fairvalue on the acquisition date.

 

The followingtable summarizes the allocation of the purchase price of WISE-TV on March 8,2005. The Company is currently obtaining a third-party valuation of certainacquired intangible assets and therefore the allocation below is preliminaryand estimated and is subject to change once the third-party valuation iscompleted. In addition, net assets acquired are subject to future workingcapital adjustments and therefore the amount below is preliminary and estimatedand subject to change.

 
| ** **                                                | ** ** | **Value at**      | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                            |       | $                 | 45,649,000 |   |
| Net Assets  Acquired                                      |       | 1,999,000         |       |
| FCC License  (indefinite lived)                           |       | 5,424,000         |       |
| Network  Affiliation (estimated useful life, 25 years)    |       | 20,797,000        |       |
|                                                      |       |              |       |
| Goodwill,  including transaction costs (indefinite lived) |       | $                 | 17,429,000 |   |

 

*KDLH*

 

On March 8, 2005,Malara Broadcast Group acquired substantially all of the assets of KDLH-TV fromNew Vision Group, LLC for $9.5 million plus approximately $300,000 oftransactions costs. The acquisition was accounted for under the purchase methodof accounting and accordingly, the purchase price was allocated to assetsacquired based 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 futureworking capital adjustments and therefore the amount below is preliminary andestimated and subject to change.

 
| ** **                                                | ** ** | **Value at**      | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                            |       | $                 | 9,840,000  |   |
| Net Assets  Acquired                                      |       | 4,648,000         |       |
| FCC License  (indefinite lived)                           |       | 2,000,000         |       |
| Network  Affiliation (estimated useful life, 25 years)    |       | 2,879,000         |       |
|                                                      |       |              |       |
| Goodwill,  including transaction costs (indefinite lived) |       | $                 | 313,000    |   |

 

The following unaudited pro forma information for thethree months ended March 31, 2005 and 2004 has been presented as if the Company’sacquisition of WISE-TV and Malara Broadcast Group’s acquisition of KDLH-TV hadoccurred on January 1, of each year:

 
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Pro Forma**                    | ** ** | **Pro Forma** | ** ** |
| Net Revenues                                  |       | $                                | 27,588,000 |   | $ | 28,861,000 |   |
| Operating  Expenses                           |       | 30,564,000                       |       | 31,497,000 |   |
| Loss from  Operations                         |       | (2,976,000                       | )          | (2,636,000 | ) |
| Other Expenses                                |       | 18,205,000                       |       | 18,556,000 |   |
| Loss before  Taxes                            |       | (21,181,000                      | )          | (21,192,000 | ) |
| Benefit for  income taxes                     |       | (179,000                         | )          | (2,484,000 | ) |
| Net loss  attributable to common shareholders |       | (21,002,000                      | )          | (18,708,000 | ) |
|                                          |       |                             |       |   |   |
| Basic and  diluted net loss per share         |       | $                                | (1.08      | ) | $ | (0.97 | ) |
|                                          |       |                             |       |   |   |
| Weighted average  common shares outstanding   |       | 19,501,042                       |       | 19,319,460 |   |

 

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The selected unaudited pro forma information ispresented for illustrative purposes only and is not necessarily indicative ofresults of operations in the future periods or results that would have beenachieved had the Company’s acquisition of WISE-TV and Malara Broadcast Group’sacquisition of KDLH-TV had occurred during the specified periods.

 

**Note 4 –Related Parties**

 

In February 2003, the Compensation Committeerecommended, and the Board of Directors approved, an incentive award of$3,286,065 to each of Mr. Cornwell and Mr. Beck to be paid, subject to vestingterms, only upon the occurrence of the refinancing with a maturity of at leasttwo years, of the senior debt due April 15, 2004. On December 22, 2003,the Company issued $405 million aggregate principal amount of 9 3/4 % SeniorSecured Notes, the proceeds of which were used by the Company in part to repayall outstanding borrowings (plus accrued interest) under the Company’s thenoutstanding senior credit agreement, which satisfied the performance objectiveof the awards.  Mr. Cornwell’s award,which vests in one-third tranches over three years from the refinancing date,will be used to repay in full his outstanding loan from the Company of$3,286,065 due January 25, 2006. Mr. Cornwell has irrevocably elected to defer payment of the first twotranches under his performance award until January 25, 2006 when his loanis repaid.  On March 1, 2005, the Boardof Directors approved the acceleration of payment of the third tranche of Mr.Cornwell’s award to January 25, 2006.

 

On September 21, 2004, Stuart Beck resigned from theCompany to accept the appointment as Ambassador/Permanent Representative of theRepublic of Palau to the United Nations. Mr. Beck remains on the Company’s Board of Directors. Pursuant to hisseparation agreement, the Company granted Mr. Beck severance totaling$1,008,000, payable in equal installments over eighteen months from the date ofseparation.  In addition, Mr. Beck was awarded a pro-rated bonus ofapproximately $255,600 based upon achievements of certain financial targets in2004 which was paid during the three months ended March 31, 2005.

 

Under the terms of the separation agreement, theCompany and Stuart J. Beck amended the Performance Award and deferral of suchpayments pursuant to the Separation Agreement. Under the amended terms of the Performance Award, Mr. Beck’s PerformanceAward fully vested as of the separation date and payment of $221,200 was madeon September 30, 2004 to repay his outstanding promissory note to theCompany.  The remaining vested award of$3,065,000 is payable in cash on December 22, 2006. In addition, the Company modifiedthe terms of Mr. Beck’s outstanding stock option awards to allow his options tocontinue to vest and have the right to exercise his options until the earlierof (A) the later of January 2, 2007 and 30 days after the last day of Mr. Beck’scontinuous service on the Company’s Board of Directors and (B) the fixed dateon which each stock option award was initially set to expire.

 

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

 

The Company allows Mr. Beck to use office space at nocharge. The Company anticipates that Mr. Beck will continue to use this officespace through 2005.

 

**Note 5 – Restructuring and Severance Charges**

 

*Restructuring Charges*

 

During 2004, the Companyrecognized a $2,027,000 restructuring charge relating to employee separationsat both 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 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.

 

In connection withthe acquisition of KDLH-TV in March 2005, the Company recognized a $252,000restructuring charge related to employee separations, which included severanceand other benefits. These charges were not costs directly attributable toMalara Broadcast Group’s acquisition of KDLH-TV due to fact that upon Malara’sacquiring of KDLH-TV certain employees were retained by Malara with theremaining employees becoming employees of the Company’s KBJR-TV station andwere either retained or subsequently terminated. The Company anticipatesadditional charges in future periods relating to stay-bonuses awarded totransitional employees of KBJR-TV upon separation.

 

At March 31, 2005, theaccruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the Buffalo, New York television station and KBJR-TV station areincluded 

 

12

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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*

 

In connection withthe Company’s acquisition of WISE-TV in March 2005, the Company accrued$590,000 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 WISE-TV, which included line through management employees. The Companyanticipates additional charges in future periods, in the form of restructuringcharges, relating to stay-bonuses awarded to transitional employees of WISEupon separation.

 

At March 31, 2005, theaccruals for acquisition activities of WISE-TV were included in “other accruedliabilities” on the consolidated Balance Sheets. These charges were recognizedin accordance with the provisions of Emerging Issues Task Force Issue No. 95-3 *Recognition of Liabilities in Connection with a Purchase Business Combination*.

 

The following is areconciliation of the aggregate liability recorded for restructuring andacquisition charges as of March 31, 2005:

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three Months Ended March 31, 2005**                                                         | ** ** |
| ** **         | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **March 31, 2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                                                                             | 250,000    |   | $ | — |   | $ | 119,000 |   | $ | 131,000 |   |
| KBJR-TV            |       | —                                                                                        |       | 252,000 |   | 148,000 |   | 104,000 |   |
| WISE-TV            |       | —                                                                                        |       | 590,000 |   | 365,000 |   | 225,000 |   |
| Corporate          |       | 1,214,000                                                                                     |       | — |   | 332,000 |   | 882,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,464,000  |   | $ | 842,000 |   | $ | 964,000 |   | $ | 1,342,000 |   |

 

The liability forthe restructuring 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 – Long-Term Debt**

 

Long-term debtconsists of the following:

 
| ** **                                                                                                                   | ** ** | **March 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|------------------------|------------|
| 9 3/4% Senior  Secured Notes, due 2010, net of discount of $4,032,527 at March 31, 2005 and  $4,208,702 at December 31, 2004 |       | $                   | 400,967,473 |                   | $          | 400,791,298 |   |
| Malara Broadcast  Group Senior Credit Facility                                                                               |       | 53,500,000          |        | —                 |       |
|                                                                                                                         |       |                |        |                   |       |
| Total                                                                                                                        |       | $                   | 454,467,473 |                   | $          | 400,791,298 |   |

 

***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 % Senior Secured Notes (the “Notes”) dueDecember 1, 2010, at a discount, resulting in proceeds to the Company of$400,067,100.  Interest on the Notes ispayable on December 1 and June 1 of each year, which commenced onJune 1, 2004.  The Company used thenet proceeds from the offering in part to (i) repay all outstandingborrowings, plus accrued interest, under its senior credit agreement, (ii) redeemat par, plus accrued interest, all of its 9 3/8 % and 10 3/8 % seniorsubordinated notes due May and December 2005, respectively, and(iii) to repurchase at par, plus accrued interest, all of its 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 the Company’s senior securedobligations. The Notes are guaranteed by each of its domestic restricted subsidiaries.The Notes and the guarantees are secured by substantially all of itsassets.  The Company may redeem some orall of the 

 

13

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Notes at any time on or after December 1, 2006. The Company mayalso redeem 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, which governs the Company’s Notes,restricts its ability and the ability of its restricted subsidiaries to, amongother things: (i) incur additional debt and issue preferred stock;(ii) make certain distributions, investments and other restrictedpayments; (iii) create certain liens; (iv) enter into transactionswith affiliates; (v) enter into agreements that restrict its restrictedsubsidiaries from making payments to the Company; (vi) merge, consolidateor sell substantially all of its assets; (vii) limit the ability of itssubsidiaries to issue preferred stock; (viii) sell or acquire assets; and(ix) enter into new lines of business.

 

Under the Indenture, the Malara Broadcast Groupcompanies to which the Company provides services pursuant to the local servicesagreements are subject to the terms of the Indenture applicable to RestrictedSubsidiaries that are not Guarantors, as such terms are defined in theIndenture.

 

***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 obligations in the event of a draw on the letter of credit,pursuant to the terms and conditions of an Application and Agreement forStandby Letter of Credit, the Company pledged $25 million of U.S. GovernmentSecurities. 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.

 

Interest rates associated with the Term Loan A arebased, at Malara Broadcast Group’s option, at either (i) the higher of thePrime Rate 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 the Term LoanB and Revolving Loan are based, at Malara Broadcast Group’s option, at either(i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Term Loan B and Revolving Loan at a rate of 3% per annum.Additionally, Malara Broadcast Group is required to pay monthly commitment feeson the unused portion of its revolving loan commitment at a rate of 0.50% perannum.  Cash interest payments arepayable monthly.

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Term Loan B as follows: (i) $125,000 payable atthe end of each month from June 1, 2006 through March 31, 2007,(ii) $158,333.33 payable at the end of each month from April 1, 2007,through March 31, 2008, and (iii) $216,667 payable at the end of eachmonth from April 1, 2008, through February 1, 2010.

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Term Loan A and the Revolving Loan equal to theproduct of (i) the Repayment Percentage (which is 25% unless there is anEvent of Default or the Consolidated Loan to Stick Value is less than 70%, inwhich case the Repayment Percentage is 100%) and (ii) the ConsolidatedExcess Free Cash Flow for the month preceding the month in which suchinstallment is due, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  All suchpayments shall be applied first to repay the outstanding Revolving Loan to thefull extent thereof (without a corresponding reduction in the Revolving LoanCommitment Amount) and second to repay the outstanding Term Loan A to the fullextent thereof; 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.

 

14

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**Note 7 – Condensed Consolidating FinancialInformation**

 

The GraniteBroadcasting Corporation column represents the registrant’s financialinformation. The Malara Broadcast Group column represents the consolidatedfinancial information of Malara Broadcast Group, an independently owned entityin which the Company is deemed to be the primary beneficiary (see Note 3) andis required to be consolidated as a variable interest entity in accordance withInterpretation 46.

 

**BALANCE SHEET**

**March 31, 2005**

 
| ** **                                       | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|--------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                       | ** ** | ** **                            | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                           |       |                                  |        |                        |       |             |       |                      |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Current assets:                                  |       |                                  |        |                        |       |             |       |                      |        |
| Cash and cash equivalents                        |       | $                                     | 37,233,056  |                        | $          | 718,536          |       | $                         | —      |   | $ | 37,951,592 |   |
| Marketable securities, at fair value             |       | 2,502,465                             |        | —                      |       | —           |       | 2,502,465                 |        |
| Accounts receivable, net                         |       | 17,477,960                            |        | 2,337,662                   |       | —           |       | 19,815,622                |        |
| Other current assets                             |       | 13,871,542                            |        | 1,222,794                   |       | —           |       | 15,094,336                |        |
| Due from consolidated entity                     |       | 1,520,192                             |        | 31,519                      |       | (1,551,711       | )          | —                    |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Total current assets                             |       | 72,605,215                            |        | 4,310,511                   |       | (1,551,711       | )          | 75,364,015                |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Restricted cash equivalents                      |       | 24,997,500                            |        | —                      |       | —           |       | 24,997,500                |        |
| Property and equipment, net                      |       | 41,316,661                            |        | 8,658,837                   |       | —           |       | 49,975,498                |        |
| Other non current assets                         |       | 24,513,496                            |        | 1,431,508                   |       | (3,646,668       | )          | 22,298,336                |        |
| Intangibles, net                                 |       | 285,340,440                           |        | 44,950,205                  |       | (27,731,100      | )          | 302,559,545               |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Total assets                                     |       | $                                     | 448,773,312 |                        | $          | 59,351,061       |       | $                         | (32,929,479 | ) | $ | 475,194,894 |   |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Liabilities and stockholders’ deficit       |       |                                  |        |                        |       |             |       |                      |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Current liabilities:                             |       |                                  |        |                        |       |             |       |                      |        |
| Accounts payable and other accrued  liabilities  |       | $                                     | 20,890,735  |                        | $          | 433,525          |       | $                         | —      |   | $ | 21,324,260 |   |
| Other current liabilities                        |       | 26,995,738                            |        | 977,876                     |       | —           |       | 27,973,614                |        |
| Due to consolidated entity                       |       | 31,519                                |        | 1,520,192                   |       | (1,551,711       | )          | —                    |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Total current liabilities                        |       | 47,917,992                            |        | 2,931,593                   |       | (1,551,711       | )          | 49,297,874                |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Long-term debt                                   |       | 400,967,473                           |        | 53,500,000                  |       | —           |       | 454,467,473               |        |
| Other non current liabilities                    |       | 47,004,705                            |        | 3,976,533                   |       | (3,646,668       | )          | 47,334,570                |        |
| Redeemable preferred stock                       |       | 198,924,682                           |        | —                      |       | —           |       | 198,924,682               |        |
| Accrued dividends on redeemable preferred  stock |       | 76,643,534                            |        | —                      |       | —           |       | 76,643,534                |        |
|                                             |       |                                  |        |                        |       |             |       |                      |        |
| Stockholders’ deficit:                      |       |                                  |        |                        |       |             |       |                      |        |
| Common stock                                     |       | 195,766                               |        | —                      |       | —           |       | 195,766                   |        |
| Additional paid-in capital                       |       | 364,812                               |        | —                      |       | —           |       | 364,812                   |        |
| Accumulated other comprehensive gain             |       | 7,021                                 |        | —                      |       | —           |       | 7,021                     |        |
| Accumulated deficit                              |       | (322,115,908                          | )           | (1,057,065                  | )          | (27,731,100      | )          | (350,904,073              | )      |
| Less: Unearned compensation                      |       | (261,090                              | )           | —                      |       | —           |       | (261,090                  | )           |
| Treasury stock, at cost                          |       | (875,675                              | )           | —                      |       | —           |       | (875,675                  | )           |
| Total stockholders’ deficit                 |       | (322,685,074                          | )           | (1,057,065                  | )          | (27,731,100      | )          | (351,473,239              | )           |
| Total liabilities and stockholders’ deficit |       | $                                     | 448,773,312 |                        | $          | 59,351,061       |       | $                         | (32,929,479 | ) | $ | 475,194,894 |   |

 

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**STATEMENT OF OPERATIONS**

**For the three months ended March 31, 2005**

** **
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                                |       | $                                      | 25,853,760  |                        | $          | 517,021          |       | $                         | (633,871   | ) | $ | 25,736,910 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station operating expenses:                                                                                                 |       |                                   |        |                        |       |             |       |                      |       |
| Direct operating expenses (exclusive of  depreciation and amortization expenses shown separately below)                     |       | 12,189,071                             |        | 123,939                     |       |             |       | 12,313,010                |       |
| Selling, general and administrative  expenses (exclusive of depreciation and amortization expenses shown  separately below) |       | 8,769,310                              |        | 699,998                     |       | (633,871         | )          | 8,835,437                 |       |
| Corporate expense (exclusive of depreciation  expense shown separately below)                                               |       | 2,697,899                              |        | —                      |       |             |       | 2,697,899                 |       |
| Depreciation and amortization                                                                                               |       | 3,802,621                              |        | 65,779                      |       |             |       | 3,868,400                 |       |
| Performance award expense                                                                                                   |       | 319,797                                |        | —                      |       |             |       | 319,797                   |       |
| Non-cash compensation expense                                                                                               |       | 94,593                                 |        | —                      |       |             |       | 94,593                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating loss                                                                                                              |       | (2,019,531                             | )           | (372,695                    | )          |             |       | (2,392,226                | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other expenses (income):                                                                                                    |       |                                   |        |                        |       |             |       |                      |       |
| Interest expense                                                                                                            |       | 9,872,570                              |        | 317,583                     |       |             |       | 10,190,153                |       |
| Interest income                                                                                                             |       | (448,754                               | )           | —                      |       |             |       | (448,754                  | )          |
| Non-cash interest expense                                                                                                   |       | 1,055,360                              |        | 17,181                      |       |             |       | 1,072,541                 |       |
| Non-cash preferred stock dividend                                                                                           |       | 6,386,961                              |        | —                      |       |             |       | 6,386,961                 |       |
| Other                                                                                                                       |       | (270,200                               | )           | 349,606                     |       |             |       | 79,406                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss before income taxes                                                                                                    |       | (18,615,468                            | )           | (1,057,065                  | )          |             |       | (19,672,533               | )          |
| Benefit for income taxes                                                                                                    |       | (178,744                               | )           | —                      |       |             |       | (178,744                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss                                                                                                                    |       | $                                      | (18,436,724 | )                           | $          | (1,057,065       | )          |                      |       | $ | (19,493,789 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss attributable to common  shareholders                                                                               |       | $                                      | (18,436,724 | )                           | $          | (1,057,065       | )          |                      |       | $ | (19,493,789 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic and diluted net loss per share                                                                                        |       | $                                      | (0.95       | )                           | N/A        |             |       |                      | $          | (1.00 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted average common shares outstanding                                                                                  |       | 19,501,042                             |        | N/A                         |       |             |       | 19,501,042                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

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**STATEMENT OF CASH FLOWS**

**For the three months ended March 31, 2005**

 
| ** **                                                       | ** ** | **Granite Broadcasting  Corporation** | ** ** | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated Company** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | ** **                            | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **               | ** ** |
| **Cash flows (used in) provided by operating  activities**       |       | $                                     | 3,275,586  |                        | $          | 237,927          |       | $                        | (31,716    | ) | $ | 3,481,797 |   |
|                                                             |       |                                  |       |                        |       |             |       |                     |       |
| **Cash flows from investing activities:**                        |       |                                  |       |                        |       |             |       |                     |       |
| Sales (purchase) of marketable securities  and other investments |       | 3,115,062                             |       | —                      |       | —           |       | 3,115,062                |       |
| Proceeds from sale of assets                                     |       | 45,417,485                            |       |                        |       | (45,417,485      | )          | —                   |       |
| Payment for acquisition of assets                                |       | (45,648,922                           | )          | (55,288,059                 | )          | 45,449,201       |       | (55,487,780              | )          |
| 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                                             |       | (276,296                              | )          | —                      |       | —           |       | (276,296                 | )          |
| Net cash used in investing activities                            |       | (26,036,839                           | )          | (51,641,391                 | )          | 31,716           |       | (77,646,514              | )          |
|                                                             |       |                                  |       |                        |       |             |       |                     |       |
| **Cash flows from financing activities:**                        |       |                                  |       |                        |       |             |       |                     |       |
| Proceeds from senior credit facility                             |       | —                                |       | 53,500,000                  |       |             |       | 53,500,000               |       |
| Payment of deferred financing fees                               |       | (864,401                              | )          | (1,378,000                  | )          |             |       | (2,242,401               | )          |
| Net cash (used in) provided by financing  activities             |       | (864,401                              | )          | 52,122,000                  |       |             |       | 51,257,599               |       |
|                                                             |       |                                  |       |                        |       |             |       |                     |       |
| Net (decrease) increase in cash and cash  equivalents            |       | (23,625,654                           | )          | 718,536                     |       |             |       | (22,907,118              | )          |
| Cash and cash equivalents, beginning of period                   |       | 60,858,710                            |       | —                      |       |             |       | 60,858,710               |       |
| Cash and cash equivalents, end of period                         |       | $                                     | 37,233,056 |                        | $          | 718,536          |       |                     |       | $ | 37,951,592 |   |
|                                                             |       |                                  |       |                        |       |             |       |                     |       |
| Supplemental information:                                        |       |                                  |       |                        |       |             |       |                     |       |
| Cash paid for interest                                           |       | $                                     | —     |                        | $          | 260,082          |       |                     |       | $ | 260,082 |   |
| Cash paid for income taxes                                       |       | 19,000                                |       | —                      |       |             |       | 19,000                   |       |
| Non-cash capital expenditures                                    |       | 51,027                                |       | —                      |       |             |       | 51,027                   |       |
|                                                                  |            |                                       |            |                             |            |                  |            |                          |            |  |  |  |  |

 

***Other Historical ConsolidationInformation***

 

At December31, 2004, the Company’s consolidated Balance Sheets included in “othernon-current assets” and “deferred financing fees” $130,000 and $32,500,respectively, as a result of the consolidation of Malara Broadcast Group.

 

For the threemonths ended March 31, 2004, consolidation of variable interest entity inaccordance with Interpretation 46 was not applicable for the Company’sStatement of Operations and Statement of Cash Flows.

 

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

 

The followinginformation should 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.

 

*Executive Summary*

 

We own and operate eight network affiliated television stations ingeographically diverse markets reaching over 6% of the nation’s televisionhouseholds.  As of March 31, 2005, fourstations are affiliated with NBC, one with ABC and one with CBS, our Big ThreeAffiliates, and two stations are affiliated with the Warner Bros. TelevisionNetwork, our WB Affiliates.  The NBCaffiliates are KSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington,Illinois, KBJR-TV, Duluth, Minnesota - Superior, Wisconsin and WISE-TV, FortWayne, Indiana.  The ABC affiliate isWKBW-TV, Buffalo, New York. The CBS affiliate is WTVH-TV, Syracuse, NewYork.  The WB affiliates are KBWB-TV, SanFrancisco, California and WDWB-TV, Detroit, Michigan. As discussed in furtherdetail below, in March 2005, we completed the sale of WPTA-TV, the ABCaffiliate serving Fort Wayne, Indiana to Malara Broadcast Group and theacquisition of WISE-TV, the NBC affiliate serving Fort Wayne, Indiana from NewVision Group, LLC.

 

17

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Through shared services agreements and advertising representationagreements (which we generally refer to as local service agreements) withMalara Broadcast Group, we currently provide advertising, sales promotion,administrative and selected programming to two stations owned and operated byMalara Broadcast Group. Malara Broadcast Group is owned by an independent thirdparty who owns and operates two television stations as of March 31, 2005. We donot own Malara Broadcast Group or its television stations. In order for both usand Malara Broadcast Group to continue to comply with FCC regulations, MalaraBroadcast Group must maintain complete responsibility for and control overprogramming, finances, personnel and operations of its televisionstations.  However, as a result of ourguarantee of the obligations incurred under Malara Broadcast Group’s seniorsecured credit facility and the revolving loan, arrangements under the localservice agreements and put or call option agreements, under Untied StatesGenerally Accepted 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 gaintherefrom was recognized in the consolidated statements of operations.  In addition, the Company did not apply theprovisions of purchase accounting to Malara Broadcast Group’s acquisition ofWPTA-TV.

 

We believe thatinflation has not had a material impact on our results of operations for thethree months ended March 31, 2005. However, there can be no assurance that future inflation would not havean adverse impact on our operating results and financial condition.

 

Our operatingrevenues are generally lower in the first calendar quarter and generally higherin the fourth 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 revenuesare derived principally from local and national advertising, politicaladvertising in an election year and, to a lesser extent, from networkcompensation for the broadcast of programming and revenues from studio rentaland commercial production activities. The primary operating expenses involved in owning and operatingtelevision stations are employee salaries, depreciation and amortization,programming, advertising and promotion. Amounts referred to in the following discussion have been rounded to thenearest thousand.

 

***Critical Accounting Polices***

 

We prepare ourconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States, 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.

 

Informationwith respect to our critical accounting policies which we believe could affectour reported results require subjective judgments by management is contained inItem 7, Management’s Discussion and Analysis of Financial Condition and Resultof Operations, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2004. We believe that as of March 31, 2005, the following is theonly material change to this information.

 

*Consolidation of Variable Interest Entities*

 

Our financial statements include the accounts ofindependently-owned Malara Broadcast Group where it has been determined thatthe Company is the primary beneficiary of a variable interest entity (“VIE”) inaccordance with FASB Interpretation 46, as revised in December 2003,Interpretation 46(R). Under U.S. GAAP a company must consolidate an entity whenit has a “controlling financial interest” resulting from ownership of amajority of the entity’s voting rights. Interpretation 46(R) expands thedefinition of controlling 

 

18

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financialinterest to include factors other than equity 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 we receive a majority of the entities 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 circumstances change.

 

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.

** **

**RESULTSOF OPERATIONS**

** **

*Three Months Ended March 31, 2005 and 2004*

 

***Consolidated***

 

Set forthbelow are significant factors that contributed to the Company’s operatingresults for the three months ended March 31, 2005 and 2004, respectively.

 
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **2005**                         | ** ** | **2004** | ** ** | **% Change** | ** ** |
|                 |       |                             |       |   |   |   |   |
| Local/Regional       |       | $                                | 16,309,000 |   | $ | 15,151,000 |   | 7.6 | % |
| National             |       | 11,632,000                       |       | 12,408,000 |   | (6.3 | )% |
| Network Compensation |       | 794,000                          |       | 798,000 |   | (0.6 | )% |
| Political            |       | 249,000                          |       | 1,268,000 |   | (80.4 | )% |
| Other                |       | 1,154,000                        |       | 1,045,000 |   | 10.3 | % |
| Gross Revenue        |       | 30,138,000                       |       | 30,670,000 |   | (1.7 | )% |
| Agency Commissions   |       | 4,401,000                        |       | 4,669,000 |   | (5.8 | )% |
| Net Revenue          |       | $                                | 25,737,000 |   | $ | 26,001,000 |   | (1 | )% |

 

Net revenuesconsist primarily 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 revenuedecreased $264,000 or 1% to $25,737,000 for the three months ended March 31,2005, from $26,001,000 for the three months ended March 31, 2004.  The decrease was primarily due to decreasesin political advertising revenue during a non-presidential election year of$1,019,000 or 80% and non-political national revenue of $776,000 or 6%. Thesedecreases were offset by healthy increase in non-political local revenues of$1,158,000 or 8%. The non-political local revenue increase was primarily due tothe growth in the instructional schools, paid programming, financial services,insurance and competitive media categories. The non-political national revenuedecrease was primarily due to declines in the movie, telecommunications,utilities and financial services categories. Malara Broadcast Group’s net revenues totaled $ 517,000 or 2% of thetotal net revenues as of March 31, 2005.

 

Directoperating expenses, consisting primarily of programming, news and engineeringdecreased $688,000 or 5% to $12,313,000 for the three months ended March 31,2005 from $13,001,000 for the same period in 2004. The decrease was primarily dueto decreases in compensation expense and amortization of film contract rightsas a result from write-downs taken in 2004 of certain film contract rights atour WB affiliates. Selling, general and administrative expenses increased$745,000 or 9% to $8,835,000 for the three months ended March 31, 2005 from$8,090,000 for the same period in 2004. The increase was primarily due tohigher expenses in professional fees, group health insurance and arestructuring charge at KBJR-TV resulting from the acquisition andconsolidation of KDLH-TV in March 2005. Malara Broadcast Group’s directoperating expenses and selling, general and administrative expenses totaled$190,000 of the total station expenses, after elimination of expenses relatingto various local service agreements between us and Malara Broadcast Group.

 

19

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***Big Three Affiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED BIG THREE AFFILIATES**

(dollars in thousands)

 
| ** **           | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------|------------|------------|------------|----------|------------|
| ** **           | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|                 |       |       |       |     |       |   |   |   |   |
| Local/Regional       |       | $          | 11,238     |     | 54.0       | % | $ | 9,982 |   | 48.1 | % |
| National             |       | 7,586      |       | 36.4     | %          | 7,818 |   | 37.7 | % |
| Network Compensation |       | 794        |       | 3.8      | %          | 798 |   | 3.8 | % |
| Political            |       | 241        |       | 1.2      | %          | 1,257 |   | 6.1 | % |
| Other                |       | 949        |       | 4.6      | %          | 886 |   | 4.3 | % |
| Gross Revenue        |       | 20,808     |       | 100      | %          | 20,741 |   | 100.0 | % |
| Agency Commissions   |       | 2,987      |       |     |       | 3,068 |   |   |   |
| Net Revenue          |       | $          | 17,821     |     |       |   | $ | 17,673 |   |   |   |

 

Net revenue atour Big Three affiliates increased $148,000 or 1% to $17,821,000 from$17,673,000. The increase in net revenue was primarily due to increases innon-political local revenues of $1,256,000 offset in part by decreases inpolitical advertising of $1,016,000 and non-political national revenues of$232,000.  The non-political localrevenue increase was primarily due to the growth in the paid programming,financial services, insurance, competitive media and games/lotteriescategories. The non-political national revenue decrease was primarily due todeclines in the movie, financial services, pharmaceutical and utilitiescategories. The Big Three affiliates contributed 69% to net revenue during thequarter. Malara Broadcast Group contributed net revenues of $517,000 to thetotal Big Three net revenues.

 

Directoperating expenses at our Big Three affiliates, consisting primarily ofprogramming, news and engineering increased $196,000 or 2% to $8,481,000 forthe three months ended March 31, 2005 from $8,285,000 for the same period in2004. The increase was primarily due to the costs associated with the additionof two new stations to our consolidated results, WISE-TV and KDLH-TV during thethree months ended March 31, 2005. The increase was offset in part by decreasesin compensation expense. Selling, general and administrative expense at our BigThree affiliates increased $434,000 or 8% to $5,665,000 for the three monthsended March 31, 2005 from $5,231,000 for the same period in 2004. The increasewas primarily due to higher expenses in professional fees, group healthinsurance and a restructuring charge at KBJR-TV resulting from the acquisitionand consolidation of KDLH-TV in March 2005. These increases were offset in partby decreases in compensation expense. Malara Broadcast Group’s direct operatingexpenses and selling, general and administrative expenses totaled $190,000 ofthe total station expenses, after elimination of expenses relating to variouslocal service agreements between us and Malara Broadcast Group.

 

***WB Affiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED WB AFFILIATES**

(dollars in thousands)

 
| ** **         | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------|------------|------------|------------|----------|------------|
| ** **         | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
|               |       |       |       |     |       |   |   |   |   |
| Local/Regional     |       | $          | 5,071      |     | 54.4       | % | $ | 5,168 |   | 52.1 | % |
| National           |       | 4,046      |       | 43.3     | %          | 4,590 |   | 46.2 | % |
| Political          |       | 8          |       | 0.1      | %          | 12 |   | 0.1 | % |
| Other              |       | 205        |       | 2.2      | %          | 159 |   | 1.6 | % |
| Gross Revenue      |       | 9,330      |       | 100.0    | %          | 9,929 |   | 100.0 | % |
| Agency Commissions |       | 1,414      |       |     |       | 1,601 |   |   |   |
| Net Revenue        |       | $          | 7,916      |     |       |   | $ | 8,328 |   |   |   |

 

Net revenue at our WBaffiliates decreased $412,000 or 4.9% to $7,916,000 from $8,328,000 dueprimarily to decreases in non-political national revenues of $544,000 andnon-political local revenues of $97,000. The non-political national revenue decreases were primarily due todeclines in the movie, department stores, telecommunications and financialservices categories.  The non-politicallocal revenue decreases were primarily due to declines in the automotive,department stores and competitive media categories. The WB affiliates do notgenerate meaningful political revenue, as they do not broadcast localnews.  The WB affiliates contributed 31%to net revenue during the quarter.

 

20

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Direct operatingexpenses at our WB affiliates, consisting primarily of programming andengineering decreased $884,000 or 19% to $3,832,000 for the three months endedMarch 31, 2005 from $4,716,000 for the same period in 2004. The decrease wasprimarily due to lower amortization of film contract rights due to the effectsof write-downs taken in 2004, and the replacement of expensive, unprofitableprograms with less expensive, profitable programming. There were no film assetwrite-downs during the three months ended March 31, 2005 and 2004. Selling,general and administrative expenses at our WB affiliates increased $311,000 or11% to $3,170,000 for the three months ended March 31, 2005 from $2,859,000 forthe same period in 2004. The increase was primarily due to higher expensesrelated to promotions.

 

***Consolidated***

 

Amortizationexpense increased $158,000 or 8% during the three months ended March 31, 2005as compared to the same period a year earlier. This increase was primarily dueto the incremental amortization expense of two additional television stations,KDLH and WISE, which were acquired in March 2005. Depreciation expenseincreased $66,000 or 4% during the three months ended March 31, 2005 comparedto the same period a year earlier.  Theincrease was primarily due to the incremental depreciation expense of twoadditional television stations, KDLH and WISE, which were acquired in March2005 as well as the result of capital expenditures related to the conversion todigital broadcasting throughout 2004.

 

Corporateexpense totaled $2,698,000; a decrease of $323,000 or 11% compared to$3,021,000 for the three months ended March 31, 2004. The decrease wasprimarily due to planned reduction in compensation and other non-personalrelated expenses. The performance award expense for the three months endedMarch 31, 2005 totaled $320,000; a decrease of $204,000 or 39% compared to$524,000 for the three months ended March 31, 2004. The decrease was primarilydue to the separation of a company executive for which the unvested portion ofthe executive’s performance award expense was accelerated during the thirdquarter of 2004 pursuant to a Separation Agreement dated September 21, 2004.Non-cash compensation expense decreased $208,000 or 69% primarily due to theforfeitures of stock awards granted certain personnel in prior years who are nolonger employed by us as of March 31, 2005.

 

Interestexpense totaled $10,190,000; an increase of $317,000 or 3% compared to$9,873,000 for the three months ended March 31, 2005.  The increase was primarily due to theinterest on Malara Broadcast Group’s Senior Credit Facility.  Interest income totaled $449,000; an increaseof $216,000, or 93% compared to the three months ended March 31, 2004 primarilydue to the increased average cash balance invested during the three monthsended March 31, 2005 as compared to the same period in 2004. Non-cash interestexpense totaled $1,073,000; a decrease of $73,000 or 6% compared to $1,146,000for the three months ended March 31, 2004. The decrease was primarily due to reduced amortization of the discounton the performance award expense which was accelerated in 2004, offset in partby higher imputed interest on our obligation to the WB network under theaffiliation agreements.

 

We recorded as an expense the accrual of dividends on our 12 3/4%Cumulative Exchangeable Preferred Stock totaling $6,387,000 during the threemonths ended March 31, 2005 and 2004, respectively as required by Statement ofFinancial Accounting Standards No.150.

 

During thethree months ended March 31, 2005, we recorded a deferred tax benefit of$179,000, compared to a deferred tax benefit of $2,484,000 for the three monthsended March 31, 2004.  The decline in thetax benefit is primarily due to increasing our valuation allowance against netoperating loss carry forwards, which may not be utilized in future periods.

 

*Restructuring and SeveranceCharges*

 

*Restructuring Charges*

 

During 2004, we recognized a $2,027,000 restructuring charge relatingto employee separations at both our corporate office and our Buffalo, New Yorktelevision station.  Of the total$2,027,000, approximately $1,406,000 related to severance and other benefits,associated with the departure of Stuart J. Beck (see Note 4, Related Parties)and administrative support staff at the corporate office which is being paidover an eighteen month period from date of separation, September 21, 2004.The remaining $621,000 restructuring charge includes severance and otherbenefits resulting from a reduction in the workforce at the Buffalo, New Yorktelevision station.

 

In connection with our consolidation ofMalara Broadcast Group (and its acquisition of KDLH-TV) in March 2005, werecognized a $252,000 restructuring charge related to employee separations,which included severance and other benefits. These charges were not costsdirectly attributable to Malara Broadcast Group’s acquisition of KDLH-TV due tofact that upon Malara’s acquiring of KDLH-TV certain employees were retained byMalara with the remaining employees becoming employees of our KBJR-TV stationand were either retained or subsequently terminated. We anticipate additionalcharges in future periods relating to stay-bonuses awarded to transitionalemployees of KBJR-TV upon separation

 

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At March 31, 2005, the accruals for restructuring activities wereincluded in “other accrued liabilities” on the consolidated Balance Sheets andthe related expense for the charge at the Buffalo, New York television stationand KBJR-TV station are included in “station operating expenses” and therelated expense for the corporate charges are included in “corporate separationagreement expenses” on the consolidated Statement of Operations.  These costs were recognized in accordancewith the provisions of Statement of Financial Accounting StandardsNo. 146, *Accounting for Costs Associated with Exit orDisposal Activities*.

 

*Acquisition Charges*

 

In connection with our acquisition of WISE-TVin March 2005, we accrued $590,000 related to employee separations, whichincluded severance and other benefits as part of our purchase accounting. Theseaccrued costs were a result of employees not retained by us subsequent to theacquisition of WISE-TV, which included line through management employees. We anticipateadditional charges in future periods, in the form of restructuring charges,relating to stay-bonuses awarded to transitional employees of WISE uponseparation.

 

At March 31, 2005, the accruals for acquisition activities of WISE-TVwere included in “other accrued liabilities” on the consolidated BalanceSheets. These charges were recognized in accordance with the provisions ofEmerging Issues Task Force Issue No. 95-3 *Recognition of Liabilitiesin Connection with a Purchase Business Combination*.

 

The following is a reconciliation of theaggregate liability recorded for restructuring and acquisition charges as ofMarch 31, 2005:

 
| ** **        | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **Three Months Ended March 31, 2005**                                                         | ** ** |
| ** **        | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **March 31, 2005** | ** ** |
|              |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New York |       | $                                                                                             | 250,000    |   | $ | — |   | $ | 119,000 |   | $ | 131,000 |   |
| KBJR-TV           |       | —                                                                                        |       | 252,000 |   | 148,000 |   | 104,000 |   |
| WISE-TV           |       | —                                                                                        |       | 590,000 |   | 365,000 |   | 225,000 |   |
| Corporate         |       | 1,214,000                                                                                     |       | — |   | 332,000 |   | 882,000 |   |
|              |       |                                                                                          |       |   |   |   |   |   |   |
| Total             |       | $                                                                                             | 1,464,000  |   | $ | 842,000 |   | $ | 964,000 |   | $ | 1,342,000 |   |

 

The liabilityfor the restructuring and acquisition charges will be paid in accordance withthe provisions of the severance agreements and payments are expected to becompleted at various times through March 2006.

 

**Recent Developments**

 

OnMarch 7, 2005, we completed the sale of WPTA-TV, the ABC affiliate servingFort Wayne, Indiana (“WPTA-TV”), to a subsidiary of Malara Broadcast Group forapproximately $45.4 million, pursuant to the terms and conditions of an assetpurchase agreement, dated April 23, 2004.  In addition, onMarch 8, 2005, we completed the purchase of WISE-TV, the NBC affiliateserving Fort Wayne, Indiana, from New Vision Group, LLC (“New Vision Television”)for approximately $43.5 million, pursuant to the terms and conditions of astock purchase agreement, dated April 23, 2004.

 

In addition, asubsidiary of Malara Broadcast Group on March 8, 2005, acquired CBSaffiliate KDLH-TV, Duluth, Minnesota-Superior, Wisconsin (“KDLH-TV”) from NewVision Television for approximately $9.5 million, pursuant to the terms andconditions of an asset purchase agreement, dated April 23, 2004. Wecurrently own and operate KBJR-TV, the NBC affiliate serving Duluth-Superior.

 

OnMarch 8, 2005, we entered into a strategic arrangement with MalaraBroadcast Group, under which we provide advertising sales, promotion andadministrative services, and selected programming to Malara BroadcastGroup-owned stations WPTA-TV and KDLH-TV in return for certain fees that willbe paid by Malara Broadcast Group to us.  The fees payable to us will bepaid after current debt service as well as certain other expenses MalaraBroadcast Group incurs directly are satisfied. 

 

MalaraBroadcast Group financed its acquisition of WPTA-TV and KDLH-TV with theproceeds of borrowings pursuant to the Malara Broadcast Group Senior CreditFacility.  The Malara Broadcast Group Senior Credit Facility provides fortwo term 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 aletter of credit.  To secure the reimbursement obligation in the event ofa draw on the letter of credit, we pledged $25 million of

 

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U.S. Government Securitieswhich are restricted and not available for working capital or any otherpurposes.  To the****extent thatprincipal payments are made on the Term Loan A, the letter of credit shall beproportionately reduced and we shall be permitted to proportionately reduce theamount 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 us.

 

**Liquidity and Capital Resources**

 

As of May 9,2005, we had approximately $37,191,000 of cash, cash equivalents and marketablesecurities on hand, which excludes $24,997,500 in U.S. Government Securitieswhich is pledged to support the reimbursement obligations in the event of adraw on the letter of credit that serves as collateral for the Term Loan Aunder Malara Broadcast Group’s Senior Credit Facility, which is described belowand is restricted 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 U.S.Government Securities pledged against the letter of credit.  At March 31, 2005, the restricted U.S.Government Securities totaled $24,997,500. Absent changes to our capitalstructure and station ownership, we will not have enough liquidity to serviceour existing obligations over the next twelve months.  In order to improve our existing liquidityposition, we are currently exploring the sale of assets and the raising ofadditional capital. However, under our Indenture, our use of the net proceedsfrom the sale of assets is restricted. Of the net proceeds received in an asset sale, $5 million may be usedfor working capital purposes 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 Notes lessany such net proceeds used to acquire qualifying Replacement Assets or to makea Permitted Business Acquisition.

 

Assuming weare successful in selling assets and raising additional capital, we believethat the available proceeds together with the cash, cash equivalents andmarketable securities on hand and internally generated funds from operationswill be sufficient to satisfy our cash requirements for our existing operationsfor the next twelve months.  There can beno assurance that we will be successful in selling assets and raisingadditional capital and a lack of liquidity would have a material adverse effecton our business strategy and therefore affect our ability to continue as agoing concern. The 2005 quarterly financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

We haveestablished an investment policy for investing cash that is not immediatelyrequired for working capital purposes. Our investment objectives are to preserve capital, maximize our returnon investment and to ensure we have appropriate liquidity for our cash needs.The investments are considered to be available-for-sale as defined underStatement of Financial Accounting Standards No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*. As of March31, 2005, we had approximately $37,952,000 of cash and cash equivalents (whichexcludes $24,997,500 of restricted U.S. Government Securities cash equivalents)and $2,502,000 of marketable securities. The marketable securities, whichinclude direct obligations of the U.S. Government, domestic commercial paperand domestic certificates of deposits, have maturities of one year or less andhave active markets to ensure portfolio liquidity.

 

***The Company’s 9 3/4 % Senior Secured Notes***

 

OnDecember 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 proceeds to us of $400,067,100. Interest on the Notes is payable on December 1 and June 1 ofeach year, which commenced on June 1, 2004.  We used the net proceeds from the offering inpart to (i) repay all outstanding borrowings, plus accrued interest, underour 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 andDecember 2005, respectively, and (iii) to repurchase at par, plusaccrued interest, all of our 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 areour senior secured obligations. The Notes are guaranteed by each of ourdomestic restricted subsidiaries. The 

 

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Notes and the guarantees aresecured by substantially all of our assets. We may redeem some or all of the Notes at any time on or afterDecember 1, 2006. We may also redeem up to 35% of the aggregate principalamount of the Notes using the proceeds of one or more equity offerings on orbefore December 1, 2005.

 

The Indenture,which governs our Notes, restricts our ability and the ability of ourrestricted 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 restrictour restricted subsidiaries from making payments to us; (vi) merge,consolidate or sell substantially all of our assets; (vii) limit theability of our subsidiaries to issue preferred stock; (viii) sell oracquire assets; and (ix) enter into new lines of business.

 

Under theIndenture, the Malara Broadcast Group companies to which we 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.

 

***Malara Broadcast Group’s Senior Credit Facility***

 

MalaraBroadcast Group financed its acquisition of WPTA-TV and KDLH-TV inMarch 2005 with the proceeds of the Malara Broadcast Group Senior CreditFacility, consisting of two terms loans totaling $48.5 million and a revolvingloan of $5 million. The $23.5 million Malara Broadcast Group Term Loan A issecured by a letter of credit. To secure the reimbursement obligations in theevent of a draw on the letter of credit, pursuant to the terms and conditionsof an Application and Agreement for Standby Letter of Credit, we pledged $25million of U.S. Government Securities. The $25 million Malara Broadcast Group Term Loan B and the $5 millionrevolving loan are secured by the assets of WPTA-TV and KDLH-TV, and guaranteedon an unsecured basis by Granite Broadcasting Corporation 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.

 

Interest ratesassociated with 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 EffectiveRate plus 0.50% (the “Base Rate”) or (ii) the Adjusted Eurodollar Rateplus 0.60% per annum, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  Interest ratesassociated with the Term Loan B and Revolving Loan are based, at MalaraBroadcast Group’s option, at 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.

 

MalaraBroadcast Group is required to make monthly principal payments on the Term LoanB as follows: (i) $125,000 payable at the end of each month fromJune 1, 2006 through March 31, 2007, (ii) $158,333.33 payable atthe end of each month 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.

MalaraBroadcast Group is required to make monthly principal payments on the Term LoanA and the Revolving Loan equal to the product of (i) the RepaymentPercentage (which is 25% unless there is an Event of Default or theConsolidated Loan to Stick Value is less than 70%, in which case the RepaymentPercentage is 100%) and (ii) the Consolidated Excess Free Cash Flow forthe month preceding the month in which such installment is due, as such termsare defined in the Malara Broadcast Group Senior Credit Facility.

 

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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.

 

***The Company’s 12 3/4 % CumulativeExchangeable Preferred Stock***

 

Under theterms of the Certificate of Designations for our 12 3/4 % CumulativeExchangeable Preferred Stock (the “Preferred Stock”), we were required to makethe semi-annual dividends on such shares in cash beginning October 1,2002.  The cash payment of dividends hadbeen restricted by the terms of our previous senior credit agreement andindentures and 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.  Since three or more semi-annual dividend paymentshave not been paid, the holders of the Preferred Stock have the right to electthe lesser of two directors or that number of directors constituting 25% of themembers of the Board of Directors.  Theright of the holders of the Preferred Stock to elect members of the Board ofDirectors as set forth above will continue until such time as all accumulateddividends that are required to be paid in cash and that are in arrears on thePreferred Stock are paid in full in cash. We are restricted from paying cash dividends under the Indenture, whichgoverns our Notes, and do not anticipate paying cash dividends on our PreferredStock in the foreseeable future.

 

***Film Payments***

 

As part of anoverall effort to reduce station operating expenses, we have made substantialprogress replacing unprofitable programming with competitive, profitableprogramming.

 

Film paymentsat our WB affiliates for the three months ended March 31, 2005 and 2004 totaled$4.2 million and $4.9 million, respectively. Film payments for the year endedDecember 31, 2005 will approximate $16.5 million as compare to $18.8 millionfor the year ended December 31, 2004. Based on completed negotiations for thepurchase of programming and our continued focus on contracting for competitive,but less expensive programming, we expect annual film payments at the WBaffiliates to decline by approximately 50% by 2007 from our 2003 levels.

 

Film paymentsat our Big Three affiliates for the three months ended March 31, 2005 and 2004totaled $1.5 million and $1.3 million, respectively. Film payments for the yearended December 31, 2005 will approximate $6.3 million as compare to $5.3million at December 31, 2004. The increase in film payments at our Big Threeaffiliates is related to the two additional television stations, WISE-TV, whichwe acquired in March 2005 and KDLH-TV, which was acquired by Malara BroadcastGroup in March 2005. Based on completed negotiations and current marketconditions for the purchase of programming, we expect annual film payments atthe Big Three affiliates to continue to decline.

 

Net cashprovided by operating activities was $3,482,000 during the three months endedMarch 31, 2005 compared to net cash used in operating activities of $382,000during the three months ended March 31, 2004. The change in 2005 from 2004 was primarily due to the changes in netassets.

 

Net cash used in investing activities was $77,647,000during the three months ended March 31, 2005 compared to $10,019,000 during thethree months ended March 31, 2004.  Thechange in 2005 from 2004 was primarily due to the acquisition of assets and thepurchase of U.S. Government Securities during March 2005, offset by a reductionin capital expenditures due to the completion of our conversion to digitaltechnology.

 

Net cashprovided by financing activities was $51,258,000 during the three months endedMarch 31, 2005 compared to net cash used in financing activities of $43,000during the three months ended March 31, 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.

 

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***No Off-Balance Sheet Arrangements***

 

At March 31, 2005 and 2004 we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or variable interest entities, which wouldhave been established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. All of our arrangements withMalara Broadcast Group are on-balance sheet arrangements.

 

***Capital and Commercial Commitments***

 

The followingtable and discussion reflect our significant contractual obligations and othercommercial commitments as of March  31, 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                                                  |       | 233,634,000               |          | 39,487,000 |   | 78,975,000 |   | 78,975,000 |   | 36,197,000 |   |
| Malara Broadcast Group Senior Credit  Facility (b)                                |       | 53,500,000                |          | 489,000 |   | 3,960,000 |   | 6,689,000 |   | 42,362,000 |   |
| Interest on Senior Credit Facility (c)                                            |       | 21,802,000                |          | 3,294,000 |   | 7,659,000 |   | 6,503,000 |   | 4,346,000 |   |
| Program contract commitments - current                                            |       | 37,497,000                |          | 19,374,000 |   | 15,523,000 |   | 2,600,000 |   | — |   |
| Program contract commitments – future                                        |       | 42,763,000                |          | 1,487,000 |   | 13,843,000 |   | 17,278,000 |   | 10,155,000 |   |
| WB Affiliation                                                                    |       | 6,735,000                 |          | 1,892,000 |   | 4,843,000 |   | — |   | — |   |
| Operating leases                                                                  |       | 13,475,000                |          | 1,405,000 |   | 3,083,000 |   | 3,150,000 |   | 5,837,000 |   |
| 12 3/4% Cumulative Exchangeable Preferred  Stock, including accrued dividends (a) |       | 377,670,000               |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring and severance                                                       |       | 1,342,000                 |          | 1,150,000 |   | 192,000 |   | — |   | — |   |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| Total capital and commercial commitments                                          |       | $                         | 1,193,418,000 |   | $ | 68,578,000 |   | $ | 128,078,000 |   | $ | 492,865,000 |   | $ | 503,897,000 |   |

 

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(a)   Asof March 31, 2005, the Cumulative Exchangeable Preferred Stock, includingaccrued dividends totaled $275,568,000. The table above includes the balance asof March 31, 2005 and the expected accrued dividends through April 2009,the date of redemption. Payment of cash dividends are restricted by the termsof the Indenture, which governs our existing Senior Secured Notes.

(b)   Theamounts are the Company’s estimates of required cash payments under the MalaraSenior Credit Facility. The Malara Senior Credit Facility consists of arevolver and two term loans. The required amortization under the revolver andone of the term loans is calculated based upon Malara’s station performance;therefore, actual required amortization may vary from our estimates above. Theremaining term loan has a fixed amortization schedule, and such amounts areincluded above.

(c)   Theamounts are the Company’s estimates of required interest payments under theMalara Senior Credit Facility. The actual interest payments may vary based uponthe actual required amortization payments of the Senior Credit Facility (see(b) above).

 

*Recent Accounting Pronouncements*

 

In December 2004, FASB issued Statement of Financial AccountingStandards No. 123(R), *Share-Based Payment*,or Statement 123(R). Statement 123(R) addresses the accounting for share-basedpayment transactions in which an enterprise receives employee services inexchange for (a) equity instruments of the enterprise or(b) 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) is effective for public companies that do not file assmall business issuers as of the beginning of the first annual reporting periodthat begins after June 15, 2005. All public companies must use either themodified prospective or modified retrospective transition method. Earlyadoption of Statement 123(R) for interim or annual periods for which financialstatements or interim reports have not been issued is encouraged but notrequired. We have not fully evaluated the impact, if any, of adopting thispronouncement which must be adopted in the first quarter of 2006, but webelieve that the adoption of this Statement will not have a significantaccounting impact.

 

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***Item 3******. Quantitative and Qualitative Disclosures about Market Risk***

 

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

 

Interest rates associated with Malara Broadcast Group’s March 8,2005, 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 Malara Broadcast Group’s March 8, 2005, Term Loan B andRevolving Loan are based, at Malara Broadcast Group’s option, at either(i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Term Loan B and Revolving Loan at a rate of 3% per annum.  As of March 31, 2005, the six-monthAdjusted Eurodollar Rate was 3.21%. Malara Broadcast Group has not entered into any agreements to hedge therisk of potential interest rate increases. Based on borrowings outstanding as of March 31, 2005, a 2% increasein the Adjusted Eurodollar Rate would increase interest expense on an annualbasis by approximately $1,070,000.

 

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

 

As of March31, 2005, an evaluation was carried out under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rule 13a-14(c) underthe Securities Exchange Act of 1934). Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were effective as ofMarch 31, 2005.  There was no change inour internal control over financial reporting (as defined in Rules 13a-15(f)under the Exchange Act) that occurred during the period covered by thisQuarterly Report on Form 10-Q that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

 

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

 

None

 

***Item 5.  Other Information***

 

None

 

***Item 6.******   Exhibits***

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1(a)          |       | Credit  Agreement, dated as of March 8, 2005, by and among Malara Broadcast Group  Inc., as Parent Guarantor, Malara Broadcast Group of Duluth LLC, Malara  Broadcast Group of Duluth Licensee LLC, Malara Broadcast Group of Fort Wayne  LLC, Malara Broadcast Group of Fort Wayne Licensee LLC, as Borrowers, the  lenders listed therein, as Lenders, D.B. Zwirn Special Opportunities Fund,  L.P., as Administrative Agent, Dresdner Bank AG New York and Grand Cayman Branches,  as Syndication Agent, and D. B. Zwirn Special Opportunities Fund, L.P., as  Arranger (incorporated by reference to Exhibit 4.1 to the Company’s Current  Report on Form 8-K filed on March 11, 2005)                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2             |       | First  Supplemental Indenture, dated as of March 9, 2005, by and among Granite  Broadcasting Corporation, the guarantors party thereto and The Bank of New  York, as Trustee, supplementing that certain Indenture, dated as of December  22, 2003, relating to the Company’s $405,000,000 Principal Amount 9 3/4%  Senior Secured Notes due December 1, 2010 (incorporated by reference to  Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on March 11,  2005)                                                                                                                                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.1            |       | Guaranty,  dated as of March 8, 2005, by Granite Broadcasting Corporation, in favor of and  for the benefit of D.B. Zwirn Special Opportunities Fund, L.P., as agent for  and representative of (“Guarantied Party”) the financial institutions  (“Lenders”) party to that certain Credit Agreement dated as of March 8, 2005,  by and among Malara Broadcast Group, Inc., Malara Broadcast Group of Duluth  LLC, Malara Broadcast Group of Duluth Licensee LLC, Malara Broadcast Group of  Fort Wayne LLC, Malara Broadcast Group of Fort Wayne Licensee LLC, Dresdner  Bank AG New York and Grand Cayman Branches, as Syndication Agent, Guarantied  Party and Lenders (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed on March 11, 2005) |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.2            |       | Network  Affiliation Agreement (WISE) (incorporated by reference to Exhibit 10.18 to  the Company’s Annual Report on Form 10-K for the fiscal year ended December  31, 2004, filed on March 31, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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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(a)           Neither the Company nor any of itssubsidiaries is party to this agreement; however, because it is anticipatedthat the results of Malara Broadcast Group Inc., Malara Broadcast Group ofDuluth LLC, Malara Broadcast Group of Duluth Licensee LLC, Malara BroadcastGroup of Fort Wayne LLC and Malara Broadcast Group of Fort Wayne Licensee LLCwill be consolidated with the results of the Company for financial reportingpurposes, this agreement of these entities is filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15 (d) of the Securities Exchange Act of 1934, the Registrant has caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   |         | GRANITE  BROADCASTING CORPORATION |                                                 |
|--------|--------------|-----------------------------------|------------------------------------------------------|
|   |         | Registrant                        |                                                 |
|   |         |                              |                                                 |
|   |         |                              |                                                 |
| Date:  | May 12, 2005 | /s/                               | W. DON CORNWELL                                      |   |
|   |         |                              | (W. Don Cornwell)                                    |   |
|   |         |                              | Chief Executive Officer                              |   |
|   |         |                              |                                                 |
|   |         |                              |                                                 |
| Date:  | May 12, 2005 | /s/                               | LAWRENCE I. WILLS                                    |   |
|   |         |                              | (Lawrence I. Wills)                                  |   |
|   |         |                              | Senior Vice President – Chief Financial Officer |   |
|   |         |                              | (Principal Financial Officer)                        |   |

 

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