**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**ý****        QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2006**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from                    to                     **

 

**Commission File Number 0-19728**

 

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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 zip code, and telephonenumber,including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed allreports 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 90days.  Yes   ý   No   o

 

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

| (Check one): |   | Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|--------------|--------|---------------------------|--------|---------------------|--------|------------------------------|

 

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

 

(APPLICABLE ONLY TO CORPORATE ISSUERS:)

 

As of May 10, 2006, the Registrant had 98,250 shares of Class A VotingCommon Stock, par value $.01 per share outstanding; and 19,657,996 shares of CommonStock (Nonvoting), par value $.01 per share outstanding.

 

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** **

**DOCUMENTS INCORPORATED BY REFERENCE:  None**

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
| PART I     | FINANCIAL INFORMATION                                                                                 | 3      |
|------------|-------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                  |   |
| Item 1.    | Financial Statements                                                                                  | 3      |
|       | Consolidated Balance Sheets as of March 31,  2006 (unaudited) and December 31, 2005                   | 3      |
|       | Consolidated Statements of Operations for  the Three Months Ended March 31, 2006 and 2005 (unaudited) | 4      |
|       | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2006 and 2005 (unaudited) | 5      |
|       | Notes to Consolidated Financial Statements                                                            | 6      |
|       |                                                                                                  |   |
| Item 2.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations           | 23     |
| Item 3.    | Quantitative and Qualitative Disclosures  About Market Risk                                           | 33     |
| Item 4.    | Controls and Procedures                                                                               | 33     |
|       |                                                                                                  |   |
| PART II    | OTHER INFORMATION                                                                                     | 34     |
|       |                                                                                                  |   |
| Item 1A.   | Risk Factors                                                                                          | 34     |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                                  | 34     |
| Item 5.    | Other Information                                                                                     | 34     |
| Item 6.    | Exhibits                                                                                              | 34     |
|       |                                                                                                  |   |
| SIGNATURES | 35                                                                                                    |

 

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

 

As ofMarch 8, 2005, we have shared services agreements and advertisingrepresentation agreements (which we generally refer to as local serviceagreements) relating to the two television stations owned by Malara BroadcastGroup, but do not own any of the equity interests in Malara Broadcast Group. Fora description of the relationship between us and Malara Broadcast Group, seeItem 2. “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Executive Summary.”

 

As of September 1,2005, we have local service agreements relating to one television station ownedby Four Seasons Broadcast Company, but do not own any of the equity interestsin Four Seasons Broadcast Company. For a description of the relationshipbetween us and Four Seasons Broadcast Company, see Item 2. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Executive Summary.”

 

1

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Any statements that are included or incorporated by reference in thisreport or that are otherwise attributable to us or persons acting on ourbehalf, other than statements of historical fact, which address activities,events or developments that we expect or anticipate will or may occur in thefuture, including, without limitation, statements regarding expected financialperformance; future capital expenditures; projected revenue growth or synergiesresulting from acquisitions and other transactions; anticipated completion ofsales of assets under contracts of sale; efforts to control or reduce costs;contingent liabilities; development or purchase of new programming; financingand restructuring efforts; expected competition; use of digital spectrum; ourability to service our outstanding debt; and business strategy, are “forward-lookingstatements”—that is, statements related to future, not past, events that aresubject to risks and uncertainties. These forward-looking statements generallycan be identified as statements that include phrases such as “believe”, “project”,“target”, “predict”, “estimate”, “forecast”, “strategy”, “may”, “goal”, “expect”,“anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or othersimilar words or phrases.  Although we believe such statements are basedon reasonable assumptions, actual outcomes and results may differ materiallyfrom those projected.  Accordingly, all forward-looking statements shouldbe evaluated with the understanding of their inherent uncertainty. Important factors that could cause actual results to differ materially from ourexpectations include, but are not limited to, those factors described underItem 1A. “Risk Factors” of our Annual Report on Form 10-K for the year endedDecember 31, 2005, filed with the Securities and Exchange Commission. Weundertake no obligation to update forward-looking statements, whether as aresult of new information, future developments or otherwise, and disclaim anyobligation to do so.

 

2

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**PART I.FINANCIAL INFORMATION**

 

***Item 1.   Financial Statements***

** **

##### **GRANITEBROADCASTING CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2006**           | ** **  | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **(Unaudited)**    | ** **  | ** **            | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                     |       |               |        |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                            |       |               |        |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                  |       | $                  | 11,176,884  |                  | $          | 8,629,044 |   |
| Restricted cash equivalents                                                                                                                                                                                                                                                                                                                                                |       | —             |        | 24,997,500            |       |
| Accounts receivable, less allowance for  doubtful accounts ($485,115 at March 31, 2006 and $632,156 at December 31,  2005)                                                                                                                                                                                                                                                 |       | 20,300,326         |        | 22,388,546            |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                       |       | 1,861,537          |        | 2,835,827             |       |
| Other current assets                                                                                                                                                                                                                                                                                                                                                       |       | 6,431,328          |        | 6,361,111             |       |
| Assets held for sale                                                                                                                                                                                                                                                                                                                                                       |       | 114,519,400        |        | 116,183,354           |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                       |       | 154,289,475        |        | 181,395,382           |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Property and equipment, net                                                                                                                                                                                                                                                                                                                                                |       | 40,895,463         |        | 41,691,267            |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                       |       | 404,863            |        | 76,562                |       |
| Other non current assets                                                                                                                                                                                                                                                                                                                                                   |       | 787,535            |        | 734,975               |       |
| Deferred financing fees, less accumulated  amortization ($5,624,157 at March 31, 2006 and $4,334,405 at December 31,  2005)                                                                                                                                                                                                                                                |       | 10,467,445         |        | 11,757,197            |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                   |       | 59,823,637         |        | 60,320,347            |       |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                                    |       | 44,686,292         |        | 44,686,292            |       |
| Network affiliations, net                                                                                                                                                                                                                                                                                                                                                  |       | 64,421,210         |        | 65,174,688            |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                               |       | $                  | 375,775,920 |                  | $          | 405,836,710 |   |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                                 |       |               |        |                  |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                           |       | $                  | 493,654     |                  | $          | 1,352,131 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                           |       | 13,162,500         |        | 3,290,625             |       |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                  |       | 4,265,395          |        | 7,188,091             |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                               |       | 2,570,587          |        | 3,658,253             |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                          |       | 3,162,000          |        | 25,844,000            |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                                  |       | 8,650,817          |        | 6,026,247             |       |
| Liabilities held for sale                                                                                                                                                                                                                                                                                                                                                  |       | 34,346,438         |        | 36,930,893            |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                  |       | 66,651,391         |        | 84,290,240            |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| Long-term debt, less current portion                                                                                                                                                                                                                                                                                                                                       |       | 428,271,285        |        | 428,871,456           |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                               |       | 553,215            |        | 188,727               |       |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                     |       | 21,267,015         |        | 21,560,807            |       |
| Redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                 |       | 199,279,956        |        | 199,191,138           |       |
| Accrued dividends on redeemable preferred  stock                                                                                                                                                                                                                                                                                                                           |       | 102,191,378        |        | 95,804,417            |       |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                              |       | 4,226,894          |        | 7,008,694             |       |
|                                                                                                                                                                                                                                                                                                                                                                       |       |               |        |                  |       |
| 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 19,657,996 shares of Common Stock (Nonvoting)  (19,480,142 shares at December 31, 2005) issued and outstanding at March  31, 2006. |       | 197,561            |        | 195,783               |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                 |       | 423,927            |        | 393,701               |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                        |       | (446,411,027       | )           | (430,792,098          | )          |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                                      |       | —             |        | (480                  | )          |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                    |       | (875,675           | )           | (875,675              | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                           |       | (446,665,214       | )           | (431,078,769          | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                           |       | $                  | 375,775,920 |                  | $          | 405,836,710 |   |

 

See accompanying notes.

 

3

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

 
| ** **                                                                                                                  | ** ** | **Three Months Ended March 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                                                                  | ** ** | **2006**                                             | ** **  | **2005** | ** ** |
|                                                                                                                        |       |                                                 |        |   |   |
| Net revenues                                                                                                                |       | $                                                    | 21,005,820  |   | $ | 17,821,130 |   |
| Operating expenses:                                                                                                         |       |                                                 |        |   |   |
| Direct operating expenses (exclusive of  depreciation and amortization expenses shown separately below)                     |       | 8,692,065                                            |        | 8,480,577 |   |
| Selling, general and administrative  expenses (exclusive of depreciation and amortization expenses shown  separately below) |       | 6,452,292                                            |        | 5,665,333 |   |
| Corporate expense (exclusive of corporate  reorganization expense and depreciation expense shown separately below)          |       | 2,847,802                                            |        | 2,697,899 |   |
| Corporate reorganization expense                                                                                            |       | 219,818                                              |        | — |   |
| Depreciation                                                                                                                |       | 1,696,106                                            |        | 1,463,405 |   |
| Amortization of intangible assets                                                                                           |       | 753,478                                              |        | 718,888 |   |
| Performance award expense                                                                                                   |       | 88,831                                               |        | 319,797 |   |
| Non-cash compensation expense (1)                                                                                           |       | 50,157                                               |        | 94,593 |   |
|                                                                                                                        |       |                                                 |        |   |   |
| Operating income (loss)                                                                                                     |       | 205,271                                              |        | (1,619,362 | ) |
|                                                                                                                        |       |                                                 |        |   |   |
| Other expenses (income):                                                                                                    |       |                                                 |        |   |   |
| Interest expense                                                                                                            |       | 11,077,602                                           |        | 10,190,153 |   |
| Interest income                                                                                                             |       | (317,575                                             | )           | (448,754 | ) |
| Non-cash interest expense                                                                                                   |       | 1,630,481                                            |        | 925,040 |   |
| Non-cash preferred stock dividend                                                                                           |       | 6,386,961                                            |        | 6,386,961 |   |
| Other                                                                                                                       |       | (3,358                                               | )           | 81,706 |   |
|                                                                                                                        |       |                                                 |        |   |   |
| Loss from continuing operations before  income taxes                                                                        |       | (18,568,840                                          | )           | (18,754,468 | ) |
| Benefit for income taxes                                                                                                    |       | (141,579                                             | )           | (178,744 | ) |
|                                                                                                                        |       |                                                 |        |   |   |
| Loss from continuing operations                                                                                             |       | (18,427,261                                          | )           | (18,575,724 | ) |
| Discontinued operations:                                                                                                    |       |                                                 |        |   |   |
| Income (loss) from discontinued operations,  net of taxes                                                                   |       | 2,808,332                                            |        | (918,065 | ) |
|                                                                                                                        |       |                                                 |        |   |   |
| Net loss                                                                                                                    |       | $                                                    | (15,618,929 | ) | $ | (19,493,789 | ) |
|                                                                                                                        |       |                                                 |        |   |   |
| Basic and diluted loss per share from  continuing operations                                                                |       | $                                                    | (0.93       | ) | $ | (0.95 | ) |
| Basic and diluted income (loss) per share  from discontinued operations                                                     |       | 0.14                                                 |        | (0.05 | ) |
| Basic and diluted net loss per share                                                                                        |       | $                                                    | (0.79       | ) | $ | (1.00 | ) |
|                                                                                                                        |       |                                                 |        |   |   |
| Weighted average common shares outstanding                                                                                  |       | 19,694,985                                           |        | 19,501,042 |   |

 

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

 
| Operating expense - Selling, general and  administrative expenses |   | $      | 16,956 |   | $      | 19,903 |   |
|-------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Corporate expense                                                 |   | 33,201 |   | 74,690 |   |
| Non-cash compensation expense                                     |   | $      | 50,157 |   | $      | 94,593 |   |

 

See accompanying notes.

 

4

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

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2006**                                             | ** **  | **2005** | ** ** |
| ** **                                                                       | ** ** | ** **                                           | ** **  | ** ** | ** ** |
| Cash flows from operating activities:                                            |       |                                                 |        |   |   |
| Net loss                                                                         |       | $                                                    | (15,618,929 | ) | $ | (19,493,789 | ) |
|                                                                             |       |                                                 |        |   |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                 |        |   |   |
| Amortization of intangible assets                                                |       | 753,478                                              |        | 2,039,740 |   |
| Depreciation                                                                     |       | 1,696,106                                            |        | 1,828,660 |   |
| Performance award expense                                                        |       | 88,831                                               |        | 319,797 |   |
| Non-cash compensation expense                                                    |       | 50,157                                               |        | 94,593 |   |
| Non-cash interest expense                                                        |       | 1,630,481                                            |        | 1,072,541 |   |
| Non-cash preferred stock dividend                                                |       | 6,386,961                                            |        | 6,386,961 |   |
| Film amortization and impairment                                                 |       | 1,133,537                                            |        | 1,439,393 |   |
| Deferred tax benefit                                                             |       | (141,579                                             | )           | (178,744 | ) |
| Change in assets and liabilities:                                                |       |                                                 |        |   |   |
| Decrease in accounts receivable                                                  |       | 2,088,220                                            |        | 2,971,742 |   |
| Increase in accrued liabilities                                                  |       | 6,766,426                                            |        | 8,502,920 |   |
| Decrease in accounts payable                                                     |       | (1,140,908                                           | )           | (359,704 | ) |
| WB affiliation payment                                                           |       | —                                               |        | (630,857 | ) |
| Decrease in film contract rights and other  assets                               |       | 1,031,174                                            |        | 4,447,069 |   |
| Decrease in film contract rights payable  and other liabilities                  |       | (3,271,769                                           | )           | (4,958,525 | ) |
| Net cash provided by operating activities                                        |       | 1,452,186                                            |        | 3,481,797 |   |
|                                                                             |       |                                                 |        |   |   |
| Cash flows from investing activities:                                            |       |                                                 |        |   |   |
| Sales of marketable securities and other  investments                            |       | —                                               |        | 3,115,062 |   |
| Payment for acquisition of assets                                                |       | —                                               |        | (55,487,780 | ) |
| Sales (purchase) of U.S. Government  Securities                                  |       | 25,315,677                                           |        | (24,997,500 | ) |
| Capital expenditures                                                             |       | (485,262                                             | )           | (276,296 | ) |
| Net cash provided by (used in) investing  activities                             |       | 24,830,415                                           |        | (77,646,514 | ) |
|                                                                             |       |                                                 |        |   |   |
| Cash flows from financing activities:                                            |       |                                                 |        |   |   |
| Proceeds from senior credit facility                                             |       | —                                               |        | 53,500,000 |   |
| Payment of senior credit facility                                                |       | (23,734,761                                          | )           | — |   |
| Payment of deferred financing fees                                               |       | —                                               |        | (2,242,401 | ) |
| Net cash (used in) provided by financing  activities                             |       | (23,734,761                                          | )           | 51,257,599 |   |
|                                                                             |       |                                                 |        |   |   |
| Net increase (decrease) in cash and cash  equivalents                            |       | 2,547,840                                            |        | (22,907,118 | ) |
| Cash and cash equivalents, beginning of  period                                  |       | 8,629,044                                            |        | 60,858,710 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                    | 11,176,884  |   | $ | 37,951,592 |   |
|                                                                             |       |                                                 |        |   |   |
| Supplemental information:                                                        |       |                                                 |        |   |   |
| Cash paid for interest                                                           |       | $                                                    | 973,787     |   | $ | 260,082 |   |
| Cash paid for income taxes                                                       |       | 130,000                                              |        | 19,000 |   |
| Non-cash capital expenditures                                                    |       | 37,533                                               |        | 51,027 |   |

 

See accompanying notes.

 

5

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** **

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

 

**Note 1 – Operations of the Company**

** **

The business operations of Granite Broadcasting Corporation and itswholly owned subsidiaries (the “Company”) consist of eight network affiliatedtelevision stations in the United States, consisting of four NBC-affiliatedtelevision stations, one ABC-affiliated station, one CBS-affiliated televisionstation and two WB Network stations. The Company’s stations are located in NewYork, California, Michigan, Indiana, Illinois and Minnesota. Through variouslocal service agreements (as fully discussed below), the Company providesadvertising sales, promotion, administrative services and selected programmingto two television stations owned by Malara Broadcast Group, Inc (“MalaraBroadcast Group”) and one television station owned by Four Seasons BroadcastCompany.

 

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

 

In September 2005, the Company entered into a strategic arrangementwith Four Seasons Broadcast Company, under which the Company providesadvertising sales, promotion and administrative services, and selectedprogramming to WAOE-TV under local services agreements. The Company does notown Four Seasons Broadcast Company or its television stations, and pursuant toInterpretation 46, the Company is not deemed to be the primary beneficiary ofFour Seasons Broadcast Company and therefore, has not consolidated theirresults with the Company’s.

 

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 Tranche A Loan which was secured by a letter of credit wasrepaid February 10, 2006, as discussed below. To secure the reimbursementobligations in the event of a draw on the letter of credit, pursuant to theterms and conditions of an Application and Agreement for Standby Letter ofCredit, the Company had pledged $25 million of U.S. Government Securities. OnFebruary 10, 2006, the letter of credit issued in March 2005 to support the$23.5 million Tranche A Term Loan was drawn upon in satisfaction of MalaraBroadcast Group’s obligations to such lenders under the Malara Tranche A TermLoan following non-renewal of the letter of credit. The Company paid itsreimbursement obligation to the letter of credit issuer on February 10, 2006,using U.S. government securities which had been pledged in support of suchobligation. The $25 million Malara Broadcast Group Tranche B Term Loan and the$5 million revolving loan are secured by the assets of WPTA-TV and KDLH-TV, andguaranteed on an unsecured basis by the Company.

 

On September 8, 2005, the Company had entered into a definitiveagreement to sell substantially all of the assets of KBWB-TV, the WB affiliateserving the San Francisco, California television market, to AM BroadcastingKBWB, Inc. In addition, on September 8, 2005, the Company had entered into adefinitive agreement to sell substantially all of the assets of WDWB-TV, the WBaffiliate serving the Detroit, Michigan television market, to AM BroadcastingWDWB, Inc.

 

On May 1, 2006, the Company terminated such agreements and entered intonew definitive agreements to sell such assets to different buyers (as describedbelow).

 

The Company has experienced annual operating lossesover the past three years and at March 31, 2006 had unrestricted cash andaccumulated deficit of $11,177,000 and $446,411,000, respectively.

 

An interest payment of $19,744,000 on the Company’s 93/4 % Senior Secured Notes (the “Notes”) is due on June 1, 2006. If payment isnot made within 30 days after June 1, 2006, an “Event of Default” under the Indenture  (the “Indenture”) governing the Notes wouldoccur.

 

6

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On March 13, 2006, the Company retained the services of Houlihan LokeyHoward & Zukin as its financial advisors to assist the Company in the evaluationof strategic options and to advise it on available financing and capitalrestructuring alternatives. At March 31, 2006, the Company recorded $220,000 ofcorporate reorganization expense in connection with reorganization servicesincurred during the period.

 

Absent changes to its capital structure and stationownership mix, the Company will not have enough liquidity to make the June 1,2006 interest payment on its Notes. In order to improve the Company’s existingliquidity position and to further the Company’s business strategy, the Companyhas entered into separate definitive agreements to sell its two WB affiliates(as discussed below) and is reviewing potential restructuring alternatives withrespect to its debt and preferred stock obligations. However, under itsIndenture, the Company’s use of the net proceeds from the sale of assets isrestricted. Of the net asset sale proceeds, $5 million may be used for workingcapital purposes and the remainder must be used either:

 

•                  to make aninvestment in properties and assets that replace the properties and assets thatwere the subject of such asset sale or in properties and assets that will beused in the business of the Company and its Restricted Subsidiaries as existingon the Issue Date or in businesses reasonably related thereto (“ReplacementAssets”) or to finance, directly or indirectly, a Permitted BusinessAcquisition or enter into a definitive agreement to effectuate suchacquisition; provided that (A) the primary purpose of such acquisition of ReplacementAssets or Permitted Business Acquisition is to acquire, and there is acquired,a television station with a Big-4 (ABC, CBS, NBC or Fox) network affiliationagreement in place or the creation (through ownership by the Company and itsRestricted Subsidiaries) of a “duopoly” in a market and (B) that the Companyshall use all reasonable best efforts to promptly dispose of any other assetsacquired in such acquisition or Permitted Business Acquisition (as such termsare defined in the Indenture); or

 

•                  to make an offerto all holders of the Notes to purchase such amount of the Notes less any suchnet proceeds used to acquire qualifying Replacement Assets or to make aPermitted Business Acquisition.

 

The Indenture provides that, prior to delivery of an accelerationnotice following an event of default, the Company is entitled to obtain arelease of the Trustee under the Indenture to use cash, including cash in thecollateral account, to pay operating expenses and to pay interest on the Notes.

 

On May 1, 2006, the Company entered into separate definitive agreementsto sell its two WB affiliates, KBWB-TV serving San Francisco, California andWDWB-TV serving Detroit, Michigan to affiliates of DS Audible, LLC. Theagreements contain covenants by the Company not to compete in the SanFrancisco, California and Detroit, Michigan markets for a period of five years.The consideration to be received by the Company for the sale of the assets ofKBWB-TV is $55,000,000, before closing and other adjustments, which is payablein cash. The consideration to be received by the Company for the sale of theassets of WDWB-TV is $75,000,000, before closing and other adjustments which ispayable in cash. In addition, the consideration for each covenant not tocompete in the San Francisco and Detroit markets is $10 million, respectively.

 

The Company anticipates that it will retainapproximately $25 million of the aggregate proceeds from the transactions to beused for working capital purposes, consisting of $5 million from the asset saleas permitted under the Company’s Indenture and $10 million for each covenantnot to compete. The remaining net proceeds, after closing adjustments, will beused to make investments in property or assets that replace the property andassets that were the subject of such asset sale and/or make an offer to all ofthe holders of the Notes, although pending such use, such proceeds may be usedfor working capital and payment of interest on the Notes, as described above.The Company expects both transactions, which are subject to FCC approval, therestructuring of certain programming obligations and customary closingconditions, to close during the second quarter of 2006. The Company continuesto explore additional capital restructuring alternatives including the raisingof additional capital and changes in its station ownership mix.

 

Assuming the Company is successful in selling KBWB-TV and WDWB-TV,selling additional assets and / or restructuring the company, managementbelieves that the available proceeds together with the cash and cashequivalents on hand and internally generated funds from operations may besufficient to satisfy its cash requirements for its existing operations anddebt service for the next twelve months. However, a lack of liquidity wouldhave a material adverse effect on the Company’s business strategy and thereforeaffect its ability to continue as a going concern and make the June 1, 2006interest payment on its Notes. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmight result from the outcome of this uncertainty.

 

7

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On January 13, 2006, the Company and certain of its subsidiariesentered into a definitive agreement with Television Station Group Holdings, LLCand certain of its subsidiaries to purchase substantially all of the assets ofWBNG-TV, Channel 12, the CBS-affiliated television station serving Binghamtonand Elmira, New York, for $45 million in cash, subject to closing adjustments.(the “WBNG Purchase and Sale Agreement”). Since February 8, 2006, the sellershave had a right to terminate the WBNG Purchase and Sale Agreement because thesales of two stations affiliated with the WB Network were not completed as ofsuch date. However, in conjunction with the payment of an aggregate of $2.25million of deposits made to the sellers by the Company and the execution by theCompany on May 1, 2006 of agreements with affiliates of DS Audible LLCdescribed above, the sellers waived until July 31, 2006 their rights toterminate the WBNG Purchase and Sale Agreement. On March 8, 2006, theapplication seeking consent to assign the WBNG-TV license to the Company’ssubsidiary was granted by the Federal Communications Commission (“FCC”).

 

**Note 2 – Summary ofSignificant Accounting Policies**

** **

*Interim Financial Statements*

 

The accompanying unaudited consolidated financial statements includethe accounts of the Company and have been prepared in accordance with theinstructions to Form 10-Q and do not include all of the information andfootnotes required by United States generally accepted accounting principlesfor complete financial statements. Operating results for the three months endedMarch 31, 2006 are not necessarily indicative of the results that may beexpected for the year ended December 31, 2006. For further information, referto the Company’s consolidated financial statements and notes thereto for theyear ended December 31, 2005, which were included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2005. In the opinion ofmanagement, all adjustments of a normal recurring nature, which are necessaryfor a fair presentation of the results for the interim periods, have been made.

 

*Principles of Consolidation*

 

The accompanying unaudited financial statements include the accounts of Granite BroadcastingCorporation, its wholly owned subsidiaries and the accounts of independently-ownedMalara Broadcast Group where it has been determined that the Company is theprimary beneficiary of a variable interest entity in accordance withInterpretation 46. All intercompany account balances and transactions have beeneliminated in consolidation. Certain prior year amounts have been reclassifiedto conform to the current year presentation.

 

Malara Broadcast Group is included in these consolidated financialstatements because the Company is deemed to be the primary beneficiary ofMalara Broadcast Group as defined by Interpretation 46 as a result of (i) theCompany’s guarantee of the obligations incurred under Malara Broadcast Group’sSenior Secured Credit Facility, (ii) local service agreements the Company haswith Malara Broadcast Group and (iii) put or call option agreements the Companyhas with Malara Broadcast Group to acquire all of the assets and assume theliabilities of each Malara Broadcast Group television station, subject toapproval by the Federal Communications Commission (“FCC”) (see Note 3 forfurther details on the aforementioned).

 

*Discontinued Operations*

 

In accordance with the provisions of Statement of Financial AccountingStandards No. 144 (“Statement 144”), *Accounting for theImpairment or Disposal of Long-Lived Assets,* the operating resultsof KBWB-TV, San Francisco, California and WDWB-TV, Detroit, Michigan are notincluded in our consolidated results from continuing operations for the periodsended March 31, 2006 and 2005 since the asset sale agreements for KBWB-TV, SanFrancisco, California and WDWB-TV, Detroit, Michigan, each meet the criteriafor a qualifying plan of sale. The Company is committed to a plan to sell theseassets, the assets are available for immediate sale, and the Company isactively seeking buyers and marketing these assets and believes that the salesof the assets is probable at prices that are reasonable in relation to theircurrent fair value. The assets and liabilities being disposed of have beenclassified as “held for sale” on the accompanying balance sheets and theiroperations have been recorded as discontinued operations. Discontinuedoperations have not been segregated in the consolidated statement of cash flowsand, therefore, amounts for certain captions will not agree with theaccompanying consolidated balance sheets and statements of operations. Theirfinancial position and results of operations have been reclassified accordinglyfor all periods presented. (See Note 7 for further details.)

 

*Reclassification*

* *

Certain balances in the prior period have been reclassified to conformto the current period’s presentation.

 

*Restricted Cash Equivalents*

 

On February 10, 2006, in accordance with the terms of the MalaraBroadcast Group’s Senior Credit Facility, the letter of credit issued in March2005 (see Note 6) to support the $23.5 million Tranche A Term Loan was drawnupon in satisfaction of Malara Broadcast Group’s obligations to such lendersLoans under the Malara Tranche A Term Loan following non-renewal of the letterof credit. The Company paid its reimbursement obligation to the letter ofcredit issuer on February 10, 2006, using U.S. government securities that hadbeen pledged in support of such obligation.

 

8

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*Cash Equivalents and Investments in MarketableSecurities*

 

All highly liquid investments with a maturity of ninety days or lessfrom the date of purchase are considered cash equivalents. Marketablesecurities, if applicable, 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*.Marketable securities are carried at fair market value based on current marketquotes. Any unrealized gains and losses are reported in stockholders’ equity asa separate component of other comprehensive income / (loss) until realized. Gainsand losses on securities sold are based on the specific identification method.The Company does not hold securities for speculative or trading purposes. AtMarch 31, 2006 the Company did not have any marketable securities.

 

*Property and Equipment*

 

Property and equipment are recorded at cost and depreciated on astraight-line basis over their estimated useful lives, by assetclassifications, ranging from a period of 3 to 40 years. Maintenance andrepairs are charged to operations as incurred.

 

*Stock-Based Compensation*

 

Prior to January 1, 2006, the Company accounted foremployee stock option plans based on the intrinsic value method in accordancewith Accounting Principles Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees*, or APB 25, and relatedInterpretations and had adopted the disclosure requirements of Statement ofFinancial Accounting Standards No.123, *Accounting for Stock-BasedCompensation* or Statement 123 as amended by Statement of FinancialAccounting Standards No.148, *Accounting for Stock-BasedCompensation-Transition and Disclosure.* Accordingly, compensationcost for stock options was measured as the excess, if any, of the quoted marketprice of the Company’s stock at the grant date over the amount an employee mustpay to acquire the stock. The Company granted stock options with exerciseprices equal to the market price of the underlying stock on the date of grant,therefore, the Company did not record stock-based compensation expense underAPB 25.

 

In December 2004, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards No. 123(R), *Share-Based Payments* or Statement 123(R) to require thatcompensation cost relating to share-based payment arrangements be recognized inthe financial statements.

 

Effective January 1, 2006, the Company adoptedStatement 123(R) using the modified prospective method, which requiresmeasurement of compensation cost for all stock-based awards at fair value ondate of grant and recognition of compensation over the service period forawards expected to vest but that are unvested at the date of adoption. Underthis method, previously reported amounts are not restated. The fair value ofstock options were determined using the Black-Scholes valuation model, which isconsistent with our valuation techniques previously utilized for stock optionsin footnote disclosures required under Statement 123. Such fair value isrecognized as expense over the service period, net of estimated forfeitures.The adoption of Statement 123(R) resulted in no cumulative change in accountingas of the date of adoption.

 

The weighted average fair value of options outstandingduring the three months ended March 31, 2006 was $1.39. These options vest overa period of one to three years. The fair value for these options was estimatedat the date of grant using a Black-Scholes option pricing model with thefollowing range of assumptions: risk-free interest rates of 2.93% to 3.19%,volatility factor of the expected market price of the Company’s Common Stock of0.59 – 1.03, assumed dividend yield of 0%, and a weighted-average expected lifeof the option of 5 years.

 

For the three months ended March 31, 2006, stockoption compensation expense of approximately $17,000 was charged to non-cashcompensation expense for unvested options granted prior to December 31, 2005.As of March 31, 2006, there was $112,000 of total unrecognized compensationcost, net of estimated forfeitures, related to nonvested share-basedcompensation arrangements, which is expected to be recognized over aweighted-average period of 1.9 years.

 

In April 1993, the Company adopted a Management Stock Plan. Under theManagement Stock Plan, the Company may select eligible officers, other keyemployees and non-employee directors of the Company and its subsidiaries toreceive a discretionary bonus of Common Stock (non-voting) based upon position,responsibilities, contributions and value to the Company and such other factors.The Company measures compensation expense for awards granted under theManagement Stock Plan at fair value on the date of the grant and recognizescompensation expense over the related service period. The fair value of awardsgranted under the Management Stock Plan is determined based on the number ofshares granted and the quoted price of the Company’s common stock on the dateof grant. The Company reserved 2,500,000 shares of common stock (non-voting)for issuance under the Management Stock Plan. As of March 31, 2006, the Companyhad issued a total of 2,035,425 shares of Common Stock (non-voting) under theManagement Stock Plan, of which 1,958,925 had vested.

 

9

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For the three months ended March 31, 2006, ManagementStock Plan compensation expense of approximately $15,000 was charged tonon-cash compensation expense for grants under the Management Stock Plan. As ofMarch 31, 2006, there was $125,000 of total unrecognized compensation cost, netof estimated forfeitures, related to nonvested awards, which is expected to berecognized over a weighted-average period of 2 years.

 

The following table illustrates the effect on netincome and net income per share for the three months ended March 31, 2005 as ifthe Company had consistently measured the compensation cost for the Company’sstock option programs under the fair value method adopted on January 1, 2006:

 
| ** **                                                 | ** ** | **March 31,** | ** **  |
|------------------------------------------------------------|------------|--------------------|-------------|
| ** **                                                 | ** ** | **2005**           | ** **  |
| ** **                                                 | ** ** | **(unaudited)**    | ** **  |
|                                                       |       |               |        |
| Net loss attributable to common  shareholders, as reported |       | $                  | (19,493,789 | ) |
| Add: pro forma compensation expense                        |       | 104,000            |        |
| Less: compensation expense, as reported                    |       | (9,500             | )           |
| Pro forma net loss attributable to common  shareholders    |       | $                  | (19,588,289 | ) |
|                                                       |       |               |        |
| Basic and diluted net loss per share, as  reported         |       | $                  | (1.00       | ) |
| Pro forma basic and diluted net loss per  share            |       | $                  | (1.00       | ) |

 

The fair value for each option grant was estimated at the date of grantusing the Black-Scholes options pricing model. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions, which have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. The Company’semployee stock options have characteristics significantly different from thoseof traded options and changes in the subjective input assumptions canmaterially affect the fair value estimate.

 

**Note 3 – Acquisitions and Dispositions**

** **

On March 7, 2005, the Company completedthe sale of its Fort Wayne, Indiana ABC affiliate, WPTA-TV to a subsidiary ofMalara Broadcast Group Inc. (“Malara Broadcast Group”) for approximately $45.4million, pursuant to the terms and conditions of an asset purchase agreement,dated April 23, 2004. In addition, on March 8, 2005, the Companycompleted its purchase of WISE-TV, the NBC affiliate serving Fort Wayne fromNew 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.

 

Furthermore, another subsidiary of Malara Broadcast Group acquired CBSaffiliate KDLH-TV, Duluth, Minnesota from New Vision Television on March 8,2005 for approximately $9.5 million, pursuant to the terms and conditions of anasset purchase agreement, dated April 23, 2004.

 

On March 8, 2005, the Company enteredinto a strategic arrangement with Malara Broadcast Group, under which theCompany provides advertising sales, promotion and administrative services, andselected programming to WPTA-TV and KDLH-TV in return for certain fees thatwill be paid by Malara Broadcast Group to the Company. The fees payable to theCompany will be paid after current debt service as well as certain otherexpenses Malara Broadcast Group incurs directly are satisfied. During the threemonths ended March 31, 2006, Malara Broadcast Group paid the Companyapproximately $722,000 under the strategic arrangements between the companies.As of March 31, 2006, the total amount owed to the Company from MalaraBroadcast Group totaled approximately $18,812,000.

 

Malara Broadcast Group financed its acquisition of WPTA-TV and KDLH-TVwith the proceeds of the Malara Broadcast Group Senior Credit Facility (see Note6).

 

The Company does not own Malara Broadcast Group or its televisionstations. However, as a result of the Company’s guarantee of the obligationsincurred under Malara Broadcast Group’s senior secured credit facility withrespect to the Tranche B Term Loan 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 gain therefrom was recognized in the consolidated statements of operations. Additionally,the Company did not apply the provisions of purchase accounting to MalaraBroadcast Group’s acquisition of WPTA-TV.

 

10

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In May 2004, an application was filed with the FCC, seeking consent toassign the license of television station KDLH to a subsidiary of MalaraBroadcast Group. A petition to deny the application was filed with the FCCjointly by two competing television station licensees in the Duluth marketasserting that the Company will have a prohibited ownership interest in KDLH byvirtue of the operating arrangement between Malara Broadcast Group and theCompany. The FCC’s Media Bureau (“Bureau”) denied the petition and granted theassignment application in December 2004. In January 2005, the petitioning broadcastersfiled an application for review seeking Commission-level review of the Bureau’sdecision. Malara Broadcast Group filed an opposition to the application forreview, and the petitioning broadcasters filed a response to that opposition.

 

The FCC has not yet ruled on the application for review. Although theCompany believes that the application for review is without merit andanticipates that the FCC will affirm the grant of the assignment applicationfor KDLH, it is not possible to predict how the FCC will rule on theapplication for review. It also is not possible to predict any remedial actionor possible sanction that may be imposed by the FCC in the event that it grantsthe application for review. An FCC grant of the application for review ultimatelycould result in a reformation or rescission of these agreements, the assignmentof the KDLH license back to New Vision Group, LLC, or a sale by MalaraBroadcast Group of its ownership of KDLH.

 

Each of the acquisitions listed below was consummated during the threemonths ended March 31, 2005. The Company’s acquisition of WISE and MalaraBroadcast Group’s acquisition of KDLH were accounted for under the purchasemethod of accounting. The consolidated financial statements continue to includethe operating results of WPTA as well as the operating results of WISE and KDLHfrom the date of consummation of the acquisition. In accordance with theprovisions of Interpretation 46, the Company did not account for the sale ofthe 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)        Operations under local service agreements,whereby, the Company provides advertising, sales, promotions, administrativeservices and selected programming services to Malara Broadcast Group televisionstations in return for certain fees that will be paid to the Company by MalaraBroadcast Group.

(2)        In accordance with Interpretation 46, theCompany did not account for the sale of the assets of WPTA-TV and no gain therefrom was recognized in the consolidated statements of operations. In addition,the Company did not apply the provisions of purchase accounting to MalaraBroadcast Group’s acquisition of WPTA-TV.

 

*WISE*

 

On March 8, 2005, the Company acquired the stock of WISE-TV from NewVision Group, LLC for $43.5 million plus approximately $2,900,000 oftransactions costs. The acquisition was accounted for under the purchase methodof accounting and accordingly, the purchase price was allocated to liabilitiesacquired based on their estimated fair value on the acquisition date.

 

The following table summarizes the allocation of the purchase price ofWISE-TV on March 8, 2005. The Company obtained a valuation of certain acquiredtangible and intangible assets and have finalized the allocations below toreflect such valuations. In addition, net liabilities assumed have beenfinalized to reflect all adjustments identified during the year of acquisition.

 
| ** **                                             | ** ** | **Value at**           | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                         |       | $                           | 46,440,000 |   |
| Net Liabilities Assumed                                |       | 1,038,000                   |       |
| FCC License (indefinite lived)                         |       | (5,248,000                  | )          |
| Network Affiliation (estimated useful life,  25 years) |       | (14,088,000                 | )          |
| Goodwill (indefinite lived)                            |       | $                           | 28,142,000 |   |

 

*KDLH*

 

On March 8, 2005, Malara Broadcast Group acquired substantially all ofthe assets of KDLH-TV from New Vision Group, LLC for $9.5 million plusapproximately $360,000 of transactions costs. The acquisition was accounted forunder the purchase method of accounting and accordingly, the purchase price wasallocated to assets acquired based on their estimated fair value on theacquisition date.

 

11

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The following table summarizes the allocation of the purchase price ofKDLH-TV acquired on March 8, 2005. Malara Broadcast Group obtained a valuationof certain acquired tangible and intangible assets and have finalized theallocations below to reflect such valuations. In addition, net assets acquiredhave been finalized to reflect all adjustments identified during the year ofacquisition.

 
| ** **                                             | ** ** | **Value at**           | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                         |       | $                           | 9,864,000  |   |
| Net Assets Acquired                                    |       | (5,086,000                  | )          |
| FCC License (indefinite lived)                         |       | (1,459,000                  | )          |
| Network Affiliation (estimated useful life,  25 years) |       | (612,000                    | )          |
| Goodwill (indefinite lived)                            |       | $                           | 2,707,000  |   |
|                                                        |            |                             |            |  |  |

 

The following unaudited pro forma information from continuingoperations for the three months ended March 31, 2006 and 2005 has beenpresented as if the Company’s acquisition of WISE-TV and Malara Broadcast Group’sacquisition of KDLH-TV had occurred on January 1, of each year:

 
| ** **                                                   | ** ** | **Three Months Ended March 31,** | ** **  |
|--------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                   | ** ** | **2006**                                             | ** **  | **2005** | ** ** |
| ** **                                                   | ** ** | **Actual**                                           | ** **  | **Pro Forma** | ** ** |
| Net Revenues                                                 |       | $                                                    | 21,006,000  |   | $ | 19,672,000 |   |
| Operating Expenses                                           |       | 20,801,000                                           |        | 21,875,000 |   |
| Income (loss) from Operations                                |       | 205,000                                              |        | (2,203,000 | ) |
| Other Expenses                                               |       | 18,774,000                                           |        | 18,058,000 |   |
| Loss before taxes                                            |       | (18,569,000                                          | )           | (20,261,000 | ) |
| Benefit for income taxes                                     |       | (142,000                                             | )           | (179,000 | ) |
| Loss from continuing operations                              |       | $                                                    | (18,427,000 | ) | $ | (20,082,000 | ) |
|                                                         |       |                                                 |        |   |   |
| Basic and diluted loss per share from  continuing operations |       | $                                                    | (0.93       | ) | $ | (1.03 | ) |
|                                                         |       |                                                 |        |   |   |
| Weighted average common shares outstanding                   |       | 19,694,985                                           |        | 19,501,042 |   |

 

The selected unaudited pro forma information is presented forillustrative purposes only and is not necessarily indicative of results ofoperations in the future periods or results that would have been achieved hadthe Company’s acquisition of WISE-TV and Malara Broadcast Group’s acquisitionof KDLH-TV occurred during the specified periods.

 

**Note 4 – Related Parties**

 

In February 2003, the Compensation Committee recommended, and the Boardof Directors approved, an incentive award of $3,286,065 to each of Mr. Cornwelland Mr. Beck to be paid, subject to vesting terms, only upon the occurrence ofthe refinancing with a maturity of at least two years, of the senior debt dueApril 15, 2004. On December 22, 2003, the Company issued $405 million aggregateprincipal amount of 9 3/4 % Senior Secured Notes, the proceeds of which wereused by the Company in part to repay all outstanding borrowings (plus accruedinterest) under the Company’s then outstanding senior credit agreement, whichsatisfied the performance objective of the awards. Mr. Cornwell’s award, whichvested in one-third tranches over three years from the refinancing date, was tobe used to repay in full his outstanding loan from the Company of $3,286,065due January 25, 2006. Mr. Cornwell irrevocably elected to defer payment of thefirst two tranches under his performance award until January 25, 2006 when hisloan was due. On March 1, 2005, the Board of Directors approved the accelerationof payment of the third tranche of Mr. Cornwell’s award to January 25, 2006.The Company’s Management Stock Plan, pursuant to which the performance awardwas granted, permits the compensation Committee, in its sole discretion, torequire as a condition to payment of an award, that the award recipient pay tothe Company the amount of any taxes that the Company is required to withhold.The Compensation Committee has so elected to require Mr. Cornwell to pay to theCompany the applicable withholding taxes with respect to the performance award.Mr. Cornwell has informed the Company that he is presently unable to do so,since the full amount of the performance award must be used to satisfy hisoutstanding loan from the Company. In light of the forgoing, the Company hasneither paid the performance award to Mr. Cornwell nor offset the amount of theaward in repayment of the loan, which loan remains due and payable.

 

12

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On September 21, 2004, Mr. Beck resigned from the Company to accept theappointment as Ambassador/Permanent Representative of the Republic of Palau tothe United Nations. Mr. Beck remains on the Company’s Board of Directors.Pursuant to his separation agreement, the Company granted Mr. Beck severancetotaling $1,008,000, payable in equal installments over eighteen months fromthe date of separation.  In addition, Mr. Beck was awarded a pro-ratedbonus of approximately $255,600 based upon achievements of certain financialtargets in 2004 which was paid during the first quarter of 2005.

 

Under the terms of the separation agreement, the Company and Mr. Beckamended the Performance Award and deferral of such payments pursuant to theseparation agreement. Under the amended terms of the Performance Award, Mr.Beck’s Performance Award fully vested as of the separation date and payment of$221,200 was made on September 30, 2004 to repay his outstanding promissorynote to the Company. The remaining vested award of $3,065,000 is payable incash on December 22, 2006.

 

In addition, the Company modified the terms of Mr. Beck’s outstandingstock option awards to allow his options to continue to vest and have the rightto exercise his options until the earlier of (i) the later of January 2, 2007and 30 days after the last day of Mr. Beck’s continuous service on the Company’sBoard of Directors and (ii) the fixed date on which each stock option award wasinitially set to expire.

 

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

 

**Note 5 – Restructuringand Severance Charges**

** **

*Restructuring Charges*

 

During the three months ended March 31, 2006, the Company recorded a$34,000 restructuring charge related to stay-bonuses awarded to transitionalemployees at its Duluth, Minnesota television stations. As of March 31, 2006,the Company completed the separation payments related to the corporaterestructuring charges recorded in 2004, and reduced its accrual byapproximately $20,000 to adjust for payments of benefits and amounts originallyaccrued for.

 

During 2005 and 2004, the Company recorded restructuringcharges in the aggregate totaling $2,474,000. Of the total $2,474,000,approximately $1,406,000 related to severance and other benefits, associatedwith the departure of Stuart J. Beck (see Note 4, Related Parties) andadministrative support staff at the corporate office which were paid over aneighteen month period from date of separation in September 2004 through March2006. As of March 31, 2006, the remaining restructuring charges related toemployee separations, which included severance, other benefits and stay-bonusesawarded to transitional employees at its Duluth, Minnesota and Fort Wayne,Indiana television stations. The Company anticipates minimal restructuringcharges in future periods relating to stay-bonuses awarded to transitionalemployees of both its Duluth, Minnesota and Fort Wayne, Indiana televisionstations upon separation.

 

At March 31, 2006, the accruals for restructuring activities wereincluded in “other accrued liabilities” on the consolidated balance sheets andthe related expense for the charge at the television stations are included in “selling,general and administrative expenses” on the consolidated statement ofoperations. These costs were recognized in accordance with the provisions ofStatement of Financial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

*Acquisition Charges*

 

During 2005, the Company accrued $627,000 related to employeeseparations, which included severance and other benefits as part of the Company’spurchase accounting. These accrued costs were a result of employees notretained by the Company subsequent to its acquisition of its Fort Wayne,Indiana television station, which included operational through managementemployees.

 

At March 31, 2006, the accruals for acquisition activities of thetelevision station were included in “other accrued liabilities” on theconsolidated balance sheets. These charges were recognized in accordance withthe provisions of Emerging Issues Task Force Issue No. 95-3 *Recognition of Liabilities in Connection with a Purchase BusinessCombination*.

 

13

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The following is a reconciliation of the aggregate liability recordedfor restructuring and acquisition charges as of March 31, 2006:

 
| ** **          | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended March 31, 2006**                                                                        | ** ** |
| ** **          | ** ** | **December 31,  2005**                                                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **March 31, 2006** | ** ** |
| Television stations |       | $                                                                                                                                     | 81,000     |   | $ | 34,000 |   | $ | 65,000 |   | $ | 50,000 |   |
| Corporate           |       | 192,000                                                                                                                               |       | (20,000 | ) | 172,000 |   | — |   |
|                |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total               |       | $                                                                                                                                     | 273,000    |   | $ | 14,000 |   | $ | 237,000 |   | $ | 50,000 |   |

 

The liability for the restructuring and acquisition charges will bepaid in accordance with the provisions of the severance agreements and paymentsare expected to be completed at various times through 2006.

 

**Note 6 – Debt**

** **

Current portion of long-term debt consists of the following:

 
| ** **                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|------------------------|------------|
| Malara Broadcast Group Senior Credit  Facility |       | $                        | 3,162,000  |                   | $          | 25,844,000 |   |
|                                           |       |                     |       |                   |       |
| Total                                          |       | $                        | 3,162,000  |                   | $          | 25,844,000 |   |

 

Long-term debt consists of the following:

 
| ** **                                                                                                                   | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| 9 3/4% Senior Secured Notes, due 2010, net  of discount of $3,327,827 at March 31, 2006 and $3,504,002 at December 31,  2005 |       | $                        | 401,672,000 |                        | $          | 401,496,000 |   |
| Malara Broadcast Group Senior Credit  Facility, less current portion                                                         |       | 26,599,000               |        | 27,375,000                  |       |
|                                                                                                                         |       |                     |        |                        |       |
| Total                                                                                                                        |       | $                        | 428,271,000 |                        | $          | 428,871,000 |   |

 

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

 

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

 

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

 

The Indenture, which governs the Company’s Notes, restricts its abilityand the ability of its restricted subsidiaries to, among other things:(i) incur additional debt and issue preferred stock; (ii) makecertain distributions, investments and other restricted payments;(iii) create certain liens; (iv) enter into transactions withaffiliates; (v) enter into agreements that restrict its restrictedsubsidiaries from making payments to the Company; (vi) merge, consolidateor sell substantially all of its assets; (vii) sell or acquire assets; and(viii) enter into new lines of business.

 

The Malara Broadcast Group companies to which the Company providesservices pursuant to the local services agreements are subject to the terms ofthe Indenture applicable to Restricted Subsidiaries that are not Guarantors, assuch terms are defined in the Indenture.

 

14

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***Malara Broadcast Group’s SeniorCredit Facility***

 

Malara Broadcast Group financed itsacquisition of WPTA-TV and KDLH-TV in March 2005 with the proceeds of theMalara Broadcast Group Senior Credit Facility, consisting of two terms loanstotaling $48.5 million and a revolving loan of $5 million. The $23.5 millionMalara Broadcast Group Tranche A Term Loan, which was secured by a letter ofcredit, was repaid on February 10, 2006. To secure the reimbursementobligations in the event of a draw on the letter of credit, pursuant to theterms and conditions of an Application and Agreement for Standby Letter ofCredit, the Company had pledged $25 million of U.S. Government Securities. Tothe****extent that principal payments weremade on the Tranche A Term Loan, the letter of credit was to be proportionatelyreduced and the Company was to 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 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 Tranche ATerm Loan were based, at Malara Broadcast Group’s option, at either (i) thehigher of the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as suchterms are defined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Tranche BTerm Loan and Revolving Loan are based, at Malara Broadcast Group’s option, oneither (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 Tranche B Term Loan and Revolving Loan at a rate of 3% perannum. Additionally, Malara Broadcast Group is required to pay monthlycommitment fees on the unused portion of its revolving loan commitment at arate of 0.50% per annum.  Cash interestpayments are payable monthly.

 

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

 

Malara Broadcast Group was required to makemonthly principal payments on the Tranche A Term Loan and the Revolving Loanequal to the product of (i) the Repayment Percentage (which is 25% unlessthere is an Event of Default or the Consolidated Loan to Stick Value is lessthan 70%, in which case the Repayment Percentage is 100%) and (ii) theConsolidated Excess Free Cash Flow for the month preceding the month in whichsuch installment is due, as such terms are defined in the Malara BroadcastGroup Senior Credit Facility.  All suchpayments would have been applied first to repay the outstanding Revolving Loanto the full extent thereof (without a corresponding reduction in the RevolvingLoan Commitment Amount) and second to repay the outstanding Tranche A Term Loanto the full extent thereof; provided that, if the Repayment Percentage for suchmonthly installment is 100%, the excess 75% of such monthly installment shallbe applied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Tranche B Term Loan to the fullextent thereof. For the three months ended March 31, 2006, the totalprincipal payments made on the Revolving Loan approximated $184,000 and totalprincipal payments made to date approximated $1,205,000.

 

On February 10,2006, in accordance with the terms of the Malara Broadcast Group Senior CreditFacility, the letter of credit issued in March 2005 to support the $23.5million Tranche A Term Loan was drawn upon in satisfaction of Malara BroadcastGroup’s obligations to such lenders under the Malara Tranche A Term Loanfollowing non-renewal of the letter of credit. The Company paid thereimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities which had been pledged in support ofsuch obligation.

 

Under a ReimbursementAgreement dated as of March 8, 2005 (the “*ReimbursementAgreement*”) among the Company, Malara Broadcast Group and certain ofMalara Broadcast Group’s subsidiaries (together with Malara, the “*Malara Borrowers*”), the Malara Borrowers agreed to repay theCompany any amounts drawn on the letter of credit plus interest at a rate of 8%per annum.  The Company reduced the $23.5million owed from Malara Broadcast Group under the Reimbursement Agreement byapproximately $6.9 million to $16.6 million.

 

15

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**Note7 – Discontinued Operations**

** **

In accordance with the provisions ofStatement No. 144, the operating results of KBWB-TV, San Francisco,California and WDWB-TV, Detroit, Michigan are reported as discontinuedoperations in the accompanying consolidated balance sheets and statements ofoperations. The respective assets and liabilities being disposed of have beenclassified as “held for sale” on the accompanying balance sheets presented, andtheir operations have been recorded as discontinued operations. Discontinuedoperations have not been segregated in the consolidated statement of cash flowsand, therefore, amounts for certain captions will not agree with theaccompanying consolidated balance sheets and statements of operations.

 

**Agreementsto sell KBWB and WDWB**

 

On September 8, 2005, the Company hadentered into a definitive agreement to sell substantially all of the assets ofKBWB-TV, the WB affiliate serving the San Francisco, California televisionmarket, to the AM Broadcasting KBWB, Inc. In addition, on September 8,2005, the Company had entered into a definitive agreement to sell substantiallyall of the assets of WDWB-TV, the WB affiliate serving the Detroit Michigantelevision market, to the AM Broadcasting WDWB, Inc.

 

On May 1, 2006, the Company terminatedsuch agreements and entered into new separate definitive agreements to sell itstwo WB affiliates, KBWB-TV serving San Francisco, California and WDWB-TVserving Detroit, Michigan to affiliates of DS Audible, LLC. The agreements containcovenants by the Company not to compete in the San Francisco, California andDetroit, Michigan markets for a period of five years. The consideration to bereceived by the Company for the sale of the assets of KBWB-TV is $55,000,000,before closing and other adjustments, which is payable in cash.  The consideration to be received by theCompany for the sale of the assets of WDWB-TV is $75,000,000, before closingand other adjustments which is payable in cash. In addition, the considerationfor each covenant not to compete in the San Francisco and Detroit markets is$10 million, respectively. As of March 31, 2006 the aggregate assets heldfor sale totaled $114,519,000 and the aggregate liabilities held for saletotaled $34,346,000.

 

Cash related to discontinued operations,which the Company will retain the rights to, is included in cash and cashequivalents in the accompanying consolidated balance sheets for all periodspresented. Cash and cash equivalents totaled $505,000 and $520,000 as of March 31,2006 and December 31, 2005, respectively and is included in the Company’sconsolidated balance sheets. Accounts receivable related to discontinuedoperations, which the Company will retain the rights to and collect, isincluded in accounts receivable, net of allowance for doubtful accounts, in theaccompanying consolidated balance sheets for all periods presented. Suchamounts totaled $5,839,000 (net of allowance of $176,000) as of March 31,2006 and $5,464,000 (net of allowance of $222,000) as of December 31, 2005and are included in the Company’s consolidated balance sheets. Net income fromdiscontinued operations totaled $2,808,000 for the three months ended March 31,2006 and the net loss from discontinued operations totaled $918,000 for thethree months ended March 31, 2005. Net revenues from discontinuedoperations were $8,270,000 and $7,916,000 for the three months ended March 31,2006 and 2005, respectively.

 

Summarized financial data for assets andliabilities held for sale are as follows:

 
| ** **                      | ** ** | **Balance Sheet Data**   | ** **  |
|---------------------------------|------------|--------------------------|-------------|
| ** **                      | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
| Film contract rights            |       | $                        | 5,587,000   |   | $ | 6,967,000 |   |
| Property and equipment, net     |       | 7,981,000                |        | 7,883,000 |   |
| Intangible and other assets     |       | 100,951,000              |        | 101,333,000 |   |
| Total assets held for sale      |       | $                        | 114,519,000 |   | $ | 116,183,000 |   |
|                            |       |                     |        |   |   |
| Film contract rights payable    |       | $                        | 30,168,000  |   | $ | 32,292,000 |   |
| Accrued and other liabilities   |       | 4,178,000                |        | 4,639,000 |   |
| Total liabilities held for sale |       | $                        | 34,346,000  |   | $ | 36,931,000 |   |

 

16

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**Note8 – Condensed Consolidating Financial Information**

** **

The Granite Broadcasting Corporation columnrepresents the registrant’s financial information. The Malara Broadcast Groupcolumn represents the consolidated financial information of Malara BroadcastGroup, an independently owned entity in which the Company is deemed to be theprimary beneficiary (see Note 3) and is required to be consolidated as avariable interest entity in accordance with Interpretation 46.

 

**BALANCESHEET**

**March 31,2006**

 
| ** **                                       | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|--------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                       | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                           |       |                                   |        |                        |       |             |       |                      |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Current assets:                                  |       |                                   |        |                        |       |             |       |                      |        |
| Cash and  cash equivalents                       |       | $                                      | 8,393,853   |                        | $          | 2,783,031        |       | $                         | —      |   | $ | 11,176,884 |   |
| Accounts  receivable, net                        |       | 17,825,003                             |        | 2,475,323                   |       | —           |       | 20,300,326                |        |
| Other  current assets                            |       | 24,308,254                             |        | 590,883                     |       | (16,606,272      | )          | 8,292,865                 |        |
| Assets held  for sale                            |       | 114,519,400                            |        | —                      |       | —           |       | 114,519,400               |        |
| Due from  consolidated entity                    |       | 18,760,835                             |        | 7,046                       |       | (18,767,881      | )          | —                    |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total  current assets                            |       | 183,807,345                            |        | 5,856,283                   |       | (35,374,153      | )          | 154,289,475               |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Property and equipment, net                      |       | 31,521,669                             |        | 9,373,794                   |       | —           |       | 40,895,463                |        |
| Other non current assets                         |       | 14,083,281                             |        | 1,223,230                   |       | (3,646,668       | )          | 11,659,843                |        |
| Intangibles, net                                 |       | 152,439,643                            |        | 44,222,596                  |       | (27,731,100      | )          | 168,931,139               |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total assets                                     |       | $                                      | 381,851,938 |                        | $          | 60,675,903       |       | $                         | (66,751,921 | ) | $ | 375,775,920 |   |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Liabilities and stockholders’ deficit       |       |                                   |        |                        |       |             |       |                      |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Current liabilities:                             |       |                                   |        |                        |       |             |       |                      |        |
| Accounts  payable and other accrued liabilities  |       | $                                      | 17,607,678  |                        | $          | 313,871          |       | $                         | —      |   | $ | 17,921,549 |   |
| Current  portion of long-term debt               |       | —                                 |        | 19,768,272                  |       | (16,606,272      | )          | 3,162,000                 |        |
| Other  current liabilities                       |       | 10,524,596                             |        | 696,808                     |       | —           |       | 11,221,404                |        |
| Liabilities  held for sale                       |       | 34,346,438                             |        | —                      |       | —           |       | 34,346,438                |        |
| Due to  consolidated entity                      |       | 7,046                                  |        | 18,760,835                  |       | (18,767,881      | )          | —                    |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total  current liabilities                       |       | 62,485,758                             |        | 39,539,786                  |       | (35,374,153      | )          | 66,651,391                |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Long-term debt, less current portion             |       | 401,672,173                            |        | 26,599,112                  |       | —           |       | 428,271,285               |        |
| Other non current liabilities                    |       | 25,802,772                             |        | 3,891,020                   |       | (3,646,668       | )          | 26,047,124                |        |
| Redeemable preferred stock                       |       | 199,279,956                            |        | —                      |       | —           |       | 199,279,956               |        |
| Accrued dividends on redeemable preferred  stock |       | 102,191,378                            |        | —                      |       | —           |       | 102,191,378               |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Stockholders’ deficit:                      |       |                                   |        |                        |       |             |       |                      |        |
| Common stock                                     |       | 197,561                                |        | —                      |       | —           |       | 197,561                   |        |
| Additional  paid-in capital                      |       | 423,927                                |        | —                      |       | —           |       | 423,927                   |        |
| Accumulated  deficit                             |       | (409,325,912                           | )           | (9,354,015                  | )          | (27,731,100      | )          | (446,411,027              | )           |
| Treasury  stock, at cost                         |       | (875,675                               | )           | —                      |       | —           |       | (875,675                  | )           |
| Total  stockholders’ deficit                |       | (409,580,099                           | )           | (9,354,015                  | )          | (27,731,100      | )          | (446,665,214              | )           |
| Total liabilities and stockholders’ deficit |       | $                                      | 381,851,938 |                        | $          | 60,675,903       |       | $                         | (66,751,921 | ) | $ | 375,775,920 |   |

 

17

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**BALANCESHEET**

**December 31,2005**

 
| ** **                                       | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|--------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                       | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                           |       |                                   |        |                        |       |             |       |                      |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Current assets:                                  |       |                                   |        |                        |       |             |       |                      |        |
| Cash and  cash equivalents                       |       | $                                      | 6,803,511   |                        | $          | 1,825,533        |       | $                         | —      |   | $ | 8,629,044 |   |
| Accounts  receivable, net                        |       | 19,373,183                             |        | 3,015,363                   |       | —           |       | 22,388,546                |        |
| Other  current assets                            |       | 8,359,472                              |        | 837,466                     |       | —           |       | 9,196,938                 |        |
| Restricted  cash equivalents                     |       | 24,997,500                             |        | —                      |       | —           |       | 24,997,500                |        |
| Assets held  for sale                            |       | 116,183,354                            |        | —                      |       | —           |       | 116,183,354               |        |
| Due from  consolidated entity                    |       | 14,773,036                             |        | 10,864                      |       | (14,783,900      | )          | —                    |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total  current assets                            |       | 190,490,056                            |        | 5,689,226                   |       | (14,783,900      | )          | 181,395,382               |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Property and equipment, net                      |       | 32,348,927                             |        | 9,342,340                   |       | —           |       | 41,691,267                |        |
| Other non current assets                         |       | 14,903,268                             |        | 1,312,134                   |       | (3,646,668       | )          | 12,568,734                |        |
| Intangibles, net                                 |       | 153,171,696                            |        | 44,740,731                  |       | (27,731,100      | )          | 170,181,327               |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total assets                                     |       | $                                      | 390,913,947 |                        | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Liabilities and stockholders’ deficit       |       |                                   |        |                        |       |             |       |                      |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Current liabilities:                             |       |                                   |        |                        |       |             |       |                      |        |
| Accounts  payable and other accrued liabilities  |       | $                                      | 11,222,811  |                        | $          | 608,036          |       | $                         | —      |   | $ | 11,830,847 |   |
| Current  portion of long-term debt               |       | —                                 |        | 25,844,000                  |       | —           |       | 25,844,000                |        |
| Other  current liabilities                       |       | 8,573,826                              |        | 1,110,674                   |       | —           |       | 9,684,500                 |        |
| Liabilities  held for sale                       |       | 36,930,893                             |        | —                      |       | —           |       | 36,930,893                |        |
| Due to  consolidated entity                      |       | 10,864                                 |        | 14,773,036                  |       | (14,783,900      | )          | —                    |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Total  current liabilities                       |       | 56,738,394                             |        | 42,335,746                  |       | (14,783,900      | )          | 84,290,240                |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Long-term debt, less current portion             |       | 401,495,998                            |        | 27,375,458                  |       | —           |       | 428,871,456               |        |
| Other non current liabilities                    |       | 28,483,877                             |        | 3,921,019                   |       | (3,646,668       | )          | 28,758,228                |        |
| Redeemable preferred stock                       |       | 199,191,138                            |        | —                      |       | —           |       | 199,191,138               |        |
| Accrued dividends on redeemable preferred  stock |       | 95,804,417                             |        | —                      |       | —           |       | 95,804,417                |        |
|                                             |       |                                   |        |                        |       |             |       |                      |        |
| Stockholders’ deficit:                      |       |                                   |        |                        |       |             |       |                      |        |
| Common stock                                     |       | 195,783                                |        | —                      |       | —           |       | 195,783                   |        |
| Additional  paid-in capital                      |       | 393,701                                |        | —                      |       | —           |       | 393,701                   |        |
| Accumulated  deficit                             |       | (390,513,206                           | )           | (12,547,792                 | )          | (27,731,100      | )          | (430,792,098              | )           |
| Unearned  compensation                           |       | (480                                   | )           | —                      |       | —           |       | (480                      | )           |
| Treasury  stock, at cost                         |       | (875,675                               | )           | —                      |       | —           |       | (875,675                  | )           |
| Total  stockholders’ deficit                |       | (390,799,877                           | )           | (12,547,792                 | )          | (27,731,100      | )          | (431,078,769              | )           |
| Total liabilities and stockholders’ deficit |       | $                                      | 390,913,947 |                        | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |

 

18

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**STATEMENTOF OPERATIONS**

**For thethree months ended March 31, 2006**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                                |       | $                                      | 21,168,241  |                        | $          | 3,608,163        |       | $                         | (3,770,584 | ) | $ | 21,005,820 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct  operating expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 8,293,080                              |        | 1,510,894                   |       | (1,111,909       | )          | 8,692,065                 |       |
| Selling,  general and administrative expenses (exclusive of depreciation and  amortization expenses shown separately below) |       | 6,206,661                              |        | 2,904,306                   |       | (2,658,675       | )          | 6,452,292                 |       |
| Corporate  expense (exclusive of corporate reorganization expense and depreciation  expense shown separately below)         |       | 2,847,802                              |        | —                      |       |             |       | 2,847,802                 |       |
| Corporate  reorganization expense                                                                                           |       | 219,818                                |        | —                      |       |             |       | 219,818                   |       |
| Depreciation  and amortization                                                                                              |       | 1,776,547                              |        | 673,037                     |       |             |       | 2,449,584                 |       |
| Performance  award expense                                                                                                  |       | 88,831                                 |        | —                      |       |             |       | 88,831                    |       |
| Non-cash  compensation expense                                                                                              |       | 50,157                                 |        | —                      |       |             |       | 50,157                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating  income (loss)                                                                                                    |       | 1,685,345                              |        | (1,480,074                  | )          |             |       | 205,271                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other  expenses (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest  expense                                                                                                           |       | 9,852,856                              |        | 1,224,746                   |       |             |       | 11,077,602                |       |
| Interest income                                                                                                             |       | (317,575                               | )           | —                      |       |             |       | (317,575                  | )          |
| Non-cash  interest expense                                                                                                  |       | 1,555,387                              |        | 75,094                      |       |             |       | 1,630,481                 |       |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                      |       |             |       | 6,386,961                 |       |
| Loss (gain)  on extinguishments of debt                                                                                     |       | 6,893,728                              |        | (6,893,728                  | )          |             |       | —                    |       |
| Other                                                                                                                       |       | (923,395                               | )           | 920,037                     |       |             |       | (3,358                    | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| (Loss)  income from continuing operations before income taxes                                                               |       | (21,762,617                            | )           | 3,193,777                   |       |             |       | (18,568,840               | )          |
| Benefit for  income taxes                                                                                                   |       | (141,579                               | )           | —                      |       |             |       | (141,579                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| (Loss)  income from continuing operations                                                                                   |       | (21,621,038                            | )           | 3,193,777                   |       |             |       | (18,427,261               | )          |
| Discontinued  operations:                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Income from  discontinued operations, net of taxes                                                                          |       | 2,808,332                              |        | —                      |       |             |       | 2,808,332                 |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net (loss)  income                                                                                                          |       | $                                      | (18,812,706 | )                           | $          | 3,193,777        |       |                      |       | $ | (15,618,929 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                                |       | $                                      | (1.10       | )                           |       |             |       |                      | $          | (0.93 | ) |
| Basic and  diluted income per share from discontinued operations                                                            |       |                                   | 0.14        |                        |       |             |       |                      | 0.14       |   |
| Basic and  diluted net loss per share                                                                                       |       | $                                      | (0.96       | )                           |       |             |       |                      | $          | (0.79 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted average  common shares outstanding                                                                                 |       | 19,694,985                             |        |                        |       |             |       | 19,694,985                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

19

----

 

**STATEMENTOF OPERATIONS**

**For thethree months ended March 31, 2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                                |       | $                                      | 17,937,980  |                        | $          | 1,053,236        |       | $                         | (1,170,086 | ) | $ | 17,821,130 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct  operating expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 8,356,638                              |        | 461,685                     |       | (337,746         | )          | 8,480,577                 |       |
| Selling,  general and administrative expenses (exclusive of depreciation and  amortization expenses shown separately below) |       | 5,599,206                              |        | 898,467                     |       | (832,340         | )          | 5,665,333                 |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,697,899                              |        | —                      |       |             |       | 2,697,899                 |       |
| Depreciation  and amortization                                                                                              |       | 2,116,514                              |        | 65,779                      |       |             |       | 2,182,293                 |       |
| Performance  award expense                                                                                                  |       | 319,797                                |        | —                      |       |             |       | 319,797                   |       |
| Non-cash  compensation expense                                                                                              |       | 94,593                                 |        | —                      |       |             |       | 94,593                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating  income (loss)                                                                                                    |       | (1,246,667                             | )           | (372,695                    | )          |             |       | (1,619,362                | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other  expenses (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest  expense                                                                                                           |       | 9,872,570                              |        | 317,583                     |       |             |       | 10,190,153                |       |
| Interest  income                                                                                                            |       | (448,754                               | )           | —                      |       |             |       | (448,754                  | )          |
| Non-cash  interest expense                                                                                                  |       | 907,859                                |        | 17,181                      |       |             |       | 925,040                   |       |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                      |       |             |       | 6,386,961                 |       |
| Other                                                                                                                       |       | (267,900                               | )           | 349,606                     |       |             |       | 81,706                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss from  continuing operations before income taxes                                                                        |       | (17,697,403                            | )           | (1,057,065                  | )          |             |       | (18,754,468               | )          |
| Benefit for  income taxes                                                                                                   |       | (178,744                               | )           | —                      |       |             |       | (178,744                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss from  continuing operations                                                                                            |       | (17,518,659                            | )           | (1,057,065                  | )          |             |       | (18,575,724               | )          |
| Discontinued  operations:                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Loss from  discontinued operations, net of taxes                                                                            |       | (918,065                               | )           | —                      |       |             |       | (918,065                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss                                                                                                                    |       | $                                      | (18,436,724 | )                           | $          | (1,057,065       | )          |                      |       | $ | (19,493,789 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                                |       | $                                      | (0.90       | )                           |       |             |       |                      | $          | (0.95 | ) |
| Basic and  diluted loss per share from discontinued operations                                                              |       |                                   | (0.05       | )                           |       |             |       |                      | (0.05      | ) |
| Basic and  diluted net loss per share                                                                                       |       | $                                      | (0.95       | )                           |       |             |       |                      | $          | (1.00 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted  average common shares outstanding                                                                                 |       | 19,501,042                             |        |                        |       |             |       | 19,501,042                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

20

----

 

**STATEMENTOF CASH FLOWS**

**For thethree months ended March 31, 2006**

 
| ** **                                                 | ** ** | **Granite Broadcasting  Corporation** | ** ** | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                                 | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| **Cash  flows provided by (used in) operating activities** |       | $                                     | 115,390    |                         | $          | 24,795,142       |       | $                         | (23,458,346 | ) | $ | 1,452,186 |   |
|                                                       |       |                                  |       |                         |       |             |       |                      |        |
| **Cash  flows from investing activities:**                 | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Sales of  U.S. Government Securities                       |       | 25,315,677                            |       | —                       |       | —           |       | 25,315,677                |        |
| Capital  expenditures                                      |       | (290,088                              | )          | (195,174                     | )          | —           |       | (485,262                  | )           |
| Net cash  provided by (used in) investing activities       |       | 25,025,589                            |       | (195,174                     | )          | —           |       | 24,830,415                |        |
|                                                       |       |                                  |       |                         |       |             |       |                      |        |
| **Cash  flows from financing activities:**                 | ** ** | ** **                            | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Payment of  senior credit facility                         |       | (23,550,637                           | )          | (23,642,470                  | )          | 23,458,346       |       | (23,734,761               | )           |
| Net cash  (used in) provided by financing activities       |       | (23,550,637                           | )          | (23,642,470                  | )          | 23,458,346       |       | (23,734,761               | )           |
|                                                       |       |                                  |       |                         |       |             |       |                      |        |
| Net increase  in cash and cash equivalents                 |       | 1,590,342                             |       | 957,498                      |       |             |       | 2,547,840                 |        |
| Cash and  cash equivalents, beginning of period            |       | 6,803,511                             |       | 1,825,533                    |       |             |       | 8,629,044                 |        |
| Cash and  cash equivalents, end of period                  |       | $                                     | 8,393,853  |                         | $          | 2,783,031        |       |                      |        | $ | 11,176,884 |   |
|                                                       |       |                                  |       |                         |       |             |       |                      |        |
| Supplemental  information:                                 |       |                                  |       |                         |       |             |       |                      |        |
| Cash paid  for interest                                    |       | $                                     | —     |                         | $          | 973,787          |       |                      |        | $ | 973,787 |   |
| Cash paid  for income taxes                                |       | 130,000                               |       | —                       |       |             |       | 130,000                   |        |
| Non-cash  capital expenditures                             |       | —                                |       | 37,533                       |       |             |       | 37,533                    |        |
|                                                            |            |                                       |            |                              |            |                  |            |                           |             |  |  |  |  |

 

21

----

 

**STATEMENTOF CASH FLOWS**

**For thethree months ended March 31, 2005**

 
| ** **                                                       | ** ** | **Granite Broadcasting  Corporation** | ** ** | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                            | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash  flows provided by (used in) 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                    |       |
|                                                                  |            |                                       |            |                             |            |                  |            |                           |            |  |  |  |  |

 

**Note 9 – Intangibles**

 

*Intangibles*

 

Intangible assets are summarized as follows:

 
| ** **               | ** ** | **March 31, 2006** | ** **  | **December 31, 2005** | ** ** |
|--------------------------|------------|-------------------------|-------------|----------------------------|------------|
| ** **               | ** ** | **Unaudited**           | ** **  | ** **                 | ** ** |
| ** **               | ** ** | ** **              | ** **  | ** **                 | ** ** |
| Goodwill                 |       | $                       | 73,591,000  |                       | $          | 74,088,000 |   |
| Network affiliations     |       | 94,292,000              |        | 94,292,000                 |       |
| Broadcast licenses       |       | 53,514,000              |        | 53,514,000                 |       |
|                     |       | 221,397,000             |        | 221,894,000                |       |
| Accumulated amortization |       | (52,466,000             | )           | (51,713,000                | )          |
|                     |       |                    |        |                       |       |
| Net intangible assets    |       | $                       | 168,931,000 |                       | $          | 170,181,000 |   |

 

The Company amortizes its network affiliationagreements for which it does not make contractual payments using an estimateduseful life of 25 years and amortizes its network affiliation agreements forwhich it makes contractual payments over the life of the contract.  The Company recorded amortization expensefrom continuing operations of $753,000 and $719,000 for the three months ended March 31,2006 and 2005, respectively.

 

22

----

 

***Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

 

The following information should be read inconjunction with the unaudited consolidated financial statements and notesthereto in this Quarterly Report and the audited financial statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contained in our Form 10-K for the year ended December 31,2005. It includes the following sections:

 

•                  Executive Summary

•                  Recent Developments

•                  Critical Accounting Policies and Estimates

•                  Results of Operations

•                  Liquidity and Capital Resources

 

*Executive Summary*

 

We own and operate eight network affiliatedtelevision stations in geographically diverse markets reaching over 6% of thenation’s television households and have shared services agreements andadvertising representation agreements (which we generally refer to as localservice agreements) to provide advertising, sales, promotion and administrativeservices, and selected programming to two additional stations owned by MalaraBroadcast Group and one additional station owned by Four Seasons BroadcastCompany.  As of March 31, 2006, fourof our stations are affiliated with NBC, one of our stations is affiliated withABC and one of our stations is affiliated with CBS, our Big Three Affiliates,and two of our stations are affiliated with the Warner Bros Television Network,our WB Affiliates.  The NBC affiliatesare KSEE-TV, Fresno-Visalia, California, WEEK-TV, Peoria-Bloomington, Illinois,KBJR-TV, Duluth, Minnesota - Superior, Wisconsin and WISE-TV, Fort Wayne,Indiana.  The ABC affiliate is WKBW-TV,Buffalo, New York. The CBS affiliate is WTVH-TV, Syracuse, New York.  The WB affiliates are KBWB-TV, San Francisco,California and WDWB-TV, Detroit, Michigan. The two Malara Broadcast Group-ownedstations to which we provide services and selected programming are WPTA-TV, theABC affiliate serving Fort Wayne, Indiana and KDLH-TV, the CBS affiliateserving Duluth, Minnesota - Superior, Wisconsin.  The Four Seasons Broadcast Company-ownedstation to which we provide services is WAOE-TV, the UPN affiliate servingPeoria-Bloomington, Illinois.

 

Malara Broadcast Group is owned by anindependent third party who owns and operates two television stations as of March 31,2006. We do not own Malara Broadcast Group or its television stations. In orderfor both us and Malara Broadcast Group to continue to comply with FCCregulations, Malara Broadcast Group must maintain complete responsibility forand control over programming, finances, personnel and operations of itstelevision stations.  However, as aresult of our guarantee of the obligations incurred under Malara BroadcastGroup’s senior secured credit facility and the revolving loan, arrangementsunder the local service agreements and put or call option agreements, underUnited States generally accepted accounting principles (“U.S. GAAP”),specifically, Financial Accounting Standards Board (“FASB”) Interpretation No. 46,*Consolidation of Variable Interest Entities*(“Interpretation 46”), we are required to consolidate Malara Broadcast Group’sfinancial position, results of operations and statement of cash flows in ourconsolidated results. In addition, in accordance with the provisions ofInterpretation 46, the Company did not account for the sale of the assets ofWPTA-TV and no gain there from was recognized in the consolidated statements ofoperations.  In addition, we did notapply the provisions of purchase accounting to Malara Broadcast Group’sacquisition of WPTA-TV. Four Seasons Broadcast Company is owned by anindependent third party. We do not own Four Seasons Broadcast Company or itstelevision stations, and pursuant to Interpretation 46, we are not deemed to bethe primary beneficiary of Four Seasons Broadcast Company and therefore, wehave not consolidated their results.

 

On September 8, 2005, we entered into a definitive agreement tosell substantially all of the assets of KBWB-TV, the WB affiliate serving theSan Francisco, California television market, to AM Broadcasting KBWB, Inc.On September 8, 2005, we entered into a definitive agreement to sellsubstantially all of the assets of WDWB-TV, the WB affiliate serving theDetroit Michigan television market, to AM Broadcasting WDWB, Inc.

 

We have reclassified the operations of these stations as discontinuedoperations and the assets and liabilities as held for sale in our consolidatedbalance sheets and statements of operations in accordance with the provisionsof Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*(See Note 7. *DiscontinuedOperations*in the Notes to our Consolidated Financial Statements.)

 

We believe that inflation has not had amaterial impact on our results of operations for the three months ended March 31,2006.  However, there can be no assurancethat future inflation would not have an adverse impact on our operating resultsand financial condition.

 

23

----

 

Our operating revenues are generally lower inthe first calendar quarter and generally higher in the fourth calendar quarterthan in the other two quarters, due in part to increases in retail advertisingin the fall months in preparation for the holiday season, and in election yearsdue to increased political advertising.

 

Our revenues are derived principally fromlocal and national advertising, political advertising in an election year and,to a lesser extent, from network compensation for the broadcast of programmingand revenues from studio rental and commercial production activities.  The primary operating expenses involved inowning and operating television stations are employee salaries, depreciationand amortization, programming, advertising and promotion.  Amounts referred to in the followingdiscussion have been rounded to the nearest thousand.

 

***First Quarter Highlights***

** **

•                  On January 13,2006, we and certain of our subsidiaries entered into a definitive agreementwith Television Station Group Holdings, LLC and certain of its subsidiaries topurchase substantially all of the assets of WBNG-TV, Channel 12, the CBS-affiliatedtelevision station serving Binghamton and Elmira, New York, for $45 million incash, subject to closing adjustments. (the “WBNG Purchase and Sale Agreement”).  Since February 8, 2006, the sellers havehad a right to terminate the WBNG Purchase and Sale Agreement because the salesof two stations affiliated with the WB Network were not completed as of suchdate. However, in conjunction with the payment of an aggregate of $2.25 millionof deposits made to the sellers by us and the execution by us on May 1,2006 of agreements with affiliates of DS Audible LLC described below, thesellers waived until July 31, 2006 their rights to terminate the WBNGPurchase and Sale Agreement. On March 8, 2006, the application seekingconsent to assign the WBNG-TV license to our subsidiary was granted by theFederal Communications Commission (“FCC”).

 

•                  On February 10,2006, in accordance with the terms of the Malara Broadcast Group Senior CreditFacility, the letter of credit issued in March 2005 to support the $23.5 millionTranche A Term Loan was drawn upon in satisfaction of Malara Broadcast Group’sobligations to such lenders under the Malara Tranche A Term Loan followingnon-renewal of the letter of credit.  Wepaid the reimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities which had been pledged in support ofsuch obligation.

 

•                  Under aReimbursement Agreement, dated as of March 8, 2005 (the “ReimbursementAgreement”), among us, Malara Broadcast Group and certain of Malara BroadcastGroup’s subsidiaries (the “Malara Borrowers”), the Malara Borrowers agreed torepay us any amounts drawn on the letter of credit plus interest at a rate of8% per annum.  We reduced to $16.6million the amount due from the Malara Borrowers to Granite under theReimbursement Agreement.

 

•                  On March 13,2006, we retained the services of Houlihan Lokey Howard & Zukin as ourfinancial advisors to assist us with the evaluation of strategic options and toadvise us on available financing and capital restructuring alternatives.

 

***Recent Developments***

** **

•                  OnMay 1, 2006, we terminated our agreements with AM Broadcasting KBWB, Incand AM Broadcasting WDWB, Inc. for the sale of KBWB-TV and WDWB-TV,respectively.

 

•                  OnMay 1, 2006, we entered into new separate definitive agreements to sellour two WB affiliates, KBWB-TV serving San Francisco, California and WDWB-TVserving Detroit, Michigan to affiliates of DS Audible, LLC. The agreementscontain covenants by us not to compete in the San Francisco, California andDetroit, Michigan markets for a period of five years. The consideration to bereceived by us for the sale of the assets of KBWB-TV is $55,000,000, beforeclosing and other adjustments, which is payable in cash.  The consideration to be received by us forthe sale of the assets of WDWB-TV is $75,000,000, before closing and otheradjustments which is payable in cash. In addition, the consideration for eachcovenant not to compete in the San Francisco and Detroit markets is $10million, respectively. We expect both transactions, which are subject to FCCapproval, the restructuring of certain programming obligations and customaryclosing conditions, is expected to close during the second quarter of 2006.

 

24

----

 

###### ***CriticalAccounting Polices and Estimates***

###### *** ***

We prepare our consolidated financialstatements in conformity with United States generally accepted accountingprinciples which require us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosures of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the period.  Actual results could differ from thoseestimates.  Results of operations forinterim periods are not necessarily indicative of results for the full year.

 

Information with respectto our critical accounting policies which we believe could affect our reportedresults require subjective judgments by management and is contained in Item 7,Management’s Discussion and Analysis of Financial Condition and Result ofOperations, of our Annual Report on Form 10-K for the fiscal year ended December 31,2005.

 

**RESULTS OF OPERATIONS**

** **

*Three Months Ended March 31, 2006 and2005*

 

***Continuing Operations***

 

Set forth below are significant factors thatcontributed to our operating results from continuing operations for the threemonths ended March 31, 2006 and 2005, respectively.

 

**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDCONTINUING OPERATIONS**

 
| ** **           | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **2006**                              | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Local/Regional       |       | $                                     | 14,257,000 |   | $ | 11,238,000 |   | 26.9 | % |
| National             |       | 7,859,000                             |       | 7,586,000 |   | 3.6 | % |
| Network Compensation |       | 401,000                               |       | 794,000 |   | (49.5 | )% |
| Political            |       | 839,000                               |       | 242,000 |   | 246.7 | % |
| Other                |       | 1,169,000                             |       | 948,000 |   | 23.3 | % |
| Gross Revenue        |       | 24,525,000                            |       | 20,808,000 |   | 17.9 | % |
| Agency Commissions   |       | 3,519,000                             |       | 2,987,000 |   | 17.8 | % |
| Net Revenue          |       | $                                     | 21,006,000 |   | $ | 17,821,000 |   | 17.9 | % |

 

The following discussion is related to theresults of our continuing operations, except for discussions regarding ourstatements of cash flows which include the results of our discontinuedoperations.

 

Net revenues consist primarily of local,national and political airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

 

Net revenue increased $3,185,000 or 17.9% to$21,006,000 for the three months ended March 31, 2006, from $17,821,000for the three months ended March 31, 2005. The increase was due to healthy increases in non-political localrevenues of $3,019,000 or 27%, non-political national revenues of $273,000 or4% and political advertising revenue of $597,000 or 247%, offset by a decreasein network compensation revenue of $393,000 or 50%. The increases innon-political local, non-political national and political advertising revenueswere primarily due to the inclusion of two additional stations, WISE-TV andKDLH-TV in our consolidated results during the three months ended March 31,2006 which were acquired in March 2005. Malara Broadcast Group’s netrevenues totaled $3,608,000 or 17% and $1,053,000 or 6% of the total netrevenues during the three months ended March 31, 2006 and 2005,respectively.

 

25

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Direct operating expenses, consistingprimarily of programming, news and engineering increased $211,000 or 3% to$8,692,000 for the three months ended March 31, 2006 from $8,481,000 forthe same period in 2005. The increase was primarily due the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results for a fullquarter during the three months ended March 31, 2006 which were includedin our consolidated results during the same period last year commencing in March 2005.Selling, general and administrative expenses increased $787,000 or 14% to$6,452,000 for the three months ended March 31, 2006 from $5,665,000 forthe same period in 2005. The increase was primarily due to the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results for a fullquarter during the three months ended March 31, 2006 which were includedin our consolidated results during the same period last year commencing in March 2005.Malara Broadcast Group’s direct operating expenses and selling, general andadministrative expenses at March 31, 2006 and 2005 totaled $645,000 and$190,000, respectively, of the total station expenses, after elimination ofexpenses relating to various local service agreements between us and MalaraBroadcast Group.

 

***Other Consolidated Expenses***

 

Amortization expense increased $35,000 or 5%during the three months ended March 31, 2006 as compared to the sameperiod a year earlier. This increase was primarily due to the incrementalamortization expense of two additional television stations, KDLH and WISE,which were acquired in March 2005. Depreciation expense increased $233,000or 16% during the three months ended March 31, 2006 compared to the sameperiod a year earlier.  The increase wasprimarily due to the incremental depreciation expense of two additionaltelevision stations, KDLH-TV and WISE-TV, which were acquired in March 2005.

 

Corporate expense totaled $2,848,000; anincrease of $150,000 or 6% compared to $2,698,000 for the three months ended March 31,2005. The increase was primarily due to increased professional fees incurredduring the period. Corporate reorganization expenses increased $220,000 duringthe three months ended March 31, 2006. The increase was due to ourannouncement that we have retained financial advisors to assist us with theevaluation of strategic options and to advise us on available financing andcapital restructuring alternatives for our company. The performance awardexpense for the three months ended March 31, 2006 totaled $89,000; adecrease of $231,000 compared to $320,000 for the three months ended March 31,2005. The decrease was due to the completion of amortization of the unvestedportion of the performance award expense during the current period. Non-cashcompensation expense decreased $44,000 or 47% primarily due to the forfeituresand / or fully vesting of stock awards granted in prior years during 2005,offset in part by $17,000 of non-cash compensation expense recorded in March 2006related to stock option grants under Interpretation 123(R).

 

Interest expense totaled $11,078,000; anincrease of $888,000 or 9% compared to $10,190,000 for the three months ended March 31,2005.  The increase was primarily due tothe incremental interest expense on Malara Broadcast Group’s Senior CreditFacility which totaled approximately $1,225,000.  Interest income totaled $318,000; a decreaseof $131,000, or 29% compared to $449,000 for the three months ended March 31,2005. The decrease was primarily due to decreased average cash balance investedduring the three months ended March 31, 2006 as compared to the sameperiod in 2005. Non-cash interest expense totaled $1,630,000; an increase of$705,000 or 76% compared to $925,000 for the three months ended March 31,2005. The increase is due to write off of approximately $709,000 of unamortizeddeferred financing fees incurred in connection with the Malara Broadcast GroupSenior Credit Facility Tranche A Term Loan, which was repaid on February 10,2006.

 

We recorded as an expense the accrual ofdividends on our 12 3/4% Cumulative Exchangeable Preferred Stock totaling$6,387,000 during the three months ended March 31, 2006 and 2005, respectivelyas required by Statement of Financial Accounting Standards No.150.

 

During the three months ended March 31,2006, we recorded a deferred tax benefit of $142,000, compared to a deferredtax benefit of $179,000 for the three months ended March 31, 2005. Thedecline in the tax benefit is primarily due to an increase in the valuationallowance against net operating loss carry forwards, which may not be utilizedin future periods.

 

26

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***Discontinued Operations***

 

Set forth below are significant factors thatcontributed to our operating results from discontinued operations for the threemonths ended March 31, 2006 and 2005, respectively.

 

**GROSSREVENUES BY CATEGORY,**

**CONSOLIDATEDDISCONTINUED OPERATIONS**

 
| ** **         | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **2006**                              | ** ** | **2005** | ** ** | **% Change** | ** ** |
|               |       |                                  |       |   |   |   |   |
| Local/Regional     |       | $                                     | 4,954,000  |   | $ | 5,071,000 |   | (2.3 | )% |
| National           |       | 4,531,000                             |       | 4,046,000 |   | 12.0 | % |
| Political          |       | 16,000                                |       | 8,000 |   | 100 | % |
| Other              |       | 236,000                               |       | 205,000 |   | 15.1 | % |
| Gross Revenue      |       | 9,737,000                             |       | 9,330,000 |   | 4.4 | % |
| Agency Commissions |       | 1,467,000                             |       | 1,414,000 |   | 3.7 | % |
| Net Revenue        |       | $                                     | 8,270,000  |   | $ | 7,916,000 |   | 4.5 | % |

 

Net revenue fromour discontinued operations increased $354,000 or 4.5% to $8,270,000 from$7,916,000 due primarily to an increase in non-political national revenues of$485,000 or 12%, offset by a decrease in non-political local revenues of$117,000 or 2%. The non-political national revenue increase was primarily dueto growth in the paid programming, entertainment/movie and telecommunicationscategories.  The non-political localrevenue decreases were primarily due to declines in the automotive, restaurantand educational schools categories.

 

Direct operating expenses from ourdiscontinued operations, consisting primarily of programming and engineeringexpenses, decreased $1,110,000 or 29% to $2,722,000 for the three months ended March 31,2006 from $3,832,000 for the same period in 2005. The decrease was primarilydue to lower amortization of film contract rights due to the effects of the replacementof expensive, unprofitable programs with less expensive, profitableprogramming. Selling, general and administrative expenses from our discontinuedoperations decreased $430,000 or 14% to $2,740,000 for the three months ended March 31,2006 from $3,170,000 for the same period in 2005. The decrease was primarilydue to lower advertising and promotion expenses.

 

*Restructuring and Severance Charges*

 

*Restructuring Charges*

 

During the three months ended March 31,2006, we recorded a $34,000 restructuring charge related to stay-bonusesawarded to transitional employees at the Duluth, Minnesota televisionstations.  As of March 31, 2006, wecompleted the separation payments related to the corporate restructuringcharges, and reduced our accrual by approximately $20,000 to adjust forpayments of benefits and amounts originally accrued for.

 

During 2005 and 2004, we recordedrestructuring charges in the aggregate totaling $2,474,000. Of the total$2,474,000, 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 who were paid over aneighteen month period from date of separation in September 2004 through March 2006.As of March 31, 2006, the remaining restructuring charges related toemployee separations, which included severance, other benefits and stay-bonusesawarded to transitional employees at the Duluth, Minnesota and Fort Wayne,Indiana television stations. We anticipate minimal restructuring charges infuture periods relating to stay-bonuses awarded to transitional employees ofboth the Duluth, Minnesota and Fort Wayne, Indiana television stations.

 

At March 31, 2006, the accruals forrestructuring activities were included in “other accrued liabilities” on the consolidatedbalance sheets and the related expense for the charge at the televisionstations are included in “selling, general and administrative expenses” on theconsolidated statement of operations.  Thesecosts were recognized in accordance with the provisions of Statement ofFinancial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

27

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*Acquisition Charges*

 

During 2005, we accrued $627,000 related toemployee separations, which included severance and other benefits as part ofour purchase accounting. These accrued costs were a result of employees notretained by us subsequent to our acquisition of the Fort Wayne, Indianatelevision station, which included operational through management employees.

 

At March 31, 2006, the accruals foracquisition activities of the television station were included in “otheraccrued liabilities” on the consolidated balance sheets. These charges wererecognized in accordance with the provisions of Emerging Issues Task ForceIssue 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 of March 31,2006:

 
| ** **          | ** ** | **Reconciliation of Aggregate  Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|---------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended March 31,  2006**                                                    | ** ** |
| ** **          | ** ** | **December 31  2005**                                                                     | ** ** | **Provision** | ** ** | **Payments** | ** ** | **March 31, 2006** | ** ** |
| Television stations |       | $                                                                                              | 81,000     |   | $ | 34,000 |   | $ | 65,000 |   | $ | 50,000 |   |
| Corporate           |       | 192,000                                                                                        |       | (20,000 | ) | 172,000 |   | — |   |
|                |       |                                                                                           |       |   |   |   |   |   |   |
| Total               |       | $                                                                                              | 273,000    |   | $ | 14,000 |   | $ | 237,000 |   | $ | 50,000 |   |

 

The liability for the restructuring andacquisition charges will be paid in accordance with the provisions of theseverance agreements and payments are expected to be completed at various timesthrough 2006.

 

**Liquidity and Capital Resources**

 

As of March 31,2006, we had approximately $11,177,000 of cash and cash equivalents on hand. OnDecember 31, 2005 we had $24,997,500in U.S. government securities which were pledged to support the reimbursementobligations in the event of a draw on the letter of credit that served ascollateral for the Tranche A Term Loan under Malara Broadcast Group’s SeniorCredit Facility.  On February 10,2006, the letter of credit issued in March 2005 to support the $23.5 million Tranche A Term Loan wasdrawn upon in satisfaction of Malara Broadcast Group’s obligations to suchlenders under the Malara Tranche A Term Loan following non-renewal of theletter of credit.  We paid ourreimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities which had been pledged in support ofsuch obligation.

 

An interest payment of$19,744,000 on our 9 3⁄4 Senior Secured Notes (the “Notes”) is due on June 1,2006. If payment is not made within 30 days after June 1, 2006, a “Eventof Default” under the Indenture governing the Notes would occur.

 

On March 13, 2006, we retained theservices of Houlihan Lokey Howard & Zukin as our financial advisors toassist us in the evaluation of strategic options and to advise us on availablefinancing and capital restructuring alternatives.

 

Absent changes to ourcapital structure and station ownership mix we will not have enough liquidityto make our interest payment on June 1, 2006 on our Notes. In order toimprove our existing liquidity position and to further our business strategy,we entered into separate definitive agreements to sell our two WB affiliates(as discussed below) and are reviewing potential restructuring alternativeswith respect to our debt and preferred stock obligations.  However, under our Indenture, our use of thenet proceeds from the sale of assets is restricted.  Of the net asset sale proceeds, $5 millionmay be used for working capital purposes and the remainder must be used toeither:

 

•                  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.

 

28

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The Indenture provides that, prior todelivery of an acceleration notice following an event of default, the Companyis entitled to obtain a release of the Trustee under the Indenture to use cash,including cash in the collateral account, to pay operating expenses and to payinterest on the Notes.

 

On May 1, 2006, we entered into separatedefinitive agreements to sell our two WB affiliates, KBWB-TV serving SanFrancisco, California and WDWB-TV serving Detroit, Michigan to affiliates of DSAudible, LLC. The agreements contain covenants by us not to compete in the SanFrancisco, California and Detroit, Michigan markets for a period of five years.The consideration to be received by us for the sale of the assets of KBWB-TV is$55,000,000, before closing and other adjustments, which is payable incash.  The consideration to be receivedby us for the sale of the assets of WDWB-TV is $75,000,000, before closing andother adjustments which is payable in cash. In addition, the consideration foreach covenant not to compete in the San Francisco and Detroit markets is $10million, respectively.

 

We anticipate that wewill retain approximately $25 million of the aggregate proceeds from thetransactions to be used for working capital purposes, consisting of $5 millionfrom the asset sales as permitted under our Indenture and $10 million for eachcovenant not to compete. The remaining net proceeds, after closing adjustments,will be used to make investments in property or assets that replace theproperty and assets that were the subject of such asset sale and/or make anoffer to all of the holders of the Notes, although pending such use, suchproceeds may be used for working capital and payment of interest on the Notes,as described above. We anticipate that both transactions, which are subject toFCC approval, the restructuring of certain programming obligations andcustomary closing conditions, to close during the second quarter of 2006. Wecontinue to explore additional capital restructuring alternatives including,the raising of additional capital and changes in our station ownership mix.

 

Assuming we are successful in selling KBWB-TVand WDWB-TV and / or restructuring our company, we believe that the availableproceeds together with the cash and cash equivalents on hand and internallygenerated funds from operations will be sufficient to satisfy our cashrequirements for our existing operations and debt service for the next twelvemonths.  There can be no assurance thatwe will be successful in selling assets and restructuring our company and alack of liquidity would have a material adverse effect on our business strategyand therefore affect our ability to continue as a going concern and make our June 1,2006 interest payment on our Notes. The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classifications of liabilities thatmight result from the outcome of this uncertainty.

 

We have established an investment policy forinvesting cash that is not immediately required for working capitalpurposes.  Our investment objectives areto preserve capital, maximize our return on investment and to ensure we haveappropriate liquidity for our cash needs. The investments are considered to beavailable-for-sale as defined under Statement of Financial Accounting StandardsNo. 115, *Accounting for Certain Investments in Debtand Equity Securities*. As of March 31, 2006, we hadapproximately $11,177,000 of cash and cash equivalents. As of March 31,2006, we had no marketable securities.

 

***NetCash Used in or Provided by Operating, Investing and Financing Activities***

 

Net cash provided by operating activities was$1,452,000 during the three months ended March 31, 2006 compared to$3,482,000 during the three months ended March 31, 2005.  The change in 2006 from 2005 was primarilydue to the changes in net assets.

 

Net cash provided byinvesting activities was $24,830,000 during the three months ended March 31,2006 compared to net cash used in investing activities of $77,647,000 duringthe three months ended March 31, 2005. The change in 2006 from 2005 was primarily due to the selling of ourU.S. Government Securities during the three months ended March 31, 2006,as compared to the acquisition of assets and the purchase of U.S. GovernmentSecurities during the same period in 2005.

 

Net cash used in financing activities was$23,735,000 during the three months ended March 31, 2006 compared to netcash provided by financing activities of $51,258,000 during the three monthsended March 31, 2005.  The change in2006 from 2005 is primarily due to the draw on the letter of credit weguaranteed for the Malara Broadcast Group Tranche A Term Loan during the threemonths ended March 31, 2006 compared to proceeds received from the MalaraBroadcast Group Senior Credit Facility, offset in part by increased payments ofdeferred financing fees during the same period in 2005.

 

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***Our 9 3/4 % Senior SecuredNotes***

 

On December 22, 2003, we completed a$405,000,000 offering of our 9 3/4 % Senior Secured Notes (the “Notes”) due December 1,2010, at a discount, resulting in proceeds to us of $400,067,100.  Interest on the Notes is payable on December 1and June 1 of each 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 and December 2005,respectively, and (iii) to repurchase at par, plus accrued interest, allof our 8 7/8 % senior subordinated notes due May 2008.  The remaining proceeds were invested inshort-term securities as well as being used for general working capitalpurposes.

 

The Notes are guaranteed by each of our domesticrestricted subsidiaries and are secured by substantially all of ourassets.  We may redeem some or all of theNotes at any time on or after December 1, 2006. We may also redeem up to35% of the aggregate principal amount of the Notes using the proceeds of one ormore equity offerings on or before December 1, 2005.

 

The Indenture, which governs our Notes,restricts our ability and the ability of our restricted subsidiaries to, amongother things: (i) incur additional debt and issue preferred stock; (ii) makecertain distributions, investments and other restricted payments; (iii) createcertain liens; (iv) enter into transactions with affiliates; (v) enterinto agreements that restrict our restricted subsidiaries from making paymentsto us; (vi) merge, consolidate or sell substantially all of our assets; (vii) sellor acquire assets; and (viii) enter into new lines of business.

 

Under the Indenture, the Malara BroadcastGroup companies to which we 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.

 

***Malara Broadcast Group’s SeniorCredit Facility***

 

Malara Broadcast Group financed itsacquisition of WPTA-TV and KDLH-TV in March 2005 with the proceeds of theMalara Broadcast Group Senior Credit Facility, consisting of two terms loanstotaling $48.5 million and a revolving loan of $5 million. The $23.5 millionMalara Broadcast Group Term Loan A, which was secured by a letter of credit,was paid off on February 10, 2006. To secure the reimbursement obligationsin the event of a draw on the letter of credit, pursuant to the terms andconditions of an Application and Agreement for Standby Letter of Credit, we hadpledged $25 million of 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 Granite Broadcasting Corporationpursuant to a guaranty agreement (the “Granite Guaranty”).

 

The Malara Broadcast Group Senior CreditFacility contains covenants restricting the ability of Malara Broadcast Groupand its subsidiaries to, among other things, (i) incur additional debt, (ii) incurliens, (iii) make loans and investments, (iv) incur contingentobligations (including hedging arrangements), (v) declare dividends orredeem or repurchase capital stock or debt, (vi) engage in certainmergers, acquisitions and asset sales, (vii) engage in transactions withaffiliates, (viii) engage in sale-leaseback transactions and (ix) changethe nature of its business and the business conducted by its subsidiaries.  Malara Broadcast Group is also required tocomply with financial covenants with respect to a minimum interest coverageratio, minimum consolidated available cash flow, a maximum leverage ratio andminimum consolidated net revenue and limits on capital expenditures.

 

Interest rates associated with the Term LoanA were based, at Malara Broadcast Group’s option, at either (i) the higherof the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as suchterms are defined 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, on either (i) theBase Rate plus 4.625% per annum or (ii) the Adjusted Eurodollar Rate plus7.375% per annum.  In addition, DeferredInterest (as defined in the Malara Broadcast Group Senior Credit Facility)accrues with respect to, and is added to the principal amount of, the Term LoanB and Revolving Loan at a rate of 3% per annum. Additionally, Malara BroadcastGroup is required to pay monthly commitment fees on the unused portion of itsrevolving loan commitment at a rate of 0.50% per annum.  Cash interest payments are payable monthly.

 

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

 

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Malara Broadcast Group was required to makemonthly principal payments on the Term Loan A and the Revolving Loan equal tothe product of (i) the Repayment Percentage (which is 25% unless there isan Event of Default or the Consolidated Loan to Stick Value is less than 70%,in which 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 would have been applied first to repay the outstanding Revolving Loanto the full extent thereof (without a corresponding reduction in the RevolvingLoan Commitment Amount) and second to repay the outstanding Term Loan A to thefull extent thereof; provided that, if the Repayment Percentage for suchmonthly installment is 100%, the excess 75% of such monthly installment wouldhave been applied first to repay the outstanding Revolving Loan to the fullextent thereof and second to repay the outstanding Term Loan B to the fullextent thereof. For the three months ended March 31, 2006, the totalprincipal payments made on the Revolving Loan approximated $184,000 and totalprincipal payments made to date totaled approximately $1,205,000.

 

On February 10,2006, in accordance with the terms of the Malara Broadcast Group Senior CreditFacility, the letter of credit issued in March 2005 to support the $23.5million Tranche A Term Loan was drawn upon in satisfaction of Malara BroadcastGroup’s obligations to such lenders under the Malara Tranche A Term Loanfollowing non-renewal of the letter of credit.  We paid the reimbursementobligation to the letter of credit issuer on February 10, 2006, using U.S.government securities which had been pledged in support of such obligation.

 

Under a ReimbursementAgreement dated as of March 8, 2005 (the “*ReimbursementAgreement*”) among the us, Malara Broadcast Group and certain ofMalara Broadcast Group’s subsidiaries (together with Malara, the “*Malara Borrowers*”), the Malara Borrowers agreed to repay usany amounts drawn on the letter of credit plus interest at a rate of 8% perannum.  We reduced the $23.5 million owedfrom Malara Broadcast Group under the Reimbursement Agreement by approximately$6.9 million to $16.6 million.

 

***Our 12 3/4 % CumulativeExchangeable Preferred Stock***

 

Under the terms of the Certificate ofDesignations for our 12 3/4 % Cumulative Exchangeable Preferred Stock (the “PreferredStock”), we are required to make the semi-annual dividends on such shares incash beginning October 1, 2002.  Thecash payment of dividends had been restricted by the terms of our previoussenior credit agreement and indentures and is prohibited under the Indenture,which governs our Notes.  Consequently wehave not paid the semi-annual dividend due to the holders since October 1,2002.  During the three months ended March 31,2006 a dividend payment of $6,387,000 accrued on our Preferred Stock. As of March 31,2006, we have recorded an aggregate of $102,191,000 in accrued dividends on ourPreferred Stock. Since three or more semi-annual dividend payments have notbeen paid, the holders of the Preferred Stock have the right to elect thelesser of two directors or that number of directors constituting 25% of themembers of the Board of Directors. Effective October 24, 2005, the holdersof the majority of the Preferred Stock exercised their right to elect twodirectors to the Board of Directors of the Company. We are restricted frompaying cash dividends under the Indenture, which governs our Notes, and do notanticipate paying cash dividends on our Preferred Stock in the foreseeablefuture.

 

***Film Payments***

 

As part of an overall effort to reducestation operating expenses, we have made substantial progress replacingunprofitable programming with competitive, profitable programming.

 

Film payments from our continuing operationsfor the three months ended March 31, 2006 totaled $1.2 million, ascompared to the three months ended March 31, 2005 totaling $1.5 million.

 

Film payments from our discontinuedoperations for the three months ended March 31, 2006 totaled $2.1 million,as compared to the three months ended March 31, 2005 totaling $4.2million.

 

***No Off-Balance SheetArrangements***

 

At March 31, 2006 and 2005 we did nothave any relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or variable interestentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. All of our arrangements with Malara Broadcast Group are on-balancesheet arrangements.

 

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***Capital and CommercialCommitments***

 

The following table and discussion reflectour significant contractual obligations and other commercial commitmentsrelated to continuing operations as of March 31, 2006:

 
| ** **                                                                        | ** ** | **Payment Due by Period** | ** **    |
|-----------------------------------------------------------------------------------|------------|---------------------------|---------------|
| **Capital Commitment**                                                            | ** ** | **Total**                 | ** **    | **Remainder of 2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| 9 3/4%  Senior Secured Notes due 2010                                             |       | $                         | 405,000,000   |   | $ | — |   | $ | — |   | $ | 405,000,000 |   | $ | — |   |
| Interest on  Senior Secured Notes                                                 |       | 194,147,000               |          | 39,488,000 |   | 78,975,000 |   | 75,684,000 |   |   |   |
| Malara  Broadcast Group Senior Credit Facility (b)                                |       | 29,761,000                |          | 2,266,000 |   | 6,772,000 |   | 20,723,000 |   | — |   |
| Interest on  Senior Credit Facility (c)                                           |       | 11,166,000                |          | 2,644,000 |   | 5,782,000 |   | 2,740,000 |   | — |   |
| Program contract  commitments - current                                           |       | 3,124,000                 |          | 2,515,000 |   | 386,000 |   | 198,000 |   | 25,000 |   |
| Program  contract commitments - future (d)                                        |       | 16,989,000                |          | 1,501,000 |   | 8,606,000 |   | 6,099,000 |   | 783,000 |   |
| Operating  leases                                                                 |       | 2,670,000                 |          | 440,000 |   | 1,044,000 |   | 961,000 |   | 225,000 |   |
| 12 3/4%  Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000               |          |   |   |   |   | 377,670,000 |   | — |   |
| Restructuring  and severance                                                      |       | 50,000                    |          | 50,000 |   | — |   | — |   | — |   |
| Total  capital and commercial commitments                                         |       | $                         | 1,040,577,000 |   | $ | 48,904,000 |   | $ | 101,565,000 |   | $ | 889,075,000 |   | $ | 1,033,000 |   |

 

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(a)          As of March 31, 2006, the Cumulative Exchangeable Preferred Stock,including accrued dividends totaled $301,471,000. The table above includes thebalance as of March 31, 2006 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)         The amounts are our 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)          The amounts are our 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).

(d)          Program contract commitments – future reflect a license agreement forprogram material that is not yet available for its first broadcast and istherefore not recorded as an asset or liability on our consolidated balancesheet in accordance with the provisions of Statement of Financial AccountingStandards No. 63, *Financial Reporting forBroadcasters*.

 

The following table and discussion reflectour significant contractual obligations and other commercial commitmentsrelated to discontinued operations as of March 31, 2006:

 
| ** **                                 | ** ** | **Payment Due by Period** | ** ** |
|--------------------------------------------|------------|---------------------------|------------|
| **Capital Commitment**                     | ** ** | **Total**                 | ** ** | **Remainder of 2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                       |       |                      |       |   |   |   |   |   |   |   |   |
| Program  contract commitments - current    |       | $                         | 30,169,000 |   | $ | 17,386,000 |   | $ | 9,853,000 |   | $ | 2,930,000 |   | $ | — |   |
| Program  contract commitments - future (a) |       | 23,787,000                |       | 1,608,000 |   | 7,827,000 |   | 9,044,000 |   | 5,308,000 |   |
| Network  Affiliation                       |       | 3,154,000                 |       | 3,154,000 |   | — |   | — |   | — |   |
| Operating  leases                          |       | 9,704,000                 |       | 1,063,000 |   | 2,264,000 |   | 1,958,000 |   | 4,419,000 |   |
|                                       |       |                      |       |   |   |   |   |   |   |   |   |
| Total  capital and commercial commitments  |       | $                         | 66,814,000 |   | $ | 23,211,000 |   | $ | 19,944,000 |   | $ | 13,932,000 |   | $ | 9,727,000 |   |

 

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(a)          Program contract commitments – future reflect a license agreement forprogram material that is not yet available for its first broadcast and istherefore not recorded as an asset or liability on our consolidated balancesheet in accordance with the provisions of Statement of Financial AccountingStandards No. 63, *Financial Reporting forBroadcasters*.

 

32

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***Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk***

 

The interest rate on our outstanding SeniorSecured Notes is fixed at 9.75%. Consequently, our earnings will not be affected by changes in short-terminterest rates.

 

Interest rates associated with MalaraBroadcast Group’s March 8, 2005, Tranche A Term Loan, which was repaid on February 10,2006,  were based, at Malara BroadcastGroup’s option, at either (i) the higher of the Prime Rate or the FederalFunds Effective Rate plus 0.50% (the “Base Rate”) or (ii) the AdjustedEurodollar Rate plus 0.60% per annum, as such terms are defined in the MalaraBroadcast Group Senior Credit Facility. Interest rates associated with Malara Broadcast Group’s March 8,2005, Tranche B Term Loan and Revolving Loan are based, at Malara BroadcastGroup’s option, at either (i) the Base Rate plus 4.625% per annum or (ii) theAdjusted Eurodollar 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, 2006, 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 March 31, 2006, an evaluation wascarried out under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934). Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of March 31,2006.  There was no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that occurred duringthe period covered by this Quarterly Report on Form 10-Q that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

33

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**PART II.  OTHER INFORMATION**

 

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

 

There havebeen no material changes in our risk factors from those disclosed in our 2005Annual Report on Form 10-K.

 

***Item 4.  Submission of Matters toa Vote of Security Holders***

 

On March 28, 2006, the holder of all of ourVoting Common Stock elected W. Don Cornwell, Stuart J. Beck, James L.Greenwald, Edward Dugger III, Thomas R. Settle, Charles J. Hamilton, Jr.,Jon E. Barfield, Milton Frederick Brown and Veronica Pollard to the Board ofDirectors.

 

***Item 5.  Other Information***

 

None.

 

***Item 6.  Exhibits***

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                 |       | Amendment to Purchase and Sale Agreement,  dated as of February 14, 2006, by and among AM Broadcasting KBWB, Inc.**,**Granite Broadcasting Corporation**,**KBWB, Inc, and** **KBWB License, Inc. (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed  on February 21, 2006)                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2                 |       | Amendment to Purchase and Sale Agreement,  dated as of February 14, 2006, by and among AM Broadcasting WDWB, Inc.**,**Granite Broadcasting Corporation**,**WXON, Inc, and** **WXON License, Inc. (incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed  on February 21, 2006)                                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                 |       | Form of Security Agreement among  Granite Broadcasting Corporation, the Guarantors party thereto and The Bank  of New York (incorporated by reference to Exhibit 10.3 to our Current  Report on Form 8-K filed on February 21, 2006)                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4                 |       | Form of Mortgage, Assignment of Leases  and Rents, Security Agreement and Fixture Filing, in favor of The Bank of New  York, in its capacity as Collateral Agent and Trustee pursuant to the  Indenture (incorporated by reference to Exhibit 10.4 to our Current  Report on Form 8-K filed on February 21, 2006)                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                 |       | Reimbursement and Refinancing Agreement,  dated as of March 8, 2005, among 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 and Granite  Broadcasting Corporation (incorporated by reference to Exhibit 10.5 to  our Current Report on Form 8-K filed on February 21, 2006) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6                 |       | Purchase and Sale Agreement, dated as of January 13,  2006, by and among Television Station Group Holdings, LLC, Television Station  Group LLC, Television Station Group License Subsidiary, LLC, WBNG, Inc.,  WBNG License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 10 to our Current Report on Form 8-K filed on January 17,  2006)                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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)                                                                                                                                                                                                                                                                     |

 

34

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Registrant has caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
|   |              |   | GRANITE  BROADCASTING CORPORATION |
|--------|-------------------|--------|-----------------------------------|
|   |              |   | Registrant                        |
|   |              |   |                              |   |
|   |              |   |                              |   |
| Date:  | May 15, 2006 |   | /s/                               | W. DON  CORNWELL |
|   |              |   |                              | (W. Don  Cornwell) |
|   |              |   |                              | Chief  Executive Officer |
|   |              |   |                              |   |
|   |              |   |                              |   |
| Date:  | May 15, 2006 |   | /s/                               | LAWRENCE I.  WILLS |
|   |              |   |                              | (Lawrence I.  Wills) |
|   |              |   |                              | Senior Vice  President – Chief Financial Officer |
|   |              |   |                              | (Principal  Financial Officer) |

 

35

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**Exhibit Index**

 
| **Exhibit  No.** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                        |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1             |   | Amendment to Purchase and Sale Agreement,  dated as of February 14, 2006, by and among AM Broadcasting KBWB, Inc.**,**Granite Broadcasting Corporation**,**KBWB, Inc, and** **KBWB License, Inc. (incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed  on February 21, 2006)                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2             |   | Amendment to Purchase and Sale Agreement,  dated as of February 14, 2006, by and among AM Broadcasting WDWB, Inc.**,**Granite Broadcasting Corporation**,**WXON, Inc, and** **WXON License, Inc. (incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed  on February 21, 2006)                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3             |   | Form of Security Agreement among Granite  Broadcasting Corporation, the Guarantors party thereto and The Bank of New  York (incorporated by reference to Exhibit 10.3 to our Current Report on  Form 8-K filed on February 21, 2006)                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4             |   | Form of Mortgage, Assignment of Leases  and Rents, Security Agreement and Fixture Filing, in favor of The Bank of New  York, in its capacity as Collateral Agent and Trustee pursuant to the  Indenture (incorporated by reference to Exhibit 10.4 to our Current  Report on Form 8-K filed on February 21, 2006)                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5             |   | Reimbursement and Refinancing Agreement,  dated as of March 8, 2005, among 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 and Granite  Broadcasting Corporation (incorporated by reference to Exhibit 10.5 to  our Current Report on Form 8-K filed on February 21, 2006) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6             |   | Purchase and Sale Agreement, dated as of January 13,  2006, by and among Television Station Group Holdings, LLC, Television Station  Group LLC, Television Station Group License Subsidiary, LLC, WBNG, Inc.,  WBNG License, Inc. and Granite Broadcasting Corporation (incorporated by  reference to Exhibit 10 to our Current Report on Form 8-K filed on January 17,  2006)                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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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