**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form10-Q**

 

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

 

**For the quarterly period ended June 30, 2005**

 

**OR**

 

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

 

**For the transition period from                    to                **

 

**Commission File Number 0-19728**

 

**GRANITEBROADCASTING CORPORATION**

(Exact name of registrantas specified in its charter)

 

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

 

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

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

 

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

 

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

 

(APPLICABLE ONLYTO CORPORATE ISSUERS:)

 

As of August 12, 2005,the Registrant had 98,250 shares of Class A Voting Common Stock, par value $.01per share outstanding; and 19,480,142 shares of Common Stock (Nonvoting), parvalue $.01 per share outstanding.

 

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**DOCUMENTS INCORPORATED BYREFERENCE:  None**

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
|       |                   | **Page**                                                                                                      |
|------------|------------------------|---------------------------------------------------------------------------------------------------------------|
| PART I     | FINANCIAL  INFORMATION |                                                                                                          | 3 |   |
|       |                   |                                                                                                          |   |   |   |
|       | Item 1.                | Financial  Statements                                                                                         |   | 3 |   |
|       |                   | Consolidated  Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004                            |   | 3 |   |
|       |                   | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2005 and  2004 (unaudited) |   | 4 |   |
|       |                   | Consolidated  Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2005  (unaudited)     |   | 5 |   |
|       |                   | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004  (unaudited)           |   | 6 |   |
|       |                   | Notes  to Consolidated Financial Statements                                                                   |   | 7 |   |
|       |                   |                                                                                                          |   |   |   |
|       | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |   | 20 |   |
|       | Item 3.                | Quantitative  and Qualitative Disclosures About Market Risk                                                   |   | 32 |   |
|       | Item 4.                | Controls and  Procedures                                                                                      |   | 33 |   |
|       |                   |                                                                                                          |   |   |   |
| PART II    | OTHER INFORMATION      |                                                                                                          | 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) ”MalaraBroadcast Group” and “Malara” refer to Malara Broadcast Group, Inc.,together with its direct and indirect subsidiaries.  Our principal executive offices are locatedat 767 Third Avenue, 34th Floor, New York, NY 10017, and our telephone numberat that address is (212) 826-2530. Our web site is located at http://www.granitetv.com.The information on our web site is not part of this report.

 

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

 

1

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

This reportincludes and incorporates forward-looking statements.  We have based these forward-lookingstatements on our current expectations and projections about futureevents.  Generally, the words “anticipates,”“believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similarexpressions identify forward-looking statements. We believe that theforward-looking statements contained in this report are based upon reasonableassumptions, we can give no assurance that our goals will be achieved. Theseforward-looking statements are subject to risks, uncertainties and assumptions aboutus, including, among other things:

 

•      inabilityto implement our strategy, or, having implemented it, failure to realizeanticipated cost savings or revenue opportunities available throughimplementation of our strategy;

 

•      inabilityto effect dispositions or acquisitions of television stations, which are animportant part of our strategy;

 

•      the effectsof governmental regulation of broadcasting, including adverse changes in, orinterpretations of, the exceptions to the Federal Communications Commission’sduopoly rule which could restrict, or eliminate, our ability to enter intoduopoly-type operating arrangements and implement our operating strategy;

 

•      pricingfluctuations in national and local advertising;

 

•      volatilityor increases in programming costs;

 

•      restrictionson our operations due to, and the effect of, our significant leverage andlimited sources of liquidity;

 

•      the impactof changes in national and regional economies;

 

•      delay inany economic recovery or the recovery not being as robust as might otherwisehave been anticipated;

 

•      our abilityto service our outstanding debt;

 

•      successfulintegration of acquired television stations (including achievement of synergiesand cost reductions);

 

•      successfulresults of local services arrangement with Malara Broadcast Group stations inFort Wayne, Indiana and Duluth, Minnesota;

 

•      anyextraordinary, newsworthy event, including hostilities or terrorist attacks;

 

•      competitionin the markets in which the stations we own and the stations to which weprovide services are located;

 

•      loss ofnetwork affiliations or changes in the terms of network affiliation agreementsupon renewal; and

 

•      technologicalchange and innovation in the broadcasting industry.

 

Other matters setforth in this report, as well as risk factors set forth in our Annual Report onForm 10-K for the year ended December 31, 2004, filed with the Securities andExchange Commission may also cause actual results in the future to differmaterially from those described in the forward-looking statements.  We undertake no obligation to update andrevise any forward-looking statements, whether as a result of new information,future events or otherwise.  In light of theserisks, uncertainties and assumptions, the forward-looking events discussed inthis report might not occur.

 

2

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**PART I. FINANCIAL INFORMATION**

 

***Item 1.   Financial Statements***

**GRANITE BROADCASTING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **June 30,**    | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **2005**        | ** **  | **2004**         | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **(Unaudited)** | ** **  | ** **       | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                    |       |            |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                           |       |            |        |             |       |
| Cash and cash  equivalents (Excludes $24,997,500 of restricted cash equivalents at June 30,  2005, which is shown separately below.)                                                                                                                                                                                                                                      |       | $               | 20,046,214  |             | $          | 60,858,710 |   |
| Marketable  securities, at fair value                                                                                                                                                                                                                                                                                                                                     |       | —          |        | 5,603,500        |       |
| Accounts  receivable, less allowance for doubtful accounts ($724,089 at June 30, 2005  and $896,465 at December 31, 2004)                                                                                                                                                                                                                                                 |       | 21,591,968      |        | 20,551,203       |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                     |       | 7,307,766       |        | 11,605,637       |       |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                     |       | 4,533,067       |        | 4,442,080        |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                     |       | 53,479,015      |        | 103,061,130      |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Restricted cash  equivalents                                                                                                                                                                                                                                                                                                                                              |       | 24,997,500      |        | —           |       |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                              |       | 49,306,585      |        | 45,739,747       |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                     |       | 2,517,904       |        | 5,180,140        |       |
| Other non  current assets                                                                                                                                                                                                                                                                                                                                                 |       | 5,037,212       |        | 8,430,731        |       |
| Deferred  financing fees, less accumulated amortization ($3,095,361 at June 30, 2005  and $1,989,038 at December 31, 2004)                                                                                                                                                                                                                                                |       | 12,896,158      |        | 11,760,080       |       |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                                             |       | 69,351,748      |        | 47,632,113       |       |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                  |       | 134,755,829     |        | 127,331,829      |       |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                |       | 100,033,859     |        | 80,793,410       |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                              |       | $               | 452,375,810 |             | $          | 429,929,180 |   |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                               |       |            |        |             |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                     |       |            |        |             |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                          |       | $               | 1,884,501   |             | $          | 1,859,291 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                          |       | 3,290,625       |        | 3,290,625        |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                                |       | 5,788,026       |        | 7,376,683        |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                             |       | 20,684,755      |        | 24,526,448       |       |
| Short-term debt                                                                                                                                                                                                                                                                                                                                                           |       | 2,492,000       |        | —           |       |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                                |       | 4,573,346       |        | 3,785,399        |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                |       | 38,713,253      |        | 40,838,446       |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Long-term debt,  less current portion                                                                                                                                                                                                                                                                                                                                     |       | 451,768,489     |        | 400,791,298      |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                             |       | 11,281,375      |        | 17,976,348       |       |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                   |       | 22,517,668      |        | 19,347,007       |       |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                               |       | 199,013,500     |        | 198,835,862      |       |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                          |       | 83,030,495      |        | 70,256,573       |       |
| Other non  current liabilities                                                                                                                                                                                                                                                                                                                                            |       | 13,647,345      |        | 13,973,794       |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |            |        |             |       |
| Stockholders’  deficit:                                                                                                                                                                                                                                                                                                                                              |       |            |        |             |       |
| Common stock:  41,000,000 shares authorized consisting of 1,000,000 shares of Class A Common  Stock, $.01 par value, and 40,000,000 shares of Common Stock (Nonvoting),  $.01 par value; 98,250 shares of Class A Common Stock and 19,480,142 shares  of Common Stock (Nonvoting) (19,283,924 shares at December 31, 2004)  issued and outstanding at June 30, 2005. |       | 195,783         |        | 193,820          |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                               |       | 364,313         |        | 361,088          |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                                                                                     |       | —          |        | (12,914          | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                      |       | (367,110,965    | )           | (331,410,284     | )          |
| Less: Unearned  compensation                                                                                                                                                                                                                                                                                                                                              |       | (169,771        | )           | (346,183         | )          |
| Treasury stock,  at cost                                                                                                                                                                                                                                                                                                                                                  |       | (875,675        | )           | (875,675         | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                         |       | (367,596,315    | )           | (332,090,148     | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                         |       | $               | 452,375,810 |             | $          | 429,929,180 |   |

 

See accompanying notes.

 

3

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTSOF OPERATIONS(Unaudited)**

 
| ** **                                                                                                                  | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                        | ** **  | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Net revenues                                                                                                                |       | $                               | 31,011,011  |                          | $          | 29,163,107 |   | $ | 56,747,921 |   | $ | 55,163,748 |   |
| Operating  expenses:                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Direct operating  expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 12,505,918                      |        | 12,688,490                    |       | 24,818,927 |   | 25,689,726 |   |
| Selling, general  and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 9,406,334                       |        | 9,623,487                     |       | 18,241,772 |   | 17,713,527 |   |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,725,159                       |        | 2,953,132                     |       | 5,423,058 |   | 5,973,850 |   |
| Depreciation                                                                                                                |       | 1,445,697                       |        | 1,724,372                     |       | 3,274,357 |   | 3,486,849 |   |
| Amortization of  intangible assets                                                                                          |       | 2,395,367                       |        | 1,882,227                     |       | 4,435,107 |   | 3,764,465 |   |
| Performance  award expense                                                                                                  |       | 319,797                         |        | 524,271                       |       | 639,594 |   | 1,048,542 |   |
| Non-cash  compensation expense (1)                                                                                          |       | 93,557                          |        | 132,178                       |       | 188,150 |   | 435,002 |   |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Operating  income(loss)                                                                                                     |       | 2,119,182                       |        | (365,050                      | )          | (273,044 | ) | (2,948,213 | ) |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Other expenses  (income):                                                                                                   |       |                            |        |                          |       |   |   |   |   |
| Interest expense                                                                                                            |       | 11,140,969                      |        | 9,872,461                     |       | 21,331,122 |   | 19,745,054 |   |
| Interest income                                                                                                             |       | (289,045                        | )           | (284,012                      | )          | (737,799 | ) | (516,539 | ) |
| Non-cash  interest expense                                                                                                  |       | 1,145,212                       |        | 1,133,856                     |       | 2,217,753 |   | 2,280,297 |   |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                       |        | 6,386,961                     |       | 12,773,922 |   | 12,773,922 |   |
| Other                                                                                                                       |       | 88,626                          |        | 422,214                       |       | 168,032 |   | 562,152 |   |
| Loss before  income taxes                                                                                                   |       | (16,353,541                     | )           | (17,896,530                   | )          | (36,026,074 | ) | (37,793,099 | ) |
| Benefit for  income taxes                                                                                                   |       | (146,649                        | )           | (2,193,992                    | )          | (325,393 | ) | (4,677,664 | ) |
| Net loss                                                                                                                    |       | $                               | (16,206,892 | )                             | $          | (15,702,538 | ) | $ | (35,700,681 | ) | $ | (33,115,435 | ) |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Net loss  attributable to common shareholders                                                                               |       | $                               | (16,206,892 | )                             | $          | (15,702,538 | ) | $ | (35,700,681 | ) | $ | (33,115,435 | ) |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Basic and  diluted net loss per share                                                                                       |       | $                               | (0.83       | )                             | $          | (0.81 | ) | $ | (1.83 | ) | $ | (1.71 | ) |
|                                                                                                                        |       |                            |        |                          |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                 |       | 19,577,199                      |        | 19,381,124                    |       | 19,539,121 |   | 19,350,292 |   |

 

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

 
| Operating  expense - Selling, general and administrative expenses |   | $      | 18,867 |    | $      | 24,306  |   | $       | 38,770  |   | $ | 52,842  |   |
|-------------------------------------------------------------------|--------|--------|--------|---------|--------|---------|--------|---------|---------|--------|---|---------|--------|
| Corporate  expense                                                |   | 74,690 |   | 107,872 |   | 149,380 |   | 382,160 |    |
| Non-cash  compensation expense                                    |   | $      | 93,557 |    | $      | 132,178 |   | $       | 188,150 |   | $ | 435,002 |   |

 

See accompanying notes.

 

4

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**GRANITE BROADCASTING CORPORATIONCONSOLIDATED STATEMENTOF STOCKHOLDERS’ DEFICIT(Unaudited)**

 
| ** **                              | ** ** | **Class A  Common  Stock** | ** ** | **Common  Stock  (Nonvoting)** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Other  Comprehensive  Income/(Loss)** | ** ** | **Accumulated  Deficit** | ** ** | **Unearned  Compensation** | ** ** | **Treasury  Stock** | ** **   | **Total  Stockholders’  Deficit** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------|--------------|----------------------------------------|------------|
|                                    |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         |                                   |       |
| Balance at  December 31, 2004           |       | $                          | 982        |                           | $          | 192,838                          |       | $                                       | 361,088    |                     | $          | (12,914                    | )          | $                   | (331,410,284 | )                                      | $          | (346,183 | ) | $ | (875,675 | ) | $ | (332,090,148 | ) |
| Issuance of  Common Stock (Nonvoting)   |       |                       |       | 1,963                          |       | (1,963                           | )          |                                    |       |                     |       |                       |       |                |         | —                                 |       |
| Stock expense  related to stock plans   |       |                       |       |                           |       | 12,450                           |       |                                    |       |                     |       | 74,535                     |       |                |         | 86,985                                 |       |
| Grant of stock  award under stock plans |       |                       |       |                           |       | (7,262                           | )          |                                    |       |                     |       | 7,262                      |       |                |         | —                                 |       |
| Discount on  loans to officers          |       |                       |       |                           |       |                             |       |                                    |       |                     |       | 94,615                     |       |                |         | 94,615                                 |       |
| Net loss                                |       |                       |       |                           |       |                             |       |                                    |       | (35,700,681              | )          |                       |       |                |         | (35,700,681                            | )          |
| Unrealized gain  on investment          |       |                       |       |                           |       |                             |       | 12,914                                  |       |                     |       |                       |       |                |         | 12,914                                 |       |
| Comprehensive  loss                     |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         | (35,687,767                            | )          |
|                                    |       |                       |       |                           |       |                             |       |                                    |       |                     |       |                       |       |                |         |                                   |       |
| Balance at June  30, 2005               |       | $                          | 982        |                           | $          | 194,801                          |       | $                                       | 364,313    |                     | $          | —                     |       | $                   | (367,110,965 | )                                      | $          | (169,771 | ) | $ | (875,675 | ) | $ | (367,596,315 | ) |

 

Seeaccompanying notes.

 

5

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTSOF CASH FLOWS(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                   | ** ** | **2005**                      | ** **  | **2004** | ** ** |
| ** **                                                                   | ** ** | ** **                    | ** **  | ** ** | ** ** |
| Cash flows from  operating activities:                                       |       |                          |        |   |   |
| Net loss                                                                     |       | $                             | (35,700,681 | ) | $ | (33,115,435 | ) |
|                                                                         |       |                          |        |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                          |        |   |   |
| Amortization of  intangible assets                                           |       | 4,435,107                     |        | 3,764,465 |   |
| Depreciation                                                                 |       | 3,274,357                     |        | 3,486,849 |   |
| Performance award  expense                                                   |       | 639,594                       |        | 1,048,542 |   |
| Non-cash  compensation expense                                               |       | 188,150                       |        | 435,002 |   |
| Non-cash  interest expense                                                   |       | 2,217,753                     |        | 2,280,297 |   |
| Non-cash  preferred stock dividend                                           |       | 12,773,922                    |        | 12,773,922 |   |
| Deferred tax  benefit                                                        |       | (325,393                      | )           | (4,677,664 | ) |
| Change in assets  and liabilities:                                           |       |                          |        |   |   |
| Decrease in  accounts receivable                                             |       | 1,195,396                     |        | 766,155 |   |
| (Decrease)  Increase in accrued liabilities                                  |       | (2,001,219                    | )           | 270,703 |   |
| Decrease in  accounts payable                                                |       | (216,673                      | )           | (1,149,015 | ) |
| WB affiliation  payment                                                      |       | (1,261,714                    | )           | (1,688,389 | ) |
| Decrease in  income tax receivable                                           |       | —                        |        | 16,326,799 |   |
| Decrease in film  contract rights and other assets                           |       | 10,001,368                    |        | 6,033,580 |   |
| Decrease in film  contract rights payable and other liabilities              |       | (10,872,138                   | )           | (12,177,309 | ) |
| Net cash used in  operating activities                                       |       | (15,652,171                   | )           | (5,621,498 | ) |
|                                                                         |       |                          |        |   |   |
| Cash flows from  investing activities:                                       |       |                          |        |   |   |
| Sales  (purchases) of marketable securities and other investments            |       | 5,610,506                     |        | (8,353,112 | ) |
| Payment for  acquisition of assets                                           |       | (55,696,971                   | )           | — |   |
| Purchase of U.S.  Government Securities                                      |       | (24,997,500                   | )           | — |   |
| Capital  expenditures                                                        |       | (950,800                      | )           | (2,600,302 | ) |
| Net cash used in  investing activities                                       |       | (76,034,765                   | )           | (10,953,414 | ) |
|                                                                         |       |                          |        |   |   |
| Cash flows from  financing activities:                                       |       |                          |        |   |   |
| Proceed from  senior credit facility                                         |       | 53,500,000                    |        | — |   |
| Payment of  senior credit facility                                           |       | (383,159                      | )           | — |   |
| Payment of  deferred financing fees                                          |       | (2,242,401                    | )           | (170,905 | ) |
| Net cash  provided by (used in) financing activities                         |       | 50,874,440                    |        | (170,905 | ) |
|                                                                         |       |                          |        |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (40,812,496                   | )           | (16,745,817 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 60,858,710                    |        | 90,213,995 |   |
| Cash and cash  equivalents, end of period                                    |       | $                             | 20,046,214  |   | $ | 73,468,178 |   |
|                                                                         |       |                          |        |   |   |
| Supplemental  information:                                                   |       |                          |        |   |   |
| Cash paid for  interest                                                      |       | $                             | 21,033,658  |   | $ | 17,440,313 |   |
| Cash paid for  income taxes                                                  |       | 38,250                        |        | 21,100 |   |
| Non-cash capital  expenditures                                               |       | 153,307                       |        | 72,254 |   |

 

See accompanying notes.

 

6

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**GRANITEBROADCASTING CORPORATIONNOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(UNAUDITED)**

 

**Note 1 –Operations of the Company**

 

The businessoperations of Granite Broadcasting Corporation and its wholly ownedsubsidiaries (the “Company”) consist of eight network affiliated televisionstations in the United States, consisting of four NBC-affiliated televisionstations, one ABC-affiliated station, one CBS-affiliated television station andtwo WB Network stations. The Company’s stations are located in New York,California, Michigan, Indiana, Illinois and Minnesota. Through various localservice agreements (as fully discussed below), Granite Broadcasting Corporationprovides advertising sales, promotion, administrative services and selectedprogramming to two television stations owned by Malara Broadcast Group, Inc (“MalaraBroadcast Group”).

 

As more fullydiscussed in Note 3, the Company completed the sale of its Fort Wayne, IndianaABC affiliate, WPTA-TV, to Malara Broadcast Group and acquired the Fort Wayne,Indiana NBC affiliate, WISE-TV from New Vision Group, LLC. in March 2005.  Malara Broadcast Group also acquired KDLH-TV,the CBS affiliate serving Duluth, Minnesota from New Vision Group, LLC. TheCompany entered into a strategic arrangement with Malara Broadcast Group, underwhich the Company provides advertising sales, promotion and administrativeservices, and selected programming to WPTA-TV and KDLH-TV under local servicesagreements. Although the Company does not own Malara Broadcast Group or itstelevision stations, the Company is deemed to be the primary beneficiary ofMalara Broadcast Group as defined under Financial Accounting Standards BoardInterpretation No. 46, *Consolidation of VariableInterest Entities* (“Interpretation 46”). As a result, Interpretation46 requires the Company to consolidate Malara Broadcast Group’s financialposition, results of operations and cash flows for the period ended June 30,2005.

 

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

 

As of June 30,2005, the Company had approximately $20,046,000 of cash and cash equivalents onhand, which excluded $24,997,500 in U.S. Government Securities which arepledged to secure the reimbursement obligations in the event of a draw on theletter of credit that serves as collateral for the Term Loan A under MalaraBroadcast Group’s Senior Credit Facility and is restricted and not availablefor working capital or any other purposes. To the****extent that principal paymentsare made on the Term Loan A, the letter of credit shall be proportionatelyreduced and the Company shall be permitted to proportionately reduce the amountof pledged U.S. Government Securities. Absent changes to its capital structureand station ownership mix, the Company will not have enough liquidity toservice its existing obligations over the next twelve months.  In order to improve the Company’s existingliquidity position, the Company is currently exploring the sale of assets andthe raising of additional capital. However, under its Indenture, the Company’s use of the net proceeds fromthe sale of assets is restricted.  Of thenet proceeds received in an asset sale, $5 million may be used for workingcapital purposes and the remainder must be used either:

 

•      to make an investment in properties andassets that replace the properties and assets that were the subject of suchasset sale or in properties and assets that will be used in the business of theCompany and its Restricted Subsidiaries as existing on the Issue Date or inbusinesses reasonably related thereto (“Replacement Assets”) or to finance,directly or indirectly, a Permitted Business Acquisition or enter into adefinitive agreement to effectuate such acquisition; provided that (A) theprimary purpose of such acquisition of Replacement Assets or Permitted BusinessAcquisition is to acquire, and there is acquired, a television station with aBig-4 (ABC, CBS, NBC or Fox) network affiliation agreement in place or thecreation (through ownership by the Company and its Restricted Subsidiaries) ofa “duopoly” in a market and (B) that the Company shall use all reasonablebest efforts to promptly dispose of any other assets acquired in suchacquisition or Permitted Business Acquisition (as such terms are defined in theIndenture); or

 

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

 

7

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Assuming theCompany is successful in selling assets and raising additional capital, itbelieves that the available proceeds together with the cash and cashequivalents on hand and internally generated funds from operations will besufficient to satisfy our cash requirements for our existing operations for thenext twelve months. However, there can be no assurance that the Company will besuccessful in selling assets and raising additional capital and a lack ofliquidity would have a material adverse effect on the Company’s businessstrategy and therefore affect its ability to continue as a going concern. The2005 quarterly financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

**Note 2 – Summary ofSignificant Accounting Policies**

 

*InterimFinancial Statements*

 

The accompanyingunaudited consolidated financial statements include the accounts of the Companyand have been prepared in accordance with the instructions to Form 10-Q and donot include all of the information and footnotes required by United Statesgenerally accepted accounting principles for complete financial statements.  Operating results for the three and sixmonths ended June 30, 2005 are not necessarily indicative of the results thatmay be expected for the year ended December 31, 2005.  For further information, refer to the Company’sconsolidated financial statements and notes thereto for the year ended December31, 2004, which were included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2004.  In theopinion of management, all adjustments of a normal recurring nature, which arenecessary for a fair presentation of the results for the interim periods, havebeen made.

 

*Principlesof Consolidation*

 

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

 

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

 

*Reclassification*

 

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

 

*RestrictedCash Equivalents*

 

The $23.5 million Term Loan A under the MalaraBroadcast Group Senior Credit Facility is secured by a letter of credit. To secure the reimbursement obligations in the event of a draw on the letter ofcredit and pursuant to the terms and conditions of an Application and Agreementfor Standby Letter of Credit, the Company pledged $25 million of U.S.Government Securities, which are not available for working capital or any otherpurposes and held in escrow. To the****extent thatprincipal payments are made on the Term Loan A, the letter of credit shall beproportionately reduced and the Company shall be permitted to proportionatelyreduce the amount of the pledged U.S. Government Securities. As of June 30,2005, the restricted U.S. Government Securities totaled $24,997,500.

 

*CashEquivalents and Investments in Marketable Securities*

 

All highly liquid investments with a maturity ofninety days or less from the date of purchase are considered cash equivalents.Marketable securities, if applicable, are classified as available-for-sale inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 115, Accounting for Certain Investments in Debt and Equity Securities.  Marketable securities are carried at fairmarket value based on current market quotes. Any unrealized gains and lossesare reported in stockholders’ equity as a separate component of othercomprehensive income / (loss) until realized. Gains and losses on securities sold are based on the specificidentification method. The Company does not hold securities for speculative ortrading purposes. As of June 30, 2005, the Company’s did not have anyunrealized holding gains.  For the sixmonths ended June 30, 2005, the Company recorded realized gain of approximately$12,914.

 

8

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*Property andEquipment*

 

Propertyand equipment are reorded at cost and depreciated on a straight-line basis overtheir estimated useful lives, by asset classifications, ranging from a periodof 3 to 40 years. Effective January 1, 2005, the Company revised its estimateduseful lives of certain asset classifications which were being depreciated on astraight-line basis ranging from 3 to 35 years in periods prior to January 1,2005. Maintenance and repairs are charged to operations as incurred.

 

*Stock-BasedCompensation*

 

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

 

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

 

The following table illustrates the effect on net lossand loss per share as if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123 *Accounting for Stock-Based Compensation,*, as amended byStatement 148, to stock-based compensation for the three and six months endedJune 30, 2005 and 2004 which may not berepresentative of the impact in future years.

 
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                                 | ** ** | **2005**                        | ** **  | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **(unaudited)**                 | ** **  | **(unaudited)**               | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Net loss  attributable to common shareholders, as reported |       | $                               | (16,206,892 | )                             | $          | (15,702,538 | ) | $ | (35,700,681 | ) | $ | (33,115,435 | ) |
| Add: pro forma  compensation expense                       |       | 104,355                         |        | 358,064                       |       | 208,710 |   | 715,438 |   |
| Less:  compensation expense, as reported                   |       | 9,500                           |        | 12,000                        |       | 19,000 |   | 24,000 |   |
| Pro forma net  loss attributable to common shareholders    |       | $                               | (16,301,747 | )                             | $          | (16,048,602 | ) | $ | (35,890,391 | ) | $ | (33,806,873 | ) |
|                                                       |       |                            |        |                          |       |   |   |   |   |
| Basic and  diluted net loss per share, as reported         |       | $                               | (0.83       | )                             | $          | (0.81 | ) | $ | (1.83 | ) | $ | (1.71 | ) |
| Pro forma  compensation expense                            |       | (0.00                           | )           | (0.02                         | )          | (0.01 | ) | (0.04 | ) |
| Pro forma basic  and diluted net loss per share            |       | $                               | (0.83       | )                             | $          | (0.83 | ) | $ | (1.84 | ) | $ | (1.75 | ) |

 

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

 

*RecentAccounting Pronouncements*

 

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

 

9

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

employee services in exchange for (i) equity instruments of theenterprise or (ii) liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments. Statement 123(R) requires an entity to recognize thegrant-date fair-value expense of stock options or other equity basedcompensation issued to employees in the statement of operations. The revisedStatement generally requires that an entity account for those transactionsusing the fair-value-based method, and eliminates the intrinsic value method ofaccounting in Accounting Principles Board No. 25, *Accountingfor Stock Issued to Employees*, or APB 25.   The revised Statement requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial position, results ofoperations or cash flows.

 

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

 

**Note 3 – Acquisitions and Dispositions**

 

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

 

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

 

On March 8, 2005,the Company entered into a strategic arrangement with Malara Broadcast Group,under which the Company provides advertising sales, promotion andadministrative services, and selected programming to WPTA-TV and KDLH-TV inreturn for certain fees that will be paid by Malara Broadcast Group to theCompany. The fees payable to the Company will be paid after current debtservice as well as certain other expenses Malara Broadcast Group incursdirectly are satisfied. During the three and six months ended June 30, 2005,Malara Broadcast Group paid the Company approximately $800,000 owed under thestrategic arrangements between both company’s. As of June 30, 2005, the totalamount owed to the Company from Malara Broadcast Group totaled approximately$5,925,000.

 

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

 

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

 

In May 2004, an application was filed with the FCC,seeking consent to assign the license of television station KDLH to asubsidiary of Malara Broadcast Group.  Apetition to deny the application was filed with the FCC jointly by twocompeting television station licensees in the Duluth market asserting that theCompany will have a prohibited ownership interest in KDLH by virtue of theoperating arrangement between Malara Broadcast Group and the Company.  The FCC’s Media Bureau (“Bureau”) denied thepetition and granted the assignment 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 filedan opposition to the application for review, and the petitioning broadcastersfiled a response to that opposition.

 

10

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The FCC has not yet ruled on the application forreview.  Although the Company believesthat the application for review is without merit and anticipates that the FCCwill affirm the grant of the assignment application for KDLH, it is notpossible to predict how the FCC will rule on the application for review.  It also is not possible to predict anyremedial action or possible sanction that may be imposed by the FCC in theevent that it grants the application for review.  An FCC grant of the application for reviewultimately could result in a reformation or rescission of these agreements, theassignment of the KDLH license back to New Vision Group, LLC, or a sale byMalara Broadcast Group of its ownership of KDLH.

 

Each of theacquisitions listed below was consummated during the three months ended March31, 2005. The Company’s acquisition of WISE and Malara Broadcast Group’sacquisition of KDLH were accounted for under the purchase method of accounting.The consolidated financial statements continue to include the operating resultsof WPTA as well as the operating results of WISE and KDLH from the date ofconsummation of the acquisition. In accordance with the provisions ofInterpretation 46, the Company did not account for the sale of the assets ofWPTA.

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

 

----

(1)   Operations 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 New Vision Group, LLC for $43.5million plus approximately $2,300,000 of transactions costs. The acquisitionwas accounted for under the purchase method of accounting and accordingly, thepurchase price was allocated to liabilities acquired based on their estimatedfair value on the acquisition date.

 

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

 
| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                         |       | $                 | 45,843,000 |   |
| Net Liabilities  Acquired                              |       | 1,714,000         |       |
| FCC License  (indefinite lived)                        |       | (5,424,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (20,797,000       | )          |
|                                                   |       |              |       |
| Goodwill  (indefinite lived)                           |       | $                 | 21,336,000 |   |

 

*KDLH*

 

On March 8, 2005,Malara Broadcast Group acquired substantially all of the assets of KDLH-TV fromNew Vision Group, LLC for $9.5 million plus approximately $315,000 of transactionscosts. The acquisition was accounted for under the purchase method ofaccounting and accordingly, the purchase price was allocated to assets acquiredbased on their estimated fair value on the acquisition date.

 

The followingtable summarizes the allocation of the purchase price of KDLH-TV acquired onMarch 8, 2005. Malara Broadcast Group is currently obtaining a third-partyvaluation of certain acquired intangible assets and therefore the allocationbelow is preliminary and estimated and is subject to change once thethird-party valuation is completed. In addition, net assets acquired aresubject to future adjustments and therefore the amount below is preliminary andestimated and subject to change.

 

11

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| ** **                                             | ** ** | **Value at**      | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|
| ** **                                             | ** ** | **March 8, 2005** | ** ** |
| Purchase Price                                         |       | $                 | 9,854,000  |   |
| Net Assets  Acquired                                   |       | (4,639,000        | )          |
| FCC License  (indefinite lived)                        |       | (2,000,000        | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (2,879,000        | )          |
|                                                   |       |              |       |
| Goodwill  (indefinite lived)                           |       | $                 | 336,000    |   |

 

The following unaudited pro forma information for thethree months ended June 30, 2004  and sixmonths ended June 30, 2005 and 2004 has been presented as if the Company’sacquisition of WISE-TV and Malara Broadcast Group’s acquisition of KDLH-TV hadoccurred on January 1, of each year:

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                                    | ** ** | **2005**                        | ** **  | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Actual**                      | ** **  | **Pro Forma**                 | ** ** | **Pro Forma** | ** ** | **Pro Forma** | ** ** |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Net Revenues                                  |       | $                               | 31,011,000  |                          | $          | 32,468,000 |   | $ | 58,599,000 |   | $ | 61,329,000 |   |
| Operating  Expenses                           |       | 28,892,000                      |        | 32,209,000                    |       | 59,456,000 |   | 63,706,000 |   |
| Income (loss)  from Operations                |       | 2,119,000                       |        | 259,000                       |       | (857,000 | ) | (2,377,000 | ) |
| Other Expenses                                |       | 18,473,000                      |        | 18,504,000                    |       | 36,678,000 |   | 37,060,000 |   |
| Loss before  Taxes                            |       | (16,354,000                     | )           | (18,245,000                   | )          | (37,535,000 | ) | (39,437,000 | ) |
| Benefit for  income taxes                     |       | (147,000                        | )           | (2,194,000                    | )          | (326,000 | ) | (4,678,000 | ) |
| Net loss  attributable to common shareholders |       | $                               | (16,207,000 | )                             | $          | (16,051,000 | ) | $ | (37,209,000 | ) | $ | (34,759,000 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Basic and  diluted net loss per share         |       | $                               | (0.83       | )                             | $          | (0.83 | ) | $ | (1.90 | ) | $ | (1.80 | ) |
|                                          |       |                            |        |                          |       |   |   |   |   |
| Weighted average  common shares outstanding   |       | 19,577,199                      |        | 19,381,124                    |       | 19,539,121 |   | 19,350,292 |   |

 

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

 

**Note 4 –Related Parties**

 

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

 

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

 

Under the terms of the separation agreement, theCompany and Mr. Beck amended the Performance Award and deferral of suchpayments pursuant to the separation agreement. Under the amended terms of the Performance Award, Mr. Beck’s PerformanceAward fully vested as of the separation date and a payment of $221,200 was madeon September 30, 2004 to repay his outstanding promissory note to theCompany.  The remaining vested award of$3,065,000 is payable in cash on December 22, 2006.

 

12

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In addition, the Company modified the terms of Mr.Beck’s outstanding stock option awards to allow his options to continue to vestand to allow Mr. Beck the right to exercise his options until the earlier of(i) the later of January 2, 2007 and 30 days after the last day of Mr. Beck’scontinuous service on the Company’s Board of Directors and (ii) the fixed dateon which each stock option award was initially set to expire.

 

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

 

From September 2004 through July 2005, the Companyallowed Mr. Beck to use office space at no charge.

 

**Note 5 – Restructuring and Severance Charges**

 

*Restructuring Charges*

 

During 2004, the Companyrecognized a $2,027,000 restructuring charge relating to employee separationsat both its corporate office and its Buffalo, New York television station.  Of the total $2,027,000, approximately$1,406,000 related to severance and other benefits, associated with the departureof Stuart J. Beck (see Note 4, Related Parties) and administrative supportstaff at the corporate office which are being paid over an eighteen monthperiod from date of separation, September 21, 2004. The remaining $621,000restructuring charge includes severance and other benefits resulting from areduction in the workforce at the Buffalo, New York television station.

 

During the threemonths ended March 31, 2005, the Company recognized a $252,000 restructuringcharge related to employee separations, which included severance and other benefits.These charges were not costs directly attributable to Malara Broadcast Group’sacquisition of KDLH-TV due to the fact that upon Malara’s acquiring of KDLH-TVcertain employees were retained by Malara with the remaining employees becomingemployees of the Company’s KBJR-TV station and were either retained orsubsequently terminated. During the three months ended June 30, 2005, asanticipated, the Company recorded an additional $100,000 of restructuringcharges related to severance and stay-bonuses awarded to transitional employeesof KBJR-TV. In addition, during the three months ended June 30, 2005, asanticipated, the Company recorded restructuring charges of $61,000 related tostay-bonuses awarded to transitional employees of WISE-TV. The Company anticipatesminimal restructuring charges in future periods relating to stay-bonusesawarded to transitional employees of both KBJR-TV and WISE-TV upon separation.

.

At June 30, 2005, theaccruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the Buffalo, New York television station and KBJR-TV station areincluded in “station operating expenses” and the related expense for thecorporate charges are included in “corporate separation agreement expenses” onthe consolidated Statement of Operations. These costs were recognized in accordance with the provisions ofStatement of Financial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

*AcquisitionCharges*

 

During the threemonths ended March 31, 2005, the Company accrued $590,000 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 WISE-TV, whichincluded line through management employees. During the three months ended June30, 2005, the Company accrued an additional $32,000 related to employeeseparations at WISE-TV, which included severance and other benefits as part ofits purchase accounting.

 

At June 30, 2005,the accruals for acquisition activities of WISE-TV 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 Liabilities in Connectionwith a Purchase Business Combination*.

 

13

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

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three Months Ended June 30, 2005**                                                          | ** ** |
| ** **         | ** ** | **March 31,  2005**                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                                                                             | 131,000    |   | $ | — |   | $ | 104,000 |   | $ | 27,000 |   |
| KBJR-TV            |       | 104,000                                                                                       |       | 100,000 |   | 139,000 |   | 65,000 |   |
| WISE-TV            |       | 225,000                                                                                       |       | 93,000 |   | 137,000 |   | 181,000 |   |
| Corporate          |       | 882,000                                                                                       |       | — |   | 307,000 |   | 575,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,342,000  |   | $ | 193,000 |   | $ | 687,000 |   | $ | 848,000 |   |

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Six Months Ended June 30, 2005**                                                            | ** ** |
| ** **         | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                                                                             | 250,000    |   | $ | — |   | $ | 223,000 |   | $ | 27,000 |   |
| KBJR-TV            |       | —                                                                                        |       | 352,000 |   | 287,000 |   | 65,000 |   |
| WISE-TV            |       | —                                                                                        |       | 683,000 |   | 502,000 |   | 181,000 |   |
| Corporate          |       | 1,214,000                                                                                     |       | — |   | 639,000 |   | 575,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,464,000  |   | $ | 1,035,000 |   | $ | 1,651,000 |   | $ | 848,000 |   |

 

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

 

**Note 6 – Debt**

 

Short-term debtconsists of the following:

 
| ** **                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| Malara Broadcast  Group Senior Credit Facility |       | $                  | 2,492,000  |                   | $          | — |   |
|                                           |       |               |       |                   |       |
| Total                                          |       | $                  | 2,492,000  |                   | $          | — |   |

 

Long-term debtconsists of the following:

 
| ** **                                                                                                                  | ** ** | **June 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|
| 9 3/4% Senior  Secured Notes, due 2010, net of discount of $3,856,352 at June 30, 2005 and  $4,208,702 at December 31, 2004 |       | $                  | 401,144,000 |                   | $          | 400,791,000 |   |
| Malara Broadcast  Group Senior Credit Facility, less current portion                                                        |       | 50,625,000         |        | —                 |       |
|                                                                                                                        |       |               |        |                   |       |
| Total                                                                                                                       |       | $                  | 451,769,000 |                   | $          | 400,791,000 |   |

 

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

 

On December 22, 2003, the Company completed a$405,000,000 offering of our 9 3/4 % Senior Secured Notes (the “Notes”) dueDecember 1, 2010, at a discount, resulting in proceeds of$400,067,100.  Interest on the Notes ispayable on December 1 and June 1 of each year, which commenced onJune 1, 2004.  The Company used thenet proceeds from the offering in part to (i) repay all outstanding borrowings,plus accrued interest, under its senior credit agreement, (ii) redeem atpar, plus accrued interest, all of its 9 3/8 % and 10 3/8 % senior subordinated notes due May andDecember 2005, respectively, and (iii) to repurchase at par, plusaccrued interest, all of its 8 7/8 % senior subordinated notes dueMay 2008.  The remaining proceedswere invested in short-term securities as well as being used for generalworking capital purposes.

 

14

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

 

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

 

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

 

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

 

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

 

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

 

Interest rates associated with the Term Loan A arebased, at Malara Broadcast Group’s option, at either (i) the higher of thePrime Rate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Term LoanB and Revolving Loan are based, at Malara Broadcast Group’s option, at either(i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Term Loan B and Revolving Loan at a rate of 3% per annum.Additionally, Malara Broadcast Group is required to pay monthly commitment feeson the unused portion of its revolving loan commitment at a rate of 0.50% perannum.  Cash interest payments are payablemonthly.

 

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

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Term Loan A and the Revolving Loan equal to theproduct of (i) the Repayment Percentage (which is 25% unless there is anEvent of Default or the Consolidated Loan to Stick Value is less than 70%, inwhich case the Repayment Percentage is 100%) and (ii) the ConsolidatedExcess Free Cash Flow for the month preceding the month in which suchinstallment is due, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  All suchpayments shall be applied first to repay the outstanding Revolving Loan to thefull extent thereof (without a corresponding reduction in the Revolving LoanCommitment Amount) and second to repay the outstanding Term Loan A to the fullextent thereof; provided that, if the Repayment Percentage for such monthlyinstallment is 100%, the excess 75% of such monthly installment shall beapplied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Term Loan B to the full extentthereof. For the three and six months ended June 30, 2005, the total principalpayments made on the Term Loan A and the Revolving Loan approximated $383,000.

 

15

----

 

**Note 7 – Condensed Consolidating FinancialInformation**

 

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

 

**BALANCE SHEET**

**June 30, 2005**

 
| ** **                                        | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|---------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                        | ** ** | ** **                            | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                            |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current assets:                                   |       |                                  |        |                        |       |             |       |                      |        |
| Cash and cash  equivalents                        |       | $                                     | 18,540,960  |                        | $          | 1,505,254        |       | $                         | —      |   | $ | 20,046,214 |   |
| Accounts receivable,  net                         |       | 18,752,773                            |        | 2,839,195                   |       | —           |       | 21,591,968                |        |
| Other current  assets                             |       | 11,079,855                            |        | 760,978                     |       | —           |       | 11,840,833                |        |
| Due from  consolidated entity                     |       | 5,932,983                             |        | 90,127                      |       | (6,023,110       | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total current  assets                             |       | 54,306,571                            |        | 5,195,554                   |       | (6,023,110       | )          | 53,479,015                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Restricted cash  equivalents                      |       | 24,997,500                            |        | —                      |       | —           |       | 24,997,500                |        |
| Property and  equipment, net                      |       | 40,906,473                            |        | 8,400,112                   |       | —           |       | 49,306,585                |        |
| Other non  current assets                         |       | 22,736,060                            |        | 1,361,882                   |       | (3,646,668       | )          | 20,451,274                |        |
| Intangibles, net                                  |       | 286,998,034                           |        | 44,874,502                  |       | (27,731,100      | )          | 304,141,436               |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total assets                                      |       | $                                     | 429,944,638 |                        | $          | 59,832,050       |       | $                         | (37,400,878 | ) | $ | 452,375,810 |   |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Liabilities and  stockholders’ deficit       |       |                                  |        |                        |       |             |       |                      |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Current liabilities:                              |       |                                  |        |                        |       |             |       |                      |        |
| Accounts payable  and other accrued liabilities   |       | $                                     | 10,709,960  |                        | $          | 253,192          |       | $                         | —      |   | $ | 10,963,152 |   |
| Short-term debt                                   |       | —                                |        | 2,492,000                   |       | —           |       | 2,492,000                 |        |
| Other current  liabilities                        |       | 24,474,107                            |        | 783,994                     |       | —           |       | 25,258,101                |        |
| Due to  consolidated entity                       |       | 90,127                                |        | 5,932,983                   |       | (6,023,110       | )          | —                    |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Total current  liabilities                        |       | 35,274,194                            |        | 9,462,169                   |       | (6,023,110       | )          | 38,713,253                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Long-term debt,  less current portion             |       | 401,143,648                           |        | 50,624,841                  |       | —           |       | 451,768,489               |        |
| Other non current  liabilities                    |       | 46,924,512                            |        | 4,168,544                   |       | (3,646,668       | )          | 47,446,388                |        |
| Redeemable  preferred stock                       |       | 199,013,500                           |        | —                      |       | —           |       | 199,013,500               |        |
| Accrued  dividends on redeemable preferred stock  |       | 83,030,495                            |        | —                      |       | —           |       | 83,030,495                |        |
|                                              |       |                                  |        |                        |       |             |       |                      |        |
| Stockholders’  deficit:                      |       |                                  |        |                        |       |             |       |                      |        |
| Common stock                                      |       | 195,783                               |        | —                      |       | —           |       | 195,783                   |        |
| Additional  paid-in capital                       |       | 364,313                               |        | —                      |       | —           |       | 364,313                   |        |
| Accumulated  deficit                              |       | (334,956,361                          | )           | (4,423,504                  | )          | (27,731,100      | )          | (367,110,965              | )           |
| Less: Unearned  compensation                      |       | (169,771                              | )           | —                      |       | —           |       | (169,771                  | )           |
| Treasury stock,  at cost                          |       | (875,675                              | )           | —                      |       | —           |       | (875,675                  | )           |
| Total  stockholders’ deficit                 |       | (335,441,711                          | )           | (4,423,504                  | )          | (27,731,100      | )          | (367,596,315              | )           |
| Total  liabilities and stockholders’ deficit |       | $                                     | 429,944,638 |                        | $          | 59,832,050       |       | $                         | (37,400,878 | ) | $ | 452,375,810 |   |

 

16

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**STATEMENT OF OPERATIONS**

**For the three months ended June30, 2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                                |       | $                                      | 30,728,008  |                        | $          | 2,102,358        |       | $                         | (1,819,355 | ) | $ | 31,011,011 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct operating  expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 12,080,178                             |        | 425,740                     |       |             |       | 12,505,918                |       |
| Selling, general  and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 9,169,678                              |        | 2,056,011                   |       | (1,819,355       | )          | 9,406,334                 |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                               |       | 2,725,159                              |        | —                      |       |             |       | 2,725,159                 |       |
| Depreciation and  amortization                                                                                              |       | 3,502,824                              |        | 338,240                     |       |             |       | 3,841,064                 |       |
| Performance  award expense                                                                                                  |       | 319,797                                |        | —                      |       |             |       | 319,797                   |       |
| Non-cash  compensation expense                                                                                              |       | 93,557                                 |        | —                      |       |             |       | 93,557                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating income  (loss)                                                                                                    |       | 2,836,815                              |        | (717,633                    | )          |             |       | 2,119,182                 |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other expenses  (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest expense                                                                                                            |       | 9,880,136                              |        | 1,260,833                   |       |             |       | 11,140,969                |       |
| Interest income                                                                                                             |       | (289,045                               | )           | —                      |       |             |       | (289,045                  | )          |
| Non-cash  interest expense                                                                                                  |       | 1,076,260                              |        | 68,952                      |       |             |       | 1,145,212                 |       |
| Non-cash  preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                      |       |             |       | 6,386,961                 |       |
| Other                                                                                                                       |       | (1,230,395                             | )           | 1,319,021                   |       |             |       | 88,626                    |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss before  income taxes                                                                                                   |       | (12,987,102                            | )           | (3,366,439                  | )          |             |       | (16,353,541               | )          |
| Benefit for  income taxes                                                                                                   |       | (146,649                               | )           | —                      |       |             |       | (146,649                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss                                                                                                                    |       | $                                      | (12,840,453 | )                           | $          | (3,366,439       | )          |                      |       | $ | (16,206,892 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss  attributable to common shareholders                                                                               |       | $                                      | (12,840,453 | )                           | $          | (3,366,439       | )          |                      |       | $ | (16,206,892 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic and  diluted net loss per share                                                                                       |       | $                                      | (0.66       | )                           | N/A        |             |       |                      | $          | (0.83 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted average  common shares outstanding                                                                                 |       | 19,577,199                             |        | N/A                         |       |             |       | 19,577,199                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

17

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**STATEMENT OF OPERATIONS**

**For the six months ended June 30,2005**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                                |       | $                                      | 56,581,768  |                        | $          | 2,619,379        |       | $                         | (2,453,226 | ) | $ | 56,747,921 |   |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Station  operating expenses:                                                                                                |       |                                   |        |                        |       |             |       |                      |       |
| Direct operating  expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 24,269,248                             |        | 549,679                     |       |             |       | 24,818,927                |       |
| Selling, general  and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 17,938,989                             |        | 2,756,009                   |       | (2,453,226       | )          | 18,241,772                |       |
| Corporate expense  (exclusive of depreciation expense shown separately below)                                               |       | 5,423,058                              |        | —                      |       |             |       | 5,423,058                 |       |
| Depreciation and  amortization                                                                                              |       | 7,305,445                              |        | 404,019                     |       |             |       | 7,709,464                 |       |
| Performance  award expense                                                                                                  |       | 639,594                                |        | —                      |       |             |       | 639,594                   |       |
| Non-cash  compensation expense                                                                                              |       | 188,150                                |        | —                      |       |             |       | 188,150                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Operating income  (loss)                                                                                                    |       | 817,284                                |        | (1,090,328                  | )          |             |       | (273,044                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Other expenses  (income):                                                                                                   |       |                                   |        |                        |       |             |       |                      |       |
| Interest expense                                                                                                            |       | 19,752,706                             |        | 1,578,416                   |       |             |       | 21,331,122                |       |
| Interest income                                                                                                             |       | (737,799                               | )           | —                      |       |             |       | (737,799                  | )          |
| Non-cash  interest expense                                                                                                  |       | 2,131,620                              |        | 86,133                      |       |             |       | 2,217,753                 |       |
| Non-cash  preferred stock dividend                                                                                          |       | 12,773,922                             |        | —                      |       |             |       | 12,773,922                |       |
| Other                                                                                                                       |       | (1,500,595                             | )           | 1,668,627                   |       |             |       | 168,032                   |       |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Loss before  income taxes                                                                                                   |       | (31,602,570                            | )           | (4,423,504                  | )          |             |       | (36,026,074               | )          |
| Benefit for  income taxes                                                                                                   |       | (325,393                               | )           | —                      |       |             |       | (325,393                  | )          |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss                                                                                                                    |       | $                                      | (31,277,177 | )                           | $          | (4,423,504       | )          |                      |       | $ | (35,700,681 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Net loss  attributable to common shareholders                                                                               |       | $                                      | (31,277,177 | )                           | $          | (4,423,504       | )          |                      |       | $ | (35,700,681 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Basic and  diluted net loss per share                                                                                       |       | $                                      | (1.60       | )                           | N/A        |             |       |                      | $          | (1.83 | ) |
|                                                                                                                        |       |                                   |        |                        |       |             |       |                      |       |
| Weighted average  common shares outstanding                                                                                 |       | 19,539,121                             |        | N/A                         |       |             |       | 19,539,121                |       |
|                                                                                                                             |            |                                        |             |                             |            |                  |            |                           |            |  |  |  |  |

 

18

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**STATEMENT OF CASH FLOWS**

**For the six months ended June 30,2005**

 
| ** **                                                       | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|-------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                            | ** **  | ** **                  | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash  flows (used in) provided by operating activities**       |       | $                                     | (17,021,102 | )                           | $          | 1,400,647        |       | $                         | (31,716    | ) | $ | (15,652,171 | ) |
|                                                             |       |                                  |        |                        |       |             |       |                      |       |
| **Cash  flows from investing activities:**                       |       |                                  |        |                        |       |             |       |                      |       |
| Sales (purchase)  of marketable securities and other investments |       | 5,610,506                             |        | —                      |       | —           |       | 5,610,506                 |       |
| Proceeds from  sale of assets                                    |       | 45,417,485                            |        | —                      |       | (45,417,485      | )          | —                    |       |
| Payment for  acquisition of assets                               |       | (45,843,106                           | )           | (55,303,066                 | )          | 45,449,201       |       | (55,696,971               | )          |
| 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                                            |       | (972,964                              | )           | 22,164                      |       | —           |       | (950,800                  | )          |
| Net cash used in  investing activities                           |       | (24,432,247                           | )           | (51,634,234                 | )          | 31,716           |       | (76,034,765               | )          |
|                                                             |       |                                  |        |                        |       |             |       |                      |       |
| **Cash  flows from financing activities:**                       |       |                                  |        |                        |       |             |       |                      |       |
| Proceeds from  senior credit facility                            |       | —                                |        | 53,500,000                  |       |             |       | 53,500,000                |       |
| Payment of  senior credit facility                               |       | —                                |        | (383,159                    | )          |             |       | (383,159                  | )          |
| Payment of  deferred financing fees                              |       | (864,401                              | )           | (1,378,000                  | )          |             |       | (2,242,401                | )          |
| Net cash (used  in) provided by financing activities             |       | (864,401                              | )           | 51,738,841                  |       |             |       | 50,874,440                |       |
|                                                             |       |                                  |        |                        |       |             |       |                      |       |
| Net (decrease)  increase in cash and cash equivalents            |       | (42,317,750                           | )           | 1,505,254                   |       |             |       | (40,812,496               | )          |
| Cash and cash  equivalents, beginning of period                  |       | 60,858,710                            |        | —                      |       |             |       | 60,858,710                |       |
| Cash and cash  equivalents, end of period                        |       | $                                     | 18,540,960  |                        | $          | 1,505,254        |       |                      |       | $ | 20,046,214 |   |
|                                                             |       |                                  |        |                        |       |             |       |                      |       |
| Supplemental  information:                                       |       |                                  |        |                        |       |             |       |                      |       |
| Cash paid for  interest                                          |       | $                                     | 19,743,750  |                        | $          | 1,289,908        |       |                      |       | $ | 21,033,658 |   |
| Cash paid for  income taxes                                      |       | 38,250                                |        | —                      |       |             |       | 38,250                    |       |
| Non-cash capital  expenditures                                   |       | 153,307                               |        | —                      |       |             |       | 153,307                   |       |
|                                                                  |            |                                       |             |                             |            |                  |            |                           |            |  |  |  |  |

 

***Other Historical Consolidation Information***

 

At December 31, 2004, the Company’s consolidatedBalance Sheets included in “other non-current assets” and “deferred financingfees” of $130,000 and $32,500, respectively, as a result of the consolidationof Malara Broadcast Group.

 

For the three and six months ended June 30, 2004,consolidation of variable interest entity in accordance with Interpretation 46was not applicable for the Company’s Statement of Operations and Statement ofCash Flows.

 

**Note 8 – Intangibles**

 

*Intangibles*

 

Intangible assets are summarized as follows:

 
| ** **                | ** ** | **June 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|---------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                | ** ** | **Unaudited**     | ** **  | **Audited**           | ** ** |
| ** **                | ** ** | ** **        | ** **  | ** **            | ** ** |
| Goodwill                  |       | $                 | 97,552,000  |                  | $          | 75,833,000 |   |
| Covenant not to  compete  |       | 30,000,000        |        | 30,000,000            |       |
| Network  affiliations     |       | 159,345,000       |        | 135,669,000           |       |
| Broadcast licenses        |       | 167,072,000       |        | 159,648,000           |       |
|                      |       | 453,969,000       |        | 401,150,000           |       |
| Accumulated  amortization |       | (149,828,000      | )           | (145,393,000          | )          |
|                      |       |              |        |                  |       |
| Net intangible  assets    |       | $                 | 304,141,000 |                  | $          | 255,757,000 |   |

 

19

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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 expense of$7,893,000 for the year ended December 31, 2004 and $4,435,000 for the sixmonths ended June 30, 2005,

 

***Item2.  Management’s Discussion and Analysisof Financial 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 of Operationscontained in our Form 10-K for the year ended December 31, 2004.

 

*Executive Summary*

 

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

 

Through shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) with Malara Broadcast Group, we currently provideadvertising, sales promotion, administrative and selected programming to twostations owned and operated by Malara Broadcast Group. Malara Broadcast Groupis owned by an independent third party who owns and operates two televisionstations as of June 30, 2005. We do not own Malara Broadcast Group or itstelevision stations. In order for both us and Malara Broadcast Group tocontinue to comply with FCC regulations, Malara Broadcast Group must maintaincomplete responsibility for and control over programming, finances, personneland operations of its television stations. However, as a result of our guarantee of the obligations incurred underMalara Broadcast Group’s senior secured credit facility and the revolving loan,arrangements under the local service agreements and put or call optionagreements, under United States generally accepted accounting principles (“U.S.GAAP”), specifically, Financial Accounting Standards Board (“FASB”)Interpretation No. 46, *Consolidation of VariableInterest Entities* (“Interpretation 46”) we are required toconsolidate Malara Broadcast Group’s financial position, results of operationsand statement of cash flows in our consolidated results. In addition, inaccordance with the provisions of Interpretation 46, the Company did notaccount for the sale of the assets of WPTA-TV and no gain there from wasrecognized in the consolidated statements of operations.  In addition, we did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV.

 

We believe that inflation has not had a materialimpact on our results of operations for the three and six months endedJune 30, 2005.  However, there canbe no assurance that future inflation would not have an adverse impact on ouroperating results and financial condition.

 

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

 

Our revenues are derived principally from local andnational advertising, political advertising in an election year and, to alesser extent, from network compensation for the broadcast of programming andrevenues 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.

 

***CriticalAccounting Polices***

 

We prepare our consolidated financial statements inconformity with United States generally accepted accounting principles whichrequire us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the period. Actual results could differ from those estimates.  Results of operations for interim periods arenot necessarily indicative of results for the full year.

 

20

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Information with respect to our critical accountingpolicies which we believe could affect our reported results require subjectivejudgments by management and is contained in Item 7, Management’s Discussion andAnalysis of Financial Condition and Result of Operations, of our Annual Reporton Form 10-K for the fiscal year ended December 31, 2004. We believe that as ofJune 30, 2005, the following is the only material change to this information.

 

*Consolidation of Variable Interest Entities*

 

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

 

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

 

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

** **

**RESULTSOF OPERATIONS**

** **

*Three Months Ended June 30, 2005and 2004*

 

***Consolidated***

 

Set forth below are significant factors thatcontributed to our operating results for the three months ended June 30, 2005and 2004, respectively.

 
| ** **            | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **2005**                        | ** ** | **2004** | ** ** | **% Change** | ** ** |
|                  |       |                            |       |   |   |   |   |
| Local/Regional        |       | $                               | 19,461,000 |   | $ | 17,680,000 |   | 10.1 | % |
| National              |       | 13,914,000                      |       | 14,119,000 |   | (1.5 | )% |
| Network  Compensation |       | 871,000                         |       | 790,000 |   | 10.3 | % |
| Political             |       | 464,000                         |       | 812,000 |   | (42.9 | )% |
| Other                 |       | 1,517,000                       |       | 985,000 |   | 54.0 | % |
| Gross Revenue         |       | 36,227,000                      |       | 34,386,000 |   | 5.4 | % |
| Agency  Commissions   |       | 5,216,000                       |       | 5,223,000 |   | (0.1 | )% |
| Net Revenue           |       | $                               | 31,011,000 |   | $ | 29,163,000 |   | 6.3 | % |

 

Net revenues consist primarily of local, national andpolitical 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 $1,848,000 or 6.3% to $31,011,000for the three months ended June 30, 2005, from $29,163,000 for the three monthsended June 30, 2004.  The increase wasprimarily due to the inclusion of two additional stations, WISE-TV and KDLH-TVin our consolidated results during the three months ended June 30, 2005 whichwere not in our consolidated results during the same period last year. Theincrease on a consolidated basis was primarily due to healthy increases innon-political local revenues of $1,781,000 or 10% offset by decreases in politicaladvertising revenue during a non-presidential election year of $348,000 or 43%and non-political national revenue of $205,000 or 1.5%. The non-political localrevenue increase was primarily due to the growth in the restaurant, homeimprovement, paid programming, medical, and services categories. Thenon-political national revenue decrease was primarily due to declines in theautomotive, movie, and telecommunications categories.  Malara Broadcast Group’s net revenues totaled$ 2,102,000 or 6.8% of the total net revenues during the three months endedJune 30, 2005.

 

21

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Direct operating expenses, consisting primarily ofprogramming, news and engineering decreased $182,000 or 1.4% to $12,506,000 forthe three months ended June 30, 2005 from $12,688,000 for the same period in2004. The decrease was primarily due to decreases in amortization of filmcontract rights as a result from write-downs taken in 2004 of certain filmcontract rights at our WB affiliates, offset in part by the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results of duringthe three months ended June 30, 2005 which were not in our consolidated resultsduring the same period last year. Selling, general and administrative expenses decreased $217,000 or 2.3%to $9,406,000 for the three months ended June 30, 2005 from $9,623,000 for thesame period in 2004. The decrease was primarily due to lower expenses intermination benefits/restructuring charges and sales and promotion expenses,which were offset in part by the inclusion of two additional stations, WISE-TVand KDLH-TV in our consolidated results during the three months ended June 30,2005 which were not in our consolidated results during the same period last year.Malara Broadcast Group’s direct operating expenses and selling, general andadministrative expenses totaled $662,000 of the total station expenses, afterelimination of expenses relating to various local service agreements between usand Malara Broadcast Group.

 

***Big Three Affiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED BIG THREE AFFILIATES**

 
| ** **           | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------|------------|------------|------------|----------|------------|
| ** **           | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Local/Regional       |       | $          | 14,375,000 |     | 53.3       | % | $ | 11,919,000 |   | 50.3 | % |
| National             |       | 10,006,000 |       | 37.1     | %          | 9,304,000 |   | 39.2 | % |
| Network Compensation |       | 871,000    |       | 3.2      | %          | 790,000 |   | 3.3 | % |
| Political            |       | 449,000    |       | 1.7      | %          | 788,000 |   | 3.3 | % |
| Other                |       | 1,266,000  |       | 4.7      | %          | 925,000 |   | 3.9 | % |
| Gross Revenue        |       | 26,967,000 |       | 100      | %          | 23,726,000 |   | 100 | % |
| Agency  Commissions  |       | 3,910,000  |       |     |       | 3,506,000 |   |   |   |
| Net Revenue          |       | $          | 23,057,000 |     |       |   | $ | 20,220,000 |   |   |   |

 

Net revenue at our Big Three affiliates increased$2,837,000 or 14% to $23,057,000 from $20,220,000. The increase was primarilydue to the inclusion of two additional stations, WISE-TV and KDLH-TV in ourconsolidated results during the three months ended June 30, 2005 which were notin our consolidated results during the same period last year. The increase on aconsolidated basis was primarily due to increases in non-political localrevenues of $2,456,000 and non-political national revenues of $702,000 offsetin part by decreases in political advertising of $339,000.  The non-political local revenue increase wasprimarily due to the growth in the home improvement, medical, competitive mediaand games/lotteries categories. The non-political national revenue increase wasprimarily due to growth in the paid programming, home improvement, beveragesand medical categories. The Big Three affiliates contributed 74% to net revenueduring the quarter. Malara Broadcast Group contributed net revenues of$2,102,000 to the total Big Three net revenues.

 

Direct operating expenses at our Big Three affiliates,consisting primarily of programming, news and engineering expenses, increased$780,000 or 9.7% to $8,839,000 for the three months ended June 30, 2005 from$8,059,000 for the same period in 2004. The increase was primarily due to thethe inclusion of two additional stations, WISE-TV and KDLH-TV in ourconsolidated results during the three months ended June 30, 2005 which were notin our consolidated results during the same period last year. Selling, generaland administrative expense at our Big Three affiliates increased $388,000 or6.6% to $6,232,000 for the three months ended June 30, 2005 from $5,844,000 forthe same period in 2004. The increase was primarily due to the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results during thethree months ended June 30, 2005 which were not in our consolidated resultsduring the same period last year. These increases were offset in part bydecreases in termination benefits/restructuring charges. Malara Broadcast Group’sdirect operating expenses and selling, general and administrative expensestotaled $662,000 of the total station expenses, after elimination of expenses relatingto various local service agreements between us and Malara Broadcast Group.

 

22

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***WBAffiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED WB AFFILIATES**

 
| ** **          | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------|------------|------------|------------|----------|------------|
| ** **          | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Local/Regional      |       | $          | 5,086,000  |     | 54.9       | % | $ | 5,761,000 |   | 54.0 | % |
| National            |       | 3,908,000  |       | 42.2     | %          | 4,815,000 |   | 45.2 | % |
| Political           |       | 15,000     |       | 0.2      | %          | 24,000 |   | 0.2 | % |
| Other               |       | 251,000    |       | 2.7      | %          | 60,000 |   | 0.6 | % |
| Gross Revenue       |       | 9,260,000  |       | 100      | %          | 10,660,000 |   | 100 | % |
| Agency  Commissions |       | 1,306,000  |       |     |       | 1,717,000 |   |   |   |
| Net Revenue         |       | $          | 7,954,000  |     |       |   | $ | 8,943,000 |   |   |   |

 

Net revenue at our WBaffiliates decreased $989,000 or 11.1% to $7,954,000 from $8,943,000 dueprimarily to decreases in non-political national revenues of $907,000 andnon-political local revenues of $675,000. The non-political national revenue decreases were primarily due todeclines in the automotive, movie and telecommunications categories.  The non-political local revenue decreaseswere primarily due to declines in the automotive, department stores andfinancial services categories. The WB affiliates do not generate meaningfulpolitical revenue, as they do not broadcast local news.  The WB affiliates contributed 26% to netrevenue during the quarter.

 

Direct operating expenses at our WB affiliates,consisting primarily of programming and engineering expenses, decreased$962,000 or 21% to $3,667,000 for the three months ended June 30, 2005 from$4,629,000 for the same period in 2004. The decrease was primarily due to loweramortization of film contract rights due to the effects of write-downs taken in2004, and the replacement of expensive, unprofitable programs with lessexpensive, profitable programming. There were no film asset write-downs duringthe three months ended June 30, 2005 and 2004. Selling, general andadministrative expenses at our WB affiliates decreased $605,000 or 16% to$3,174,000 for the three months ended June 30, 2005 from $3,779,000 for thesame period in 2004. The decrease was primarily due to lower advertising andpromotion expenses.

 

***Other Consolidated Expenses***

 

Amortization expense increased $513,000 or 27% duringthe three months ended June 30, 2005 as compared to the same period a yearearlier. This increase was primarily due to the incremental amortizationexpense realized for the two additional television stations, KDLH and WISE,which were acquired in March 2005. Depreciation expense decreased $279,000 or16% during the three months ended June 30, 2005 compared to the same period ayear earlier.  The decrease was primarilydue to the effect of the change in useful lives assigned to our fixed assets asof January 1, 2005 in addition to fixed assets written off in the third andfourth quarters of 2004, thereby resulting in lower depreciation expense during2005. This decrease was offset, in part, by increased depreciation expense dueto the incremental depreciation expense realized for the two additionaltelevision stations, KDLH and WISE, which were acquired in March 2005.

 

Corporate expense totaled $2,725,000; a decrease of$228,000 or 8% compared to $2,953,000 for the three months ended June 30, 2004.The decrease was primarily due to planned reduction in compensation and othernon-personal related expenses, offset in part by increases in professional feesrelated to the sale of WPTA-TV, compliance with the Sarbanes-Oxley Act andincrease in group health insurance. The performance award expense for the threemonths ended June 30, 2005 totaled $320,000; a decrease of $204,000 or 39%compared to $524,000 for the three months ended June 30, 2004. The decrease wasprimarily due to the separation of a company executive for which the unvestedportion of the executive’s performance award expense was accelerated during thethird quarter of 2004 pursuant to a Separation Agreement dated September 21,2004. Non-cash compensation expense decreased $39,000 or 29% primarily due tothe forfeitures of stock awards granted to certain personnel in prior years whoare no longer employed by us as of June 30, 2005.

 

Interest expense totaled $11,141,000; an increase of$1,269,000 or 13% compared to $9,872,000 for the three months ended June 30,2004.  The increase was primarily due tothe incremental interest expense which on Malara Broadcast Group’s SeniorCredit Facility which totaled approximately $1,261,000.  Interest income totaled $289,000; an increaseof $5,000, or 2% compared to the three months ended June 30, 2004 primarily dueto the increased average cash balance invested during the three months endedJune 30, 2005 as compared to the same period in 2004. Non-cash interest expensetotaled $1,145,000; an increase of $11,000 or 1% compared to $1,134,000 for thethree months ended June 30, 2004.

 

23

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

 

During the three months ended June 30, 2005, werecorded a deferred tax benefit of $147,000, compared to a deferred tax benefitof $2,194,000 for the three months ended June 30, 2004.  The decline in the tax benefit is primarilydue to increasing our valuation allowance against net operating loss carryforwards, which may not be utilized in future periods.

 

*Six Months Ended June 30, 2005and 2004*

 

***Consolidated***

 

Set forth below are significant factors thatcontributed to our operating results for the six months ended June 30, 2005 and2004, respectively.

 
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------|------------|
| ** **            | ** ** | **2005**                      | ** ** | **2004** | ** ** | **% Change** | ** ** |
|                  |       |                          |       |   |   |   |   |
| Local/Regional        |       | $                             | 35,770,000 |   | $ | 32,831,000 |   | 9.0 | % |
| National              |       | 25,546,000                    |       | 26,526,000 |   | (3.7 | )% |
| Network  Compensation |       | 1,665,000                     |       | 1,589,000 |   | 4.8 | % |
| Political             |       | 713,000                       |       | 2,080,000 |   | (65.7 | )% |
| Other                 |       | 2,671,000                     |       | 2,030,000 |   | 31.6 | % |
| Gross Revenue         |       | 66,365,000                    |       | 65,056,000 |   | 2.0 | % |
| Agency  Commissions   |       | 9,617,000                     |       | 9,892,000 |   | (2.8 | )% |
| Net Revenue           |       | $                             | 56,748,000 |   | $ | 55,164,000 |   | 2.9 | % |

 

Net revenues consist primarily of local, national andpolitical 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 $1,584,000 or 2.9% to$56,748,000 for the six months ended June 30, 2005, from $55,164,000 for thesix months ended June 30, 2004.  Theincrease was primarily due to the inclusion of two additional stations, WISE-TVand KDLH-TV in our consolidated results during the six months ended June 30,2005 which were not in our consolidated results during the same period lastyear. The increase on a consolidated basis was primarily due to healthyincrease in non-political local revenue of $2,939,000 or 9%, offset bydecreases in political advertising revenue during a non-presidential electionyear of $1,367,000 or 65.7% and non-political national revenue of $980,000 or3.7%. The non-political local revenue increase was primarily due to the growthin the paid programming, home improvement, insurance and competitive mediacategories. The non-political national revenue decrease was primarily due todeclines in the movie, telecommunications, and packaged goods categories.  Malara Broadcast Group’s net revenues totaled$2,619,000 or 4.6% of the total net revenues during the six months ended June30, 2005.

 

Direct operating expenses, consisting primarily ofprogramming, news and engineering expenses, decreased $871,000 or 3% to$24,819,000 for the six months ended June 30, 2005 from $25,690,000 for thesame period in 2004. The decrease was primarily due to decreases inamortization of film contract rights as a result from write-downs taken in 2004of certain film contract rights at our WB affiliates, offset in part by theinclusion of two additional stations, WISE-TV and KDLH-TV in our consolidatedresults during the six months ended June 30, 2005 which were not in ourconsolidated results during the same period last year. Selling, general and administrativeexpenses increased $529,000 or 3% to $18,242,000 for the six months ended June30, 2005 from $17,713,000 for the same period in 2004. The increase wasprimarily due to the inclusion of two additional stations, WISE-TV and KDLH-TVin our consolidated results during the six months ended June 30, 2005 whichwere not in our consolidated results during the same period last year, inaddition to restructuring charges recorded at KBJR-TV and WISE-TV resultingfrom the termination benefits and stay bonuses awarded related to to theacquisistions of KDLH-TV and WISE-TV during the six months ended June 30, 2005.Malara Broadcast Group’s direct operating expenses and selling, general andadministrative expenses totaled $852,000 of the total station expenses, afterelimination of expenses relating to various local service agreements between usand Malara Broadcast Group.

 

24

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***Big Three Affiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED BIG THREE AFFILIATES**

 
| ** **            | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-----------------------|------------|------------|------------|----------|------------|
| ** **            | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Local/Regional        |       | $          | 25,613,000 |     | 53.6       | % | $ | 21,901,000 |   | 49.3 | % |
| National              |       | 17,592,000 |       | 36.9     | %          | 17,122,000 |   | 38.5 | % |
| Network  Compensation |       | 1,665,000  |       | 3.5      | %          | 1,589,000 |   | 3.6 | % |
| Political             |       | 691,000    |       | 1.4      | %          | 2,045,000 |   | 4.6 | % |
| Other                 |       | 2,214,000  |       | 4.6      | %          | 1,810,000 |   | 4.0 | % |
| Gross Revenue         |       | 47,775,000 |       | 100      | %          | 44,467,000 |   | 100 | % |
| Agency  Commissions   |       | 6,897,000  |       |     |       | 6,574,000 |   |   |   |
| Net Revenue           |       | $          | 40,878,000 |     |       |   | $ | 37,893,000 |   |   |   |

 

Net revenue at our Big Three affiliates increased $2,985,000or 7.9% to $40,878,000 from $37,893,000. The increase was primarily due to theinclusion of two additional stations, WISE-TV and KDLH-TV in our consolidatedresults during the six months ended June 30, 2005 which were not in ourconsolidated results during the same period last year. The increase on aconsolidated basis was primarily due to healthy increases in non-politicallocal revenues of $3,712,000 or 16.9% and non-political national revenues of$470,000 or 2.7%, offset in part by decreases in political advertising of$1,354,000 or 66.2%.  The non-politicallocal revenue increase was primarily due to the growth in the homeimprovements, insurance, competitive media and games/lotteries categories. Thenon-political national revenue increase was primarily due to growth in the homeimprovement, insurnce and grocery / convenience store categories. The Big Threeaffiliates contributed 72% to net revenue during the six months ended June 30,2005. Malara Broadcast Group contributed net revenues of $2,619,000 or 6.4% tothe total Big Three net revenues.

 

Direct operating expenses at our Big Three affiliates,consisting primarily of programming, news and engineering expenses, increased$972,000 or 6% to $17,317,000 for the six months ended June 30, 2005 from$16,345,000 for the same period in 2004. The increase was primarily due to theinclusion of two additional stations, WISE-TV and KDLH-TV in our consolidatedresults during the three months ended June 30, 2005 which were not in ourconsolidated results during the same period last year. Selling, general andadministrative expense at our Big Three affiliates increased $825,000 or 7% to$11,900,000 for the six months ended June 30, 2005 from $11,075,000 for thesame period in 2004. The increase was primarily due to the inclusion of twoadditional stations, WISE-TV and KDLH-TV in our consolidated results during thesix months ended June 30, 2005 which were not in our consolidated resultsduring the same period last year, in addition to restructuring charges recordedat KBJR-TV and WISE-TV resulting from the termination benefits and stay bonusesawarded related to to the acquisistions of KDLH-TV and WISE-TV during the sixmonths ended June 30, 2005.  MalaraBroadcast Group’s direct operating expenses and selling, general andadministrative expenses totaled $852,000 of the total station expenses, afterelimination of expenses relating to various local service agreements between usand Malara Broadcast Group.

 

***WBAffiliates***

 

**GROSS REVENUES BY CATEGORY,**

**CONSOLIDATED WB AFFILIATES**

 
| ** **          | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------|------------|------------|------------|----------|------------|
| ** **          | ** ** | **Amount** | ** ** | **%**    | ** ** | **Amount** | ** ** | **%** | ** ** |
| Local/Regional      |       | $          | 10,157,000 |     | 54.6       | % | $ | 10,930,000 |   | 53.1 | % |
| National            |       | 7,954,000  |       | 42.8     | %          | 9,404,000 |   | 45.7 | % |
| Political           |       | 22,000     |       | 0.1      | %          | 35,000 |   | 0.1 | % |
| Other               |       | 457,000    |       | 2.5      | %          | 220,000 |   | 1.1 | % |
| Gross Revenue       |       | 18,590,000 |       | 100      | %          | 20,589,000 |   | 100 | % |
| Agency  Commissions |       | 2,720,000  |       |     |       | 3,318,000 |   |   |   |
| Net Revenue         |       | $          | 15,870,000 |     |       |   | $ | 17,271,000 |   |   |   |

 

Net revenue at our WBaffiliates decreased $1,401,000 or 8.1% to $15,870,000 from $17,271,000 dueprimarily to decreases in non-political national revenues of $1,450,000 or 15%and non-political local revenues of $773,000 or 7%. The non-political nationalrevenue decreases were primarily due to declines in the movie, packaged goods,department stores and telecommunications categories.  The non-political local revenue decreaseswere primarily due to declines in the automotive, department stores, financialservices and competitive media categories. The WB affiliates do not generatemeaningful political revenue, as they do not broadcast local news.  The WB affiliates contributed 28% to netrevenue during the six months ended June 30, 2005.

 

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Direct operating expenses at our WB affiliates,consisting primarily of programming and engineering expenses, decreased$1,843,000 or 20% to $7,502,000 for the six months ended June 30, 2005 from$9,345,000 for the same period in 2004. The decrease was primarily due to loweramortization of film contract rights due to the effects of write-downs taken in2004, and the replacement of expensive, unprofitable programs with lessexpensive, profitable programming. There were no film asset write-downs duringthe six months ended June 30, 2005 and 2004. Selling, general andadministrative expenses at our WB affiliates decreased $296,000 or 5% to$6,342,000 for the six months ended June 30, 2005 from $6,638,000 for the sameperiod in 2004. The decrease was primarily due to lower advertising andpromotion expenses.

 

***Other Consolidated Expenses***

 

Amortization expense increased $671,000 or 18% duringthe six months ended June 30, 2005 as compared to the same period a yearearlier. This increase was primarily due to the incremental amortizationexpense of two additional television stations, KDLH and WISE, which wereacquired in March 2005. Depreciation expense decreased $212,000 or 6% duringthe six months ended June 30, 2005 compared to the same period a yearearlier.  The decrease was primarily dueto the effect of the change in useful lives assigned to our fixed assets as ofJanuary 1, 2005 in addition to fixed assets written off in the third and fourthquarters of 2004 , thereby resulting in lower depreciation expense during 2005.This decrease was offset, in part, by increased depreciation expense due to theincremental depreciation expense realized for the two additional televisionstations, KDLH and WISE, which were acquired in March 2005.

 

Corporate expense totaled $5,423,000; a decrease of$551,000 or 9% compared to $5,974,000 for the six months ended June 30, 2004.The decrease was primarily due to planned reduction in compensation and othernon-personal related expenses, offset in part by increases in professional feesrelated to the sale of WPTA-TV, compliance with the Sarbanes-Oxley Act andincrease in group health insurance. The performance award expense for the sixmonths ended June 30, 2005 totaled $640,000; a decrease of $409,000 or 39%compared to $1,049,000 for the six months ended June 30, 2004. The decrease wasprimarily due to the separation of a company executive for which the unvestedportion of the executive’s performance award expense was accelerated during thethird quarter of 2004 pursuant to a Separation Agreement dated September 21,2004. Non-cash compensation expense decreased $247,000 or 57% primarily due tothe forfeitures of stock awards granted to certain personnel in prior years whoare no longer employed by us as of June 30, 2005.

 

Interest expense totaled $21,331,000; an increase of$1,586,000 or 8% compared to $19,745,000 for the six months ended June 30,2005.  The increase was primarily due tothe interest on Malara Broadcast Group’s Senior Credit Facility which totaledapproximately $1,578,000.  Interestincome totaled $738,000; an increase of $221,000, or 43% compared to the sixmonths ended June 30, 2004 primarily due to the increased average cash balanceinvested during the six months ended June 30, 2005 as compared to the sameperiod in 2004. Non-cash interest expense totaled $2,218,000; a decrease of$62,000 or 3% compared to $2,280,000 for the six months ended June 30,2004.  The decrease was primarily due toreduced amortization of the discount on the performance award expense which wasaccelerated in 2004, offset in part by higher imputed interest on our obligationto the WB network under the affiliation agreements.

 

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $12,774,000 during the six months ended June 30, 2005 and 2004,respectively as required by Statement of Financial Accounting Standards No.150.

 

During the six months ended June 30, 2005, we recordeda deferred tax benefit of $325,000, compared to a deferred tax benefit of$4,678,000 for the six months ended June 30, 2004.  The decline in the tax benefit is primarilydue to increasing our valuation allowance against net operating loss carryforwards, which may not be utilized in future periods.

 

*Restructuring and SeveranceCharges*

 

*Restructuring Charges*

 

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

 

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During the three monthsended March 31, 2005, we recognized a $252,000 restructuring charge related toemployee separations, which included severance and other benefits. Thesecharges were not costs directly attributable to Malara Broadcast Group’sacquisition of KDLH-TV due to the fact that upon Malara’s acquiring of KDLH-TVcertain employees were retained by Malara with the remaining employees becomingemployees of our KBJR-TV station and were either retained or subsequentlyterminated. During the three months ended June 30, 2005, as anticipated, werecorded an additional $100,000 of restructuring charges related to severanceand stay-bonuses awarded to transitional employees of KBJR-TV. In addition,during the three months ended June 30, 2005, as anticipated, we recordedrestructuring charges of $61,000 related to stay-bonuses awrded to transitionalemployees of WISE-TV. We anticipate minimal restructuring charges in futureperiods relating to stay-bonuses awarded to transitional employees of bothKBJR-TV and WISE-TV upon separation.

 

At June 30, 2005, theaccruals for restructuring activities were included in “other accruedliabilities” on the consolidated Balance Sheets and the related expense for thecharge at the Buffalo, New York television station and KBJR-TV station areincluded in “station operating expenses” and the related expense for thecorporate charges are included in “corporate separation agreement expenses” onthe consolidated Statement of Operations. These costs were recognized in accordance with the provisions ofStatement of Financial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

 

*Acquisition Charges*

 

During the three monthsended March 31, 2005, we accrued $590,000 related to employee separations,which included severance and other benefits as part of our purchase accounting.These accrued costs were a result of employees not retained by us subsequent tothe acquisition of WISE-TV, which included line through management employees.During the three months ended June 30, 2005, we accrued an additional $32,000related to employee separations at WISE-TV, which included severance and otherbenfits as part of our purchase accounting.

 

At June 30, 2005, theaccruals for acquisition activities of WISE-TV were included in “other accruedliabilities” on the consolidated Balance Sheets. These charges were recognizedin accordance with the provisions of Emerging Issues Task Force Issue No. 95-3 *Recognition of Liabilities in Connection with a Purchase BusinessCombination*.

 

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

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three Months Ended June 30, 2005**                                                          | ** ** |
| ** **         | ** ** | **March 31,  2005**                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                                                                             | 131,000    |   | $ | — |   | $ | 104,000 |   | $ | 27,000 |   |
| KBJR-TV            |       | 104,000                                                                                       |       | 100,000 |   | 139,000 |   | 65,000 |   |
| WISE-TV            |       | 225,000                                                                                       |       | 93,000 |   | 137,000 |   | 181,000 |   |
| Corporate          |       | 882,000                                                                                       |       | — |   | 307,000 |   | 575,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,342,000  |   | $ | 193,000 |   | $ | 687,000 |   | $ | 848,000 |   |

 

 
| ** **         | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|--------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Six Months Ended June 30, 2005**                                                            | ** ** |
| ** **         | ** ** | **December 31,  2004**                                                                        | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2005** | ** ** |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Buffalo, New  York |       | $                                                                                             | 250,000    |   | $ | — |   | $ | 223,000 |   | $ | 27,000 |   |
| KBJR-TV            |       | —                                                                                        |       | 352,000 |   | 287,000 |   | 65,000 |   |
| WISE-TV            |       | —                                                                                        |       | 683,000 |   | 502,000 |   | 181,000 |   |
| Corporate          |       | 1,214,000                                                                                     |       | — |   | 639,000 |   | 575,000 |   |
|               |       |                                                                                          |       |   |   |   |   |   |   |
| Total              |       | $                                                                                             | 1,464,000  |   | $ | 1,035,000 |   | $ | 1,651,000 |   | $ | 848,000 |   |

 

The liability for the restructuring and acquisitioncharges will be paid in accordance with the provisions of the severanceagreements and payments are expected to be completed at various times throughMarch 2006.

 

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**Recent Developments**

 

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

 

In addition, a subsidiary of Malara Broadcast Group onMarch 8, 2005, acquired CBS affiliate KDLH-TV, Duluth, Minnesota-Superior,Wisconsin (“KDLH-TV”) from New Vision Television for approximately $9.5million, pursuant to the terms and conditions of an asset purchase agreement,dated April 23, 2004. We currently own and operate KBJR-TV, the NBCaffiliate serving Duluth-Superior.

 

On March 8, 2005, weentered into a strategic arrangement with Malara Broadcast Group, under whichwe provide advertising sales, promotion and administrative services, andselected programming to Malara Broadcast Group-owned stations WPTA-TV andKDLH-TV in return for certain fees that will be paid by Malara Broadcast Groupto us.  The fees payable to us will be paid after current debt service aswell as certain other expenses Malara Broadcast Group incurs directly aresatisfied. During the three and six months ended June 30, 2005, Malara BroadcastGroup paid us approximately $800,000 owed under the strategic arrangementsbetween both company’s. As of June 30, 2005, the total amount owed to us fromMalara Broadcast Group totaled approximately $5,925,000.

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV with the proceeds of borrowings pursuant to the MalaraBroadcast Group Senior Credit Facility.  The Malara Broadcast Group SeniorCredit Facility provides for two term loans totaling $48.5 million and arevolving loan of $5 million.  The $23.5 million Malara Broadcast GroupTerm Loan A is secured by a letter of credit.  To secure the reimbursementobligation in the event of a draw on the letter of credit, we pledged $25million of U.S. Government Securities which are restricted and not availablefor working capital or any other purposes.  To the****extentthat principal payments are made on the Term Loan A, the letter of credit shallbe proportionately reduced and we shall be permitted to proportionately reducethe amount of the pledged U.S. Government Securities.  The $25 million Malara Broadcast Group TermLoan B and the $5 million revolving loan are secured by the assets of WPTA-TVand KDLH-TV, and guaranteed on an unsecured basis by us. For the three and sixmonths ended June 30, 2005, the total principal payments made on the Term LoanA and the Revolving Loan approximated $383,000.

 

**Liquidity and Capital Resources**

 

As of June 30, 2005, we had approximately $20,046,000of cash and cash equivalents on hand, which excludes $24,997,500 in U.S.Government Securities which is pledged to support the reimbursement obligationsin the event of a draw on the letter of credit that serves as collateral forthe Term Loan A under Malara Broadcast Group’s Senior Credit Facility, which isdescribed below and is restricted and not available for working capital or anyother purposes. To the****extent thatprincipal payments are made on the Term Loan A, the letter of credit shall beproportionately reduced and we shall be permitted to proportionately reduce theamount of the U.S. Government Securities pledged against the letter ofcredit.  At June 30, 2005, the restrictedU.S. Government Securities totaled $24,997,500. Absent changes to our capitalstructure and station ownership mix, we will not have enough liquidity toservice our existing obligations over the next twelve months.  In order to improve our existing liquidityposition, we are currently exploring the sale of assets and the raising ofadditional capital. However, under our Indenture, our use of the net proceedsfrom the sale of assets is restricted. Of the net proceeds received in an asset sale, $5 million may be usedfor working capital purposes and the remainder must be used either:

 

•      to make an investment in properties andassets that replace the properties and assets that were the subject of suchasset sale or in properties and assets that will be used in the business of theCompany and its Restricted Subsidiaries as existing on the Issue Date or inbusinesses reasonably related thereto (“Replacement Assets”) or to finance,directly or indirectly, a Permitted Business Acquisition or enter into adefinitive agreement to effectuate such acquisition; provided that (A) theprimary purpose of such acquisition of Replacement Assets or Permitted BusinessAcquisition is to acquire, and there is acquired, a television station with aBig-4 (ABC, CBS, NBC or Fox) network affiliation agreement in place or thecreation (through ownership by the Company and its Restricted Subsidiaries) ofa “duopoly” in a market and (B) that the Company shall use all reasonablebest efforts to promptly dispose of any other assets acquired in suchacquisition or Permitted Business Acquisition (as such terms are defined in theIndenture); or

 

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

 

Assuming we are successful in selling assets andraising additional capital, we believe that the available proceeds togetherwith the cash, cash equivalents and marketable securities on hand andinternally generated funds from operations will be sufficient to satisfy ourcash requirements for our existing operations for the next twelve months.  There can be no assurance that we will besuccessful in selling assets and raising additional capital and a lack ofliquidity would have a material adverse effect on our business strategy andtherefore affect our ability to continue as a going concern. The 2005 quarterlyfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

We have established an investment policy for investingcash that is not immediately required for working capital purposes.  Our investment objectives are to preservecapital, maximize our return on investment and to ensure we have appropriateliquidity 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 June 30, 2005, we had approximately$20,046,000 of cash and cash equivalents (which excludes $24,997,500 of restrictedU.S. Government Securities cash equivalents).

 

Net cash used in operating activities was $15,652,000during the six months ended June 30, 2005 compared to $5,621,000 during the sixmonths ended June 30, 2004.  The changein 2005 from 2004 was primarily due to the receipt of a $16,000,000 income taxrefund during June 2004 and changes in net assets.

 

Net cash used in investing activities was $76,035,000during the six months ended June 30, 2005 compared to $10,953,000 during thesix months ended June 30, 2004.  Thechange in 2005 from 2004 was primarily due to the acquisition of assets and thepurchase of U.S. Government Securities during March 2005, offset by a reductionin capital expenditures due to the completion of our conversion to digitaltechnology.

 

Net cash provided by financing activities was$50,874,000 during the six months ended June 30, 2005 compared to net cash usedin financing activities of $171,000 during the six months ended June 30,2004.  The change in 2005 from 2004 isprimarily due to the proceeds from the Malara Broadcast Group Senior CreditFacility, offset in part by increased payments of deferred financing fees.

 

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

 

On December 22, 2003, we completed a $405,000,000offering 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 onDecember 1 and June 1 of each year, which commenced on June 1,2004.  We used the net proceeds from theoffering in part to (i) repay all outstanding borrowings, plus accruedinterest, under our senior credit agreement, (ii) redeem at par, plusaccrued interest, all of our 9 3/8 % and 10 3/8 % senior subordinated notes dueMay and December 2005, respectively, and (iii) to repurchase atpar, plus accrued interest, all of our 8 7/8 % senior subordinated notes dueMay 2008.  The remaining proceedswere invested in short-term securities as well as being used for generalworking capital purposes.

 

The Notes are our senior secured obligations. TheNotes are guaranteed by each of our domestic restricted subsidiaries. The

Notes and the guarantees 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 ourability and the ability of our 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 with affiliates;(v) enter into agreements that restrict our restricted subsidiaries frommaking payments to us; (vi) merge, consolidate or sell substantially allof our assets; (vii) sell or acquire assets; and (viii) enter intonew lines of business.

 

Under the Indenture, the Malara Broadcast Groupcompanies 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.

 

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

 

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV in March 2005 with the proceeds of the MalaraBroadcast Group Senior Credit Facility, consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Term Loan A is secured by a letter of credit. To secure thereimbursement obligations in the event of a draw on the letter of credit, pursuantto the terms and conditions of an Application and Agreement for Standby Letterof Credit, we pledged $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 BroadcastingCorporation pursuant to a guaranty agreement (the “Granite Guaranty”).

 

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

 

Interest rates associated with the Term Loan A arebased, at Malara Broadcast Group’s option, at either (i) the higher of thePrime Rate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Term LoanB and Revolving Loan are based, at Malara Broadcast Group’s option, on either(i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Term Loan B and Revolving Loan at a rate of 3% per annum.Additionally, Malara Broadcast Group is required to pay monthly commitment feeson the unused portion of its revolving loan commitment at a rate of 0.50% perannum.  Cash interest payments are payablemonthly.

 

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

 

Malara Broadcast Group is required to make monthlyprincipal payments on the Term Loan A and the Revolving Loan equal to theproduct of (i) the Repayment Percentage (which is 25% unless there is anEvent of Default or the Consolidated Loan to Stick Value is less than 70%, inwhich case the Repayment Percentage is 100%) and (ii) the ConsolidatedExcess Free Cash Flow for the month preceding the month in which suchinstallment is due, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  All suchpayments shall be applied first to repay the outstanding Revolving Loan to thefull extent thereof (without a corresponding reduction in the Revolving LoanCommitment Amount) and second to repay the outstanding Term Loan A to the fullextent thereof; provided that, if the Repayment Percentage for such monthlyinstallment is 100%, the excess 75% of such monthly installment shall beapplied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Term Loan B to the full extentthereof. For the three and six months ended June 30, 2005, the total principalpayments made on the Term Loan A and the Revolovong Loan approximated $383,000.

 

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

 

Under the terms of the Certificate of Designations forour 12 3/4 % Cumulative Exchangeable Preferred Stock (the “Preferred Stock”),we were required to make the semi-annual dividends on such shares in cashbeginning October 1, 2002.  The cashpayment of dividends had been restricted by the terms of our previous seniorcredit agreement and indentures and is prohibited under the Indenture, whichgoverns our Notes.  Consequently we havenot paid the semi-annual dividend due to the holders since October 1,2002.  During the three and six monthesended June 30, 2005 a dividend payment of $6,386,961 and $12,773,922,respectively, accrued on our Preferred Stock. As of June 30, 2005, we haverecorded an aggregate of $83,030,495 in accrued dividends on our PreferredStock. Since three or more semi-annual dividend payments have not been paid,the holders of the Preferred Stock have the right to elect the lesser of twodirectors or that number of directors constituting 25% of the members of theBoard of Directors.

 

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The right of the holders of the Preferred Stock toelect members of the Board of Directors as set forth above will continue untilsuch time as all accumulated dividends that are required to be paid in cash andthat are in arrears on the Preferred Stock are paid in full in cash.  We are restricted from paying cash dividendsunder the Indenture, which governs our Notes, and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.

 

***FilmPayments***

 

As part of an overall effort to reduce stationoperating expenses, we have made substantial progress replacing unprofitableprogramming with competitive, profitable programming.

 

Film payments at our WB affiliates for the three andsix months ended June 30, 2005 totaled $4.2 million and $8.4 million,respectively, as compared to the three and six mionths ended June 30, 2004totalling $4.8 million and $9.7 million, respectively. Film payments for theyear ended December 31, 2005 will approximate $16.5 million as compare to $18.8million for the year ended December 31, 2004. Based on completed negotiationsfor the purchase of programming and our continued focus on contracting forcompetitive, but less expensive programming, we expect annual film payments atthe WB affiliates to decline by approximately 50% by 2007 from our 2003 levels.

 

Film payments at our Big Three affiliates for thethree and six months ended June 30, 2005 totaled $1.5 million and $3.0 million,respectively, as compared to the three and six months ended June 30, 2004totalling $1.3 million and $2.6 million, respectively. Film payments for theyear ended December 31, 2005 will approximate $6.1 million as compare to $5.3million at December 31, 2004. The increase in film payments at our Big Threeaffiliates is related to the two additional television stations, WISE-TV, whichwe acquired in March 2005 and KDLH-TV, which was acquired by Malara BroadcastGroup in March 2005. Based on completed negotiations and current marketconditions for the purchase of programming, we expect annual film payments atthe Big Three affiliates to continue to decline based on a same station basis.

 

***NoOff-Balance Sheet Arrangements***

 

At June 30, 2005 and 2004we did not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orvariable interest entities, which would have been established for the purposeof facilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. All of our arrangements with Malara Broadcast Group areon-balance sheet arrangements.

 

***Capitaland Commercial Commitments***

 

The following table and discussion reflect oursignificant contractual obligations and other commercial commitments as of June30, 2005:

 
| ** **                                                                        | ** ** | **Payment Due by Period** | ** **    |
|-----------------------------------------------------------------------------------|------------|---------------------------|---------------|
| **Capital  Commitment**                                                           | ** ** | **Total**                 | ** **    | **Remainder of 2005** | ** ** | **2006 - 2007** | ** ** | **2008 - 2009** | ** ** | **Thereafter** | ** ** |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| 9 3/4% Senior  Secured Notes due 2010                                             |       | $                         | 405,000,000   |   | $ | — |   | $ | — |   | $ | — |   | $ | 405,000,000 |   |
| Interest on  Senior Secured Notes                                                 |       | 213,891,000               |          | 19,744,000 |   | 78,975,000 |   | 78,975,000 |   | 36,197,000 |   |
| Malara Broadcast  Group Senior Credit Facility (b)                                |       | 53,117,000                |          | 1,297,000 |   | 5,098,000 |   | 7,241,000 |   | 39,481,000 |   |
| Interest on  Senior Credit Facility (c)                                           |       | 20,908,000                |          | 2,046,000 |   | 7,678,000 |   | 6,709,000 |   | 4,475,000 |   |
| Program contract  commitments - current                                           |       | 31,966,000                |          | 13,761,000 |   | 15,588,000 |   | 2,617,000 |   | — |   |
| Program contract  commitments – future                                       |       | 45,485,000                |          | 1,524,000 |   | 14,428,000 |   | 19,221,000 |   | 10,312,000 |   |
| WB Affiliation                                                                    |       | 6,105,000                 |          | 1,262,000 |   | 4,843,000 |   | — |   | — |   |
| Operating leases                                                                  |       | 13,496,000                |          | 999,000 |   | 3,143,000 |   | 3,189,000 |   | 6,165,000 |   |
| 12 3/4%  Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000               |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring  and severance                                                      |       | 848,000                   |          | 656,000 |   | 192,000 |   | — |   | — |   |
|                                                                              |       |                      |          |   |   |   |   |   |   |   |   |
| Total capital  and commercial commitments                                         |       | $                         | 1,168,486,000 |   | $ | 41,289,000 |   | $ | 129,945,000 |   | $ | 495,622,000 |   | $ | 501,630,000 |   |

 

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(a)   As of June 30, 2005, the CumulativeExchangeable Preferred Stock, including accrued dividends totaled $282,044,000.The table above includes the balance as of June 30, 2005 and the expectedaccrued dividends through April 2009, the date of redemption. Payment ofcash dividends are restricted by the terms of the Indenture, which governs ourexisting Senior Secured Notes.

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

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

 

*Recent Accounting Pronouncements*

 

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

 

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

to recognize the grant-date fair-value expense of stock options orother equity based compensation issued to employees in the statement ofoperations. The revised Statement generally requires that an entity account forthose transactions using the fair-value-based method, and eliminates theintrinsic value method of accounting in Accounting Principles Board No. 25,*Accounting for Stock Issued to Employees*,or APB 25.  The revised Statementrequires entities to disclose information about the nature of the share-basedpayment transactions and the effects of those transactions on the financialposition, results of operations or cash flows.

 

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

 

***Item3.  Quantitative and QualitativeDisclosures about Market Risk***

 

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

 

Interest rates associatedwith Malara Broadcast Group’s March 8, 2005, Term Loan A are based, atMalara Broadcast Group’s option, at either (i) the higher of the PrimeRate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with MalaraBroadcast Group’s March 8, 2005, Term Loan B and Revolving Loan are based,at Malara Broadcast Group’s option, at either (i) the Base Rate plus4.625% per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% perannum.  In addition, Deferred Interest(as defined in the Malara Broadcast Group Senior Credit Facility) accrues withrespect to, and is added to the principal amount of, the Term Loan B andRevolving Loan at a rate of 3% per annum. As of March 31, 2005, the six-month Adjusted Eurodollar Rate was3.21%.  Malara Broadcast Group has notentered into any agreements to hedge the risk of potential interest rateincreases.  Based on borrowingsoutstanding as of June 30, 2005, a 2% increase in the Adjusted Eurodollar Ratewould increase interest expense on an annual basis by approximately $1,070,000.

 

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***Item4.  Controls and Procedures***

 

As of June 30, 2005, an evaluation was carried outunder the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934).Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that the design and operation of these disclosure controlsand procedures were effective as of June 30, 2005.  There was no change in our internal controlover financial reporting (as defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934) that occurred during the period covered by this QuarterlyReport on Form 10-Q that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

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

 

On May 5, 2005, the holder of all of our Voting CommonStock adopted resolutions by unanimous written consent in lieu of an annualmeeting electing W. Don Cornwell, Stuart J. Beck, James L. Greenwald, EdwardDugger III, Thomas R. Settle, Charles J. Hamilton, Jr., Robert E. Selwyn, Jr.,Jon E. Barfield, Milton Frederick Brown and Veronica Pollard as directors ofour company.

 

***Item 5.  Other Information***

 

On May 2, 2005, we issueda press release setting forth our earnings for the first quarter ended March31, 2005.  A copy of our press release isattached hereto as Exhibit 99.

 

***Item6.  Exhibits***

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                                                               |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                     |
| 31.1            |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (15 U.S.C. §7241)                              |
|            |       |                                                                                                                                                     |
| 31.2            |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (15 U.S.C. §7241)                              |
|            |       |                                                                                                                                                     |
| 32              |       | Certifications of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350) |
|            |       |                                                                                                                                                     |
| 99              |       | Granite Broadcasting  Corporation Press Release dated May 2, 2005                                                                                        |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

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

 

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