**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,  D.C.   20549**

 

 

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**FORM 10-Q**

** **

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**QuarterlyReport Pursuant to Section 13 or 15 (d) of the**

**Securities ExchangeAct of 1934**

 

| **For the quarterly period ended** |   | **Commission file number:** |
|------------------------------------|--------|-----------------------------|
| **June 30, 2003**                  |   | **0-25042**                 |

 

**YOUNGBROADCASTING INC.**

(Exact name of registrantas specified in its charter)

 

 

| **Delaware**                                                      |                                                     | **13-3339681**                        |
|-------------------------------------------------------------------|----------------------------------------------------------|---------------------------------------|
| (State of other  jurisdiction of   incorporation or organization) |                                                     | (I.R.S. employer  identification no.) |
|                                                              |                                                     |                                  |
|                                                              | **599 Lexington Avenue  New York,  New York 10022** |                                  |
|                                                              | (Address of principal  executive offices)                |                                  |

 

 

Registrant’s telephonenumber, including area code:  **(212)  754-7070**

 

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**               **Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes ý   No o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).     Yes ý   No o

 

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                Number of sharesof Common Stock outstanding as of July 30, 2003: 17,629,788 shares of Class ACommon Stock, and 2,176,699 shares of Class B Common Stock.

 

 

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**YOUNG BROADCASTING INC.**

 

**FORM 10-Q**

 

**Table of Contents**

 

 

 

 

 

 

 
|       |                  |                                                                                                |     |
|------------|-----------------------|-----------------------------------------------------------------------------------------------------|----------|
|       |                  |                                                                                                | **Page** |
| Part I     | Financial Information |                                                                                                |
|       |                  |                                                                                                |     |
|       | Item 1.               | Financial Statements  (unaudited)                                                                   |     |
|       |                  |                                                                                                |     |
|       |                  | Consolidated Balance Sheets  as of December 31, 2002 and June 30, 2003                              | 3        |
|       |                  |                                                                                                |     |
|       |                  | Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2002 and  2003   | 4        |
|       |                  |                                                                                                |     |
|       |                  | Consolidated  Statements of Stockholders’ Equity   for the Six Months Ended June 30, 2003 | 6        |
|       |                  |                                                                                                |     |
|       |                  | Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2003              | 7        |
|       |                  |                                                                                                |     |
|       |                  | Notes to  Consolidated Financial Statements                                                         | 8        |
|       |                  |                                                                                                |     |
|       | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         | 12       |
|       |                  |                                                                                                |     |
|       | Item  3.              | Quantitative  and Qualitative Disclosure About Market Risk                                          | 22       |
|       |                  |                                                                                                |     |
|       | Item 4.               | Controls and Procedures                                                                             | 22       |
|       |                  |                                                                                                |     |
| Part II.   |                  |                                                                                                |     |
|       |                  |                                                                                                |     |
|       | Item 1.               | Legal Proceedings                                                                                   | 23       |
|       |                  |                                                                                                |     |
|       | Item 4.               | Submission of Matters  to a Vote of Security Holders                                                | 23       |
|       |                  |                                                                                                |     |
|       | Item 6.               | Exhibits and Reports on  Form 8-K                                                                   | 24       |
|       |                  |                                                                                                |     |
| Signatures | 25                    |

 

 

2

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**PartI  Financial Information**

**Item1.  *FinancialStatements***

** **

**YoungBroadcasting Inc. and Subsidiaries**

** **

**Consolidated Balance Sheets**

 
|                                                                                                                                                  |   | **December  31, 2002** |        | **June 30,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|-------------|--------------------|------------|
|                                                                                                                                                  |   |                   |        | **(Unaudited)**    |       |
| **Assets**                                                                                                                                            |   |                   |        |               | ** ** |
| Current assets:                                                                                                                                       |   |                   |        |               | ** ** |
| Cash and cash  equivalents                                                                                                                            |   | $                      | 110,406,572 |               | **$**      | **111,635,042** | ** ** |
| Trade accounts  receivable, less allowance for doubtful accounts of $1,229,000 in 2002 and  $1,556,000 in 2003                                        |   | 41,867,871             |        | **40,598,119**     | ** ** |
| Income taxes  receivable                                                                                                                              |   | 28,787,381             |        | **787,381**        | ** ** |
| Escrow account —  current                                                                                                                        |   | 13,248,057             |        | **6,650,295**      | ** ** |
| Current portion  of program license rights                                                                                                            |   | 12,910,034             |        | **8,771,852**      | ** ** |
| Prepaid expenses                                                                                                                                      |   | 3,445,842              |        | **2,127,902**      | ** ** |
| Total current  assets                                                                                                                                 |   | 210,665,757            |        | **170,570,591**    | ** ** |
|                                                                                                                                                  |   |                   |        |               | ** ** |
| Property and  equipment, less accumulated depreciation and amortization of $157,356,664 in  2002 and $166,370,253 in 2003                             |   | 90,509,977             |        | **87,283,785**     | ** ** |
| Program license  rights, excluding current portion                                                                                                    |   | 1,129,042              |        | **676,049**        | ** ** |
| Deposits and  other assets                                                                                                                            |   | 14,035,792             |        | **18,714,824**     | ** ** |
| Deferred tax  asset                                                                                                                                   |   | 6,000,000              |        | **2,000,000**      | ** ** |
| Goodwill                                                                                                                                              |   | 25,543,772             |        | **25,543,772**     | ** ** |
| Unamortized  intangible assets                                                                                                                        |   | 512,427,167            |        | **512,427,167**    | ** ** |
| Amortized  intangible assets, net                                                                                                                     |   | 22,992,256             |        | **21,330,884**     | ** ** |
| Deferred  charges, net                                                                                                                                |   | 9,280,535              |        | **8,271,266**      | ** ** |
| **Total Assets**                                                                                                                                      |   | $                      | 892,584,298 |               | **$**      | **846,818,338** | ** ** |
|                                                                                                                                                  |   |                   |        |               | ** ** |
| **Liabilities and stockholders’  equity**                                                                                                        |   |                   |        |               | ** ** |
| Current  liabilities:                                                                                                                                 |   |                   |        |               | ** ** |
| Trade accounts  payable                                                                                                                               |   | $                      | 15,278,888  |               | **$**      | **13,319,323** | ** ** |
| Accrued interest                                                                                                                                      |   | 15,359,910             |        | **15,264,475**     | ** ** |
| Accrued income  tax liability                                                                                                                         |   | 699,439                |        | **573,288**        | ** ** |
| Accrued expenses                                                                                                                                      |   | 20,912,536             |        | **10,886,533**     | ** ** |
| Current  installments of program license liability                                                                                                    |   | 12,300,554             |        | **3,952,201**      | ** ** |
| Current  installments of obligations under capital leases                                                                                             |   | 549,751                |        | **581,564**        | ** ** |
| Total current  liabilities                                                                                                                            |   | 65,101,078             |        | **44,577,384**     | ** ** |
| Program license  liability, excluding current installments                                                                                            |   | 1,596,676              |        | **952,979**        | ** ** |
| Long-term debt                                                                                                                                        |   | 725,000,000            |        | **725,000,000**    | ** ** |
| Deferred taxes  and other liabilities                                                                                                                 |   | 20,984,542             |        | **15,834,263**     | ** ** |
| Obligations  under capital leases, excluding current installments                                                                                     |   | 1,492,346              |        | **1,128,511**      | ** ** |
| **Total liabilities**                                                                                                                                 |   | 814,174,642            |        | **787,493,137**    | ** ** |
| Stockholders’  equity*:*                                                                                                                         |   |                   |        |               | ** ** |
| Class A Common  Stock, $.001 par value. Authorized 40,000,000 shares; issued and outstanding  17,505,878 shares at 2002 and 17,603,043 shares at 2003 |   | 17,506                 |        | **17,603**         | ** ** |
| Class B Common  Stock, $.001 par value. Authorized 20,000,000 shares; issued and outstanding  2,211,666 shares at 2002 and 2,179,186 at 2003          |   | 2,212                  |        | **2,179**          | ** ** |
| Additional  paid-in capital                                                                                                                           |   | 376,234,121            |        | **377,044,966**    | ** ** |
| Accumulated  other comprehensive loss                                                                                                                 |   | (2,474,597             | )           | **—**         | ** ** |
| Accumulated  deficit                                                                                                                                  |   | (295,369,586           | )           | **(317,739,547**   | **)**      |
| Total  stockholders’ equity                                                                                                                      |   | 78,409,656             |        | **59,325,201**     | ** ** |
| **Total liabilities and stockholders’  equity**                                                                                                  |   | $                      | 892,584,298 |               | **$**      | **846,818,338** | ** ** |
|                                                                                                                                                       |        |                        |             |                    |            |  |  |  |

 

*Seeaccompanying notes to consolidated financial statements*

** **

 

3

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**Young Broadcasting Inc. and Subsidiaries**

**Consolidated Statements of Operations**

(Unaudited)

 
|                                                                                                                                      |   | **Three  Months Ended June 30,** |        | **Six Months  Ended June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|-------------|--------------------------------|--------|
|                                                                                                                                      |   | **2002***                        |        | **2003**                       |   | **2002*** |   | **2003** |   |
| Net operating  revenue                                                                                                                    |   | $                                | 54,450,888  |                           | $      | 53,939,029 |   | $ | 101,037,440 |   | $ | 101,176,951 |   |
|                                                                                                                                      |   |                             |        |                           |   |   |   |   |   |
| Operating  expenses (a)                                                                                                                   |   | 18,449,144                       |        | 18,852,229                     |   | 37,063,316 |   | 37,359,207 |   |
| Amortization of  program license rights                                                                                                   |   | 4,128,598                        |        | 4,328,652                      |   | 8,418,631 |   | 8,954,048 |   |
| Selling, general  and administrative expenses (a)                                                                                         |   | 14,482,594                       |        | 14,791,088                     |   | 29,432,685 |   | 29,830,602 |   |
| Depreciation and  amortization                                                                                                            |   | 5,906,112                        |        | 5,853,274                      |   | 12,017,766 |   | 11,849,143 |   |
| Corporate  overhead (a)                                                                                                                   |   | 3,023,337                        |        | 3,290,376                      |   | 5,751,326 |   | 6,427,671 |   |
| Operating income                                                                                                                          |   | 8,461,103                        |        | 6,823,410                      |   | 8,353,716 |   | 6,756,280 |   |
|                                                                                                                                      |   |                             |        |                           |   |   |   |   |   |
| Interest  expense, net                                                                                                                    |   | (24,702,165                      | )           | (15,897,779                    | )      | (51,512,061 | ) | (31,917,822 | ) |
| Non-cash change  on market valuation of swaps                                                                                             |   | 3,967,317                        |        | 2,193,453                      |   | (289,573 | ) | 732,447 |   |
| Loss on  extinguishment of debt                                                                                                           |   | (4,692,625                       | )           | —                         |   | (4,692,625 | ) | — |   |
| Other (expense)  income, net                                                                                                              |   | (170,966                         | )           | 41,552                         |   | (258,197 | ) | (131,201 | ) |
|                                                                                                                                      |   | (25,598,439                      | )           | (13,662,774                    | )      | (56,752,456 | ) | (31,316,576 | ) |
|                                                                                                                                      |   |                             |        |                           |   |   |   |   |   |
| Loss  from continuing operations before benefit  from income tax and cumulative effect of accounting change                          |   | (17,137,336                      | )           | (6,839,364                     | )      | (48,398,740 | ) | (24,560,296 | ) |
| Benefit from  income tax                                                                                                                  |   | 19,359,496                       |        | —                         |   | 19,359,496 |   | — |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change                                                   |   | 2,222,160                        |        | (6,839,364                     | )      | (29,039,244 | ) | (24,560,296 | ) |
|                                                                                                                                      |   |                             |        |                           |   |   |   |   |   |
| Income from  discontinued operations, net of taxes, including gain on sale of station of  $153.9 million in 2002 and $2.2 million in 2003 |   | 154,229,167                      |        | 2,190,335                      |   | 157,115,421 |   | 2,190,335 |   |
| Income (loss) before  cumulative effect of accounting change                                                                              |   | 156,451,327                      |        | (4,649,029                     | )      | 128,076,177 |   | (22,369,961 | ) |
| Cumulative  effect of accounting change, net of taxes of $ 123.3 million                                                                  |   | —                           |        | —                         |   | (184,904,433 | ) | — |   |
| Net income  (loss)                                                                                                                        |   | $                                | 156,451,327 |                           | $      | (4,649,029 | ) | $ | (56,828,256 | ) | $ | (22,369,961 | ) |

 

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*    Restated

(a)  Excluding Depreciation Expense

 

 

4

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|                                                                                    |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                    |   | **2002 ***                       |   | **2003**                       |   | **2002 *** |   | **2003** |   |
|                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Basic net income  (loss) per common share:                                              |   |                             |   |                           |   |   |   |   |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change |   | $                                | 0.12   |                           | $      | (0.35 | ) | $ | (1.47 | ) | $ | (1.24 | ) |
| Income from  discontinued operations, net                                               |   | 7.84                             |   | 0.11                           |   | 7.99 |   | 0.11 |   |
| Cumulative  effect of accounting change, net                                            |   | —                           |   | —                         |   | (9.41 | ) | — |   |
| Net income  (loss) per common share-basic                                               |   | $                                | 7.96   |                           | $      | (0.24 | ) | $ | (2.89 | ) | $ | (1.13 | ) |
|                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Diluted net  income (loss) per common share                                             |   |                             |   |                           |   |   |   |   |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change |   | $                                | 0.11   |                           | $      | (0.35 | ) | $ | (1.47 | ) | $ | (1.24 | ) |
| Income from  discontinued operations, net                                               |   | 7.73                             |   | 0.11                           |   | 7.99 |   | 0.11 |   |
| Cumulative  effect of accounting change, net                                            |   | —                           |   | —                         |   | (9.41 | ) | — |   |
| Net income  (loss) per common share-diluted                                             |   | $                                | 7.84   |                           | $      | (0.24 | ) | $ | (2.89 | ) | $ | (1.13 | ) |
|                                                                                    |   |                             |   |                           |   |   |   |   |   |
| Weighted average  shares — Basic                                                   |   | 19,662,143                       |   | 19,770,090                     |   | 19,654,077 |   | 19,755,027 |   |
| Weighted average  shares — Diluted                                                 |   | 19,943,268                       |   | 19,770,090                     |   | 19,654,077 |   | 19,755,027 |   |

 

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* Restated

* *

*Seeaccompanying notes to consolidated financial statements.*

 

 

5

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**YoungBroadcasting Inc. and Subsidiaries**

** **

**ConsolidatedStatements of Stockholders’ Equity**

(Unaudited)

 

 
|                                                                 |   | **Common Stock** |   | **Additional    Paid-In Capital** |   | **Accumulated  Deficit** |   | **Accumulated  Comprehensive Loss** |        | **Comprehensive  Loss** |         | **Total  Stockholders’ Equity** |        |
|----------------------------------------------------------------------|--------|------------------|--------|-----------------------------------|--------|--------------------------|--------|-------------------------------------|-------------|-------------------------|--------------|--------------------------------------|-------------|
|                                                                 |   | **Class A**      |   | **Class B**                       |   |                     |
| Balance at December 31, 2002                                         |   | $                | 17,506 |                              | $      | 2,212                    |   | $                                   | 376,234,121 |                    | $            | (295,369,586                         | )           | $ | (2,474,597 | ) |   |   | $ | 78,409,656 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Contribution of shares into Company’s defined contribution plan |   | 43               |   |                              |   | 539,591                  |   |                                |        |                    |         |                                 |        | 539,634 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Conversion of Class B Common Stock to Class A Common Stock           |   | 33               |   | (33                               | )      |                     |   |                                |        |                    |         |                                 |        |   |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Exercise of stock options                                            |   | 14               |   |                              |   | 173,786                  |   |                                |        |                    |         |                                 |        | 173,800 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Other                                                                |   |             |   |                              |   | 3,311                    |   |                                |        |                    |         |                                 |        | 3,311 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Employee stock purchase plan                                         |   | 7                |   |                              |   | 94,157                   |   |                                |        |                    |         |                                 |        | 94,164 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Net loss for the six months ended June 30, 2003                      |   |             |   |                              |   |                     |   | (22,369,961                         | )           |                    |         | $                                    | (22,369,961 | ) | (22,369,961 | ) |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Comprehensive Loss                                                   |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Realized expense on interest rate   swap                        |   |             |   |                              |   |                     |   |                                |        | 2,474,597               |         | 2,474,597                            |        | 2,474,597 |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Total                                                                |   |             |   |                              |   |                     |   |                                |        |                    |         | $                                    | (19,895,364 | ) |   |   |
|                                                                 |   |             |   |                              |   |                     |   |                                |        |                    |         |                                 |        |   |   |
| Balance at June 30, 2003                                             |   | $                | 17,603 |                              | $      | 2,179                    |   | 377,044,966                         |        | $                       | (317,739,547 | )                                    | $           | — |   | — |   | $ | 59,325,201 |   |
|                                                                      |        |                  |        |                                   |        |                          |        |                                     |             |                         |              |                                      |             |  |  |  |  |  |  |  |  |  |  |

 

*See accompanying notes to consolidated financial statements*

 

 

6

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**Young Broadcasting Inc. andSubsidiaries**

 

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 

 
|                                                                             |   | **Six Months  Ended June 30,** |        |            |
|----------------------------------------------------------------------------------|--------|--------------------------------|-------------|-----------------|
|                                                                             |   | **2002***                      |        | **2003**        |   |   |
| **Operating activities**                                                         |   |                           |        |            | ** ** |   |
| Net loss                                                                         |   | $                              | (56,828,256 | )               | **$** | **(22,369,961** | **)** |   |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |                           |        |            | ** ** |   |
| Cumulative  effect of change in accounting, net of taxes                         |   | 184,904,433                    |        | **—**      | ** ** |   |
| Gain on sale of  KCAL-TV                                                         |   | (153,917,386                   | )           | **(2,190,335**  | **)** |   |
| Provision for  deferred tax benefit                                              |   | (17,032,246                    | )           | **—**      | ** ** |   |
| Depreciation and  amortization of property and equipment                         |   | 9,556,805                      |        | **9,158,528**   | ** ** |   |
| Amortization of  program license rights                                          |   | 28,474,314                     |        | **8,954,048**   | ** ** |   |
| Amortization of  broadcasting licenses, other intangibles and deferred charges   |   | 3,447,993                      |        | **2,690,615**   | ** ** |   |
| Non-cash  compensation                                                           |   | 681,120                        |        | **603,340**     | ** ** |   |
| Non-cash change  on market valuation of swap                                     |   | 289,573                        |        | **(732,447**    | **)** |   |
| Loss on  extinguishment of debt                                                  |   | 4,692,625                      |        | **—**      | ** ** |   |
| Loss on sale of  fixed assets                                                    |   | 29,156                         |        | **7,735**       | ** ** |   |
| Income from  escrow deposits                                                     |   | (657,019                       | )           | **(70,063**     | **)** |   |
| Income tax  refund, net of estimated payment                                     |   | —                         |        | **27,000,000**  | ** ** |   |
| Interest  payments from escrow account                                           |   | 11,098,000                     |        | **6,667,825**   | ** ** |   |
| Payments on  programming license liabilities                                     |   | (25,059,773                    | )           | **(9,062,900**  | **)** |   |
| Decrease in  trade accounts receivable                                           |   | 18,444,898                     |        | **1,418,969**   | ** ** |   |
| Decrease in  prepaid expenses                                                    |   | 1,441,342                      |        | **1,317,941**   | ** ** |   |
| Increase  (decrease) in trade accounts payable                                   |   | 722,052                        |        | **(6,033,466**  | **)** |   |
| Decrease in  accrued expenses and other liabilities                              |   | (6,229,360                     | )           | **(8,548,687**  | **)** |   |
| Net cash  provided by operating activities                                       |   | 4,058,271                      |        | **8,811,142**   | ** ** |   |
|                                                                             |   |                           |        |            | ** ** |   |
| **Investing activities**                                                         |   |                           |        |            | ** ** |   |
| Proceeds from sale of KCAL-TV                                                    |   | 632,167,115                    |        | **—**      | ** ** |   |
| Capital  expenditures                                                            |   | (1,704,373                     | )           | **(5,935,798**  | **)** |   |
| Increase in  deposits and other assets                                           |   | (4,579,586                     | )           | **(1,491,963**  | **)** |   |
| Net cash used in  investing activities                                           |   | 625,883,156                    |        | **(7,427,761**  | **)** |   |
|                                                                             |   |                           |        |            | ** ** |   |
| **Financing activities**                                                         |   |                           |        |            | ** ** |   |
| Principal  payments on long-term debt                                            |   | (236,523,804                   | )           | **—**      | ** ** |   |
| Borrowings from  working capital facility                                        |   | 90,870,700                     |        | **—**      | ** ** |   |
| Deferred  acquisition and debt financing costs incurred                          |   | (490,313                       | )           | **—**      | ** ** |   |
| Principal  payments under capital lease obligations                              |   | (485,921                       | )           | **(332,022**    | **)** |   |
| Proceeds from  exercise of Common Stock options                                  |   | 3,770                          |        | **173,800**     | ** ** |   |
| Proceeds from  other financing activities                                        |   | —                         |        | **3,311**       | ** ** |   |
| Net cash used in  financing activities                                           |   | (146,625,568                   | )           | **(154,911**    | **)** |   |
|                                                                             |   |                           |        |            | ** ** |   |
| **Net increase in cash**                                                         |   | 483,315,859                    |        | **1,228,470**   | ** ** |   |
| Cash and cash  equivalents at beginning of year                                  |   | 1,936,794                      |        | **110,406,572** | ** ** |   |
| **Cash and cash equivalents at June  30**                                        |   | $                              | 485,252,653 |            | **$** | **111,635,042** | ** ** |   |
|                                                                             |   |                           |        |            | ** ** |   |
| **Supplemental disclosure of cash  flow information**                            |   |                           |        |            | ** ** |   |
| Interest paid                                                                    |   | $                              | 56,749,540  |            | **$** | **32,915,484** | ** ** |
| Income tax  refund, net of estimated payment                                     |   | $                              | —      |            | **$** | **26,809,998** | ** ** |
|                                                                                  |        |                                |             |                 |  |  |  |  |  |  |  |

----

*Restated

*Seeaccompanying notes to consolidated financial statements.*

 

7

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**Young Broadcasting Inc. andSubsidiaries**

 

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**1. Basisof Presentation**

 

The business operations of Young Broadcasting Inc. and subsidiaries(the “Company”) consist of ten network affiliated stations (six with ABC, threewith CBS, and one with NBC) and one independent commercial televisionbroadcasting station. The markets served are located in Lansing, Michigan,Green Bay, Wisconsin, Lafayette, Louisiana, Rockford, Illinois, Nashville andKnoxville, Tennessee, Albany, New York, Richmond, Virginia, Davenport, Iowa,Sioux Falls, South Dakota and San Francisco, California. In addition, theaccompanying condensed consolidated financial statements include the Company’swholly owned national television sales representation firm. Significantintercompany transactions and accounts have been eliminated.

 

The accompanying condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial statements and with the instructions toForm 10-Q and Article 10 of Regulation S-X. The interim financial statementsare unaudited but include all adjustments, which are of a normal recurringnature, that the Company considers necessary for a fair presentation of theconsolidated financial position and the consolidated results of operations andcash flows for such period. Operating results of interim periods are notnecessarily indicative of results for a full year.

 

The consolidated statements of operations for the three and six monthsended June 30, 2002 has been adjusted to correct the allocation of income taxesamong continuing operations, discontinued operations and cumulative effect ofaccounting change.  The effect on thecomponents of net income (loss) are as follows (dollars in thousands):

 
|                                                                                                       |   | **Three  Months Ended** |    | **Six Months  Ended** |   |
|------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------|--------|
|                                                                                                       |   | **June 30,  2002**      |    | **June 30,  2002**    |   |
|                                                                                                       |   | **As  Reported**        |    | **As  Restated**      |   | **As  Reported** |   | **As  Restated** |   |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Loss from continuing operations before benefit from income tax and  cumulative effect of accounting change |   | $                       | (17,138 | )                     | $      | (17,138 | ) | $ | (48,399 | ) | $ | (48,399 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Benefit from income tax                                                                                    |   | 122,021                 |    | 19,360                |   | 122,021 |   | 19,360 |   |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change                    |   | 104,883                 |    | 2,222                 |   | 73,622 |   | (29,039 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Income from  discontinued operations, net of taxes, including gain on sale of station                      |   | 135,377                 |    | 154,229               |   | 138,264 |   | 157,115 |   |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Income before  cumulative effect of accounting change                                                      |   | 240,260                 |    | 156,451               |   | 211,886 |   | 128,076 |   |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Cumulative  effect of accounting change, net                                                               |   | —                  |    | —                |   | (268,714 | ) | (184,904 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Net income  (loss)                                                                                         |   | $                       | 240,260 |                  | $      | 156,451 |   | $ | (56,828 | ) | $ | (56,828 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Basic income  (loss) per common share:                                                                     |   |                    |    |                  |   |   |   |   |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change                    |   | $                       | 5.33    |                  | $      | 0.12 |   | $ | 3.75 |   | $ | (1.47 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Income from  discontinued operations, net                                                                  |   | 6.89                    |    | 7.84                  |   | 7.03 |   | 7.99 |   |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Cumulative  effect of accounting change, net                                                               |   | —                  |    | —                |   | (13.67 | ) | (9.41 | ) |
|                                                                                                       |   |                    |    |                  |   |   |   |   |   |
| Net income  (loss) per common share - basic                                                                |   | $                       | 12.22   |                  | $      | 7.96 |   | $ | (2.89 | ) | $ | (2.89 | ) |

 

Certain balances in the prior quarters have been reclassified toconform to the presentation adopted in the current quarter.

 

**2.  Sale of KCAL-TV**

 

On May 15, 2002, the Company completed thesale of KCAL-TV in Los Angeles, California to Viacom Inc. in an all cashtransaction for $650.0 million, less purchase price adjustments. The operatingresults of KCAL-TV are not included in the Company’s consolidated results fromcontinuing operations for the six months ended June 30, 2002. During the secondquarter of 2002, the Company recorded a gain on the sale of $153.9 million, netof a provision for income taxes of $132.0 million. On December 31, 2002, theCompany had accrued approximately $7.5 million of expenses related to the saleof KCAL-TV and the Company’s obligation to reimburse Viacom Inc. for certaincosts. Payments relating to this accrual were finalized in the second quarterof 2003 and the final adjustment to this accrual resulted in the Companyrecording an additional $2.2 million gain on the sale of station.

 

The Company applied Financial Accounting Standard Board (“FASB”)Statement of Financial Accounting Standards No. 144, *Accounting for the Impairment of Long-Lived Assets to be Disposed of*(“Statement 144”), and the new rules on accounting for the discontinuation of acomponent of an entity. As a result of applying Statement 144, the Companyrecorded income from discontinued operations, net of applicable taxes relatedto the sale of KCAL-TV, of $3.2 million and $312,000 for the six and threemonths ended June 30, 2002, respectively.

 

**3. Stock-Based Compensation**

### ** **

TheCompany follows the provisions of FASB Statement No. 123, *Accounting for Stock-Based**Compensation* (“Statement 123”). Theprovisions of Statement 123 allow companies to either expense the estimatedfair value of stock options or to continue to follow the intrinsic value methodset forth in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees,*(“APB25”), but disclose the pro forma effects on net income (loss) had the fairvalue of the options been expensed. The Company has elected to continue toapply APB 25 in accounting for its stock option incentive plans.

 

 

8

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Inaccordance with APB 25 and related interpretations, compensation expense forstock options is recognized in income based on the excess, if any, of thequoted market price of the stock at the grant date of the award or othermeasurement date over the amount an employee must pay to acquire the stock.Generally, the exercise price for stock options granted to employees equals orexceeds the fair market value of the Company’s common stock at the date ofgrant, thereby resulting in no recognition of compensation expense by theCompany. For awards that generate compensation expense as defined under APB 25,the Company calculates the amount of compensation expense and recognized theexpense over the vesting period of the award.

 

Thefollowing table illustrates the effect on net income (loss) and earnings pershare if the Company had applied the fair value recognition provisions ofStatement 123.

 
|                                                                                              |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                                                                                              |   | **2002***                        |    | **2003**                       |   | **2002** |   | **2003** |   |
| (dollars in  thousands, except per share data)                                                    |   |                             |    |                           |   |   |   |   |   |
| Net income  (loss)-as reported                                                                    |   | $                                | 156,451 |                           | $      | (4,649 | ) | $ | (56,828 | ) | $ | (22,370 | ) |
| Deduct total  stock-based employee compensation expense determined under fair value based  method |   | (413                             | )       | (1,225                         | )      | (1,322 | ) | (2,451 | ) |
| Net income  (loss)-pro forma                                                                      |   | $                                | 156,038 |                           | $      | (5,874 | ) | $ | (58,150 | ) | $ | (24,821 | ) |
| Net income  (loss) per basic common share-as reported                                             |   | $                                | 7.96    |                           | $      | (0.24 | ) | $ | (2.89 | ) | $ | (1.13 | ) |
| Net income  (loss) per basic common share-pro forma                                               |   | $                                | 7.93    |                           | $      | (0.30 | ) | $ | (2.96 | ) | $ | (1.26 | ) |

----

*Restated

 

**4.  Goodwill and OtherIntangibles**

 

Goodwill represents the excess of the cost of an acquired televisionstation over the sum of the amounts assigned to assets acquired lessliabilities assumed. Intangible assets, which include broadcasting licenses,network affiliation agreements, and other intangibles, are carried on the basisof cost, less accumulated amortization. Cost is based upon appraisals. Prior toJanuary 1, 2002, goodwill and other intangible assets were amortized on astraight-line basis over varying periods, not exceeding 40 years.

 

In June 2001, the FASB issued Statement of FinancialAccounting Standards No. 142, *Goodwill andOther Intangible Assets*(“Statement 142”), whereby goodwill andindefinite lived intangible assets are no longer amortized but are reviewedannually for impairment, or more frequently, if impairment indicators arise.Intangible assets that have finite lives will continue to be amortized overtheir useful lives. The Company applied the new rules on accounting forgoodwill and other intangible assets on January 1, 2002, and as such ceasedamortizing goodwill, broadcast licenses and network affiliation agreements.Upon adoption, the Company completed its review for impairment of goodwill andcertain other intangibles and recognized an impairment loss of $184.9 million,net of tax benefits of approximately $123.3 million, as a cumulative effect ofaccounting change.  The asset that wasdetermined to be impaired was the broadcast license at KRON-TV in SanFrancisco, California.

 

The following table sets forth the additional disclosures related togoodwill and intangible assets required under Statement 142:

 

 

9

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|                                         |   | **As of  December 31, 2002** |    | **As of June  30, 2003**      |   |
|----------------------------------------------|--------|------------------------------|---------|-------------------------------|--------|
|                                         |   | **(dollars  in thousands)**  |    |
|                                         |   | **Gross  Carrying Amount**   |    | **Accumulated  Amortization** |   | **Net  Carrying Amount** |   | **Gross  Carrying Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying Amount** |   |
| Unamortized  intangible assets:              |   |                         |    |                          |   |   |   |   |   |   |   |   |   |
| Broadcast  licenses and network affiliations |   | $                            | 512,427 |                          | — |   | $ | 512,427 |   | $ | 512,427 |   | — |   | $ | 512,427 |   |
| Amortized  intangible assets:                |   |                         |    |                          |   |   |   |   |   |   |   |   |   |
| Other intangible  assets                     |   | $                            | 28,899  |                          | $      | (5,907 | ) | $ | 22,992 |   | $ | 28,899 |   | $ | (7,568 | ) | $ | 21,331 |   |
|                                              |        |                              |         |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Aggregate amortization expense for the six months ended June 30, 2002and 2003 was $3.4 million and $2.7 million, respectively.

 

It is the Company’s policy to account for other definite-livedintangibles at the lower of amortized cost or estimated realizable value. Aspart of an ongoing review of the valuation and amortization of otherintangibles of the Company and its subsidiaries, management assesses thecarrying value of other definite-lived intangibles if facts and circumstancessuggest that there may be impairment. If this review indicates that otherdefinite-lived intangibles will not be recoverable as determined by anon-discounted cash flow analysis of the operating assets over the remainingamortization period, the carrying value of other intangibles would be reducedto estimated fair value.

 

**5.Income Taxes**

 

During 2002, the Company was able to realizea tax benefit from the utilization of the loss from operations, tax losscarryforwards, and the cumulative effect of the accounting change. The Companyhas recorded a deferred tax asset of $6.0 million and $2.0 million at December31, 2002 and June 30, 2003, respectively, related to existing temporarydifferences that are expected to generate future tax losses that can be carriedback to 2002.

 

The Company recorded an income tax receivableat December 31, 2002 of $28.8 million, of which $28.0 million was received inthe first quarter of 2003.

 

**6.   Legal Proceedings**

 

On July 31, 2002, Plaintiffs served upon Young Broadcasting Inc., YoungBroadcasting of Richmond, Inc. (“WRIC-TV”) and Richard Real a complaintalleging that Defendants defamed Plaintiffs in a news story concerning JulianGraham Chevrolet that aired in April and May of 2002. Specifically, the newsstory of television station WRIC-TV reported that Julian Graham Chevrolet hadfiled for bankruptcy. Neither Julian Graham nor Julian Graham Chevrolet hadfiled for bankruptcy. The Company has responded to the complaint and obtained adismissal of one of Plaintiffs’ two claims. As a result of the dismissal of oneclaim, the total amount sought in the case is $57.0 million.  Trial is set for October 20, 2003. TheCompany has vigorously defended this matter. It is too early to estimate the likelihood of Plaintiffs’ chances ofrecovery, or a potential amount of recovery. In November 2002, Plaintiffsoffered to settle for $10.0 million. The Company has not responded to thatoffer.  The Company has $35.0 million ininsurance for this claim.

 

10

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The Company is involved in other legal proceedings and litigationarising in the ordinary course of business. In the Company’s opinion, theoutcome of such proceedings and litigation currently pending will notmaterially affect the Company’s financial condition or results of operations.

 

11

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**Item2. *Management’sDiscussion******and Analysis ofFinancial Condition and Results of Operations.***

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

**Introduction**

 

The operating revenue of the Company’s stations is derived primarilyfrom advertising revenue and, to a much lesser extent, from compensation paidby the networks to the stations for broadcasting network programming. Thestations’ primary operating expenses are for employee compensation, newsgathering, production, programming and promotion costs. A high proportion ofthe operating expenses of the stations are fixed.

 

Advertising is sold for placement within and adjoining a station’snetwork and locally originated programming. Advertising is sold in time increments and is priced primarily on thebasis of a program’s popularity among the specific audience an advertiserdesires to reach, as measured principally by periodic audience surveys.  In addition, advertising rates are affectedby the number of advertisers competing for the available time, the size anddemographic makeup of the market served by the station and the availability ofalternative advertising media in the market area.  Rates are highest during the most desirable viewing hours, withcorresponding reductions during other hours. The ratings of a local station affiliated with a national televisionnetwork can be affected by ratings of network programming.

 

Most advertising contracts are short-term, and generally run onlyfor a few weeks. Most of the Company’s annual gross revenue is generated fromlocal advertising, which is sold by a station’s sales staff directly to localaccounts. The remainder of the advertising revenue primarily representsnational advertising, which is sold by Adam Young Inc. (“AYI”), a wholly ownednational advertising sales representative. The stations generally paycommissions to advertising agencies on local, regional and nationaladvertising.

 

The advertising revenueof the Company’s stations is generally highest in the second and fourthquarters of each year, due in part to increases in consumer advertising in thespring and retail advertising in the period leading up to and including theholiday season.  In addition,advertising revenue is generally higher during even numbered election years dueto spending by political candidates, which spending typically is heaviestduring the fourth quarter.

 

**RecentDevelopments**

 

*DigitalUpgrades*.  The Company is in the process of completingupgrades to its television stations to enable them to broadcast with digitaltechnology. As of July 30, 2003, all of the Company’s television stations werecapable of digital television broadcasts except for WTEN-TV (Albany). Becausethis station is awaiting a resolution between the FCC and the Canadiangovernment relating to overlaps, an extension is not required.

 

 

12

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**Critical Accounting Policies**

 

The Company’s critical accounting for the impairment of property,equipment and intangible assets is assessing the recoverability by makingassumptions regarding estimated future cash flows and other factors todetermine the fair value of the respective assets. If these estimates orrelated assumptions materially change in the future, the Company may berequired to record impairment charges not previously recorded for these assets.At June 30, 2003, the Company had $87.3 million in net property and equipment,$25.5 million of goodwill, $512.4 million of broadcast licenses and $21.3million of other amortizable intangibles. The Company completed its review for impairment of goodwill and certainother intangibles upon the adoption of the new accounting standard in January2002, recognized an impairment loss related to KRON-TV’s broadcast license of$184.9 million and recorded it as a cumulative effect of an accounting change,net of tax benefits of approximately $123.3 million. The Company  performs its annual impairment test in thefourth quarter of each year. The 2002 annual impairment test did not result inany additional charges. Due to the uncertain economic and geopolitical climate,management cannot determine with any certainty if an additional  impairment of KRON-TV’s broadcast licensemay occur. If an impairment loss is required, it will be recorded as a chargeto continuing operations.

 

**Television Revenues**

 

Set forth below are the principal types of television revenues receivedby the Company’s stations for the periods indicated and the percentagecontribution of each to the Company’s total revenue, as well as agency andnational sales representative commissions:

 
|             |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------|--------|----------------------------------|--------|--------------------------------|--------|
|             |   | **2002**                         |   | **2003**                       |   | **2002** |   | **2003** |   |
|             |   | **Amount**                       |   | **%**                          |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|             |   | **(dollars  in thousands)**      |   |
| Revenues         |   |                             |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Local            |   | $                                | 33,672 |                           | 53.9   |   | $ | 35,429 |   | 56.8 |   | $ | 62,699 |   | 54.1 |   | $ | 66,671 |   | 57.0 |   |
| National         |   | 21,287                           |   | 34.0                           |   | 22,675 |   | 36.4 |   | 38,354 |   | 33.1 |   | 41,704 |   | 35.6 |   |
| Network          |   | 3,079                            |   | 4.9                            |   | 2,648 |   | 4.2 |   | 5,947 |   | 5.1 |   | 5,079 |   | 4.4 |   |
| Political        |   | 3,365                            |   | 5.4                            |   | 671 |   | 1.1 |   | 6,309 |   | 5.4 |   | 851 |   | 0.7 |   |
| Production/Other |   | 1,103                            |   | 1.8                            |   | 951 |   | 1.5 |   | 2,691 |   | 2.3 |   | 2,743 |   | 2.3 |   |
| Total            |   | 62,506                           |   | 100.0                          |   | 62,374 |   | 100.0 |   | 116,000 |   | 100.0 |   | 117,048 |   | 100.0 |   |
|             |   |                             |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |   | (8,056                           | )      | (12.9                          | )      | (8,435 | ) | (13.5 | ) | (14,963 | ) | (12.9 | ) | (15,871 | ) | (13.6 | ) |
|             |   |                             |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue      |   | $                                | 54,450 |                           | 87.1   |   | $ | 53,939 |   | 86.5 |   | $ | 101,037 |   | 87.1 |   | $ | 101,177 |   | 86.4 |   |
|                  |        |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

13

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**Results of Operations**

 

The results from continuing operations for the threemonths ended June 30, 2002 do not include the results of operations forKCAL-TV. These results are reflected as discontinued operations.

 

*Three Months Ended June 30, 2003Compared to Three Months Ended June 30, 2002*

 

Net revenue for the three months ended June 30, 2003was $53.9 million, a decrease of $511,000, or 0.9%, compared to $54.4 millionfor the three months ended June 30, 2002. Political revenues for the threemonths ended June 30, 2003 was $671,000, a decrease of $2.7 million, or 80%,compared to $3.4 million for the three months ended June 30, 2002. The decreasein political revenue was attributable to the existence of strongly contestedlocal races in Iowa, California and South Dakota in 2002, while 2003 had onlylimited state and local elections. Although for the three months ended June 30,2003 net revenue decreased compared to the prior year period, the Company’sgross local and national revenues increased 5.2% and 6.5%, respectively.Network compensation for the three months ended June 30, 2003 was $2.6 million,a decrease of $431,000, or 14.0%, compared to $3.0 million for the three monthsended June 30, 2002.  The decrease innetwork compensation was the result of a new network affiliation agreemententered into by the Company with the ABC network.  The new compensation agreement reduces the amount of compensationpaid to our ABC network affiliates but gives the stations more advertisingspots within network programming.

 

Operating expenses and selling, general andadministrative expenses for the three months ended June 30, 2003 was $33.6million, an increase of $711,000, or 2.2%, compared to $32.9 million for thethree months ended June 30, 2002. This increase resulted from higher healthinsurance and property and casualty insurance costs, and various otherexpenses. On October 1, 2002, the Company implemented a reorganization plan atKRON-TV, intended to reduce expenses for 2003. This plan and the Company’s control over the operating costs of all ofits stations allowed this increase to be kept to a minimum. Included in the selling,general and administrative expenses is non-cash compensation of $289,000 and$304,000 for the three months ended June 30, 2003 and 2002, respectively.  All of this non-cash compensation relates tothe Company’s  contribution of  common stock to its 401(k) plan.

 

Amortization of program license rights for the threemonths ended June 30, 2003 was $4.3 million, compared to $4.1 million for thethree months ended June 30, 2002, an increase of $200,000, or 4.8%. All of thisincrease was the result of the purchase of the broadcast rights to the *Oprah* show in September 2002 at one of theCompany’s stations.

 

Depreciation of property and equipment andamortization of intangible assets was $5.9 million for the three months endedJune  30, 2003 and 2002.

 

Corporate overhead for the three months ended June 30,2003 was $3.3 million, compared to $3.0 million for the comparable period in2002, an increase of $267,000 or 8.8%. This increase was a result of additionalpersonnel fees relating to the promotion of three station general managers tonew corporate vice president positions, as well as increased legal andprofessional fees relating to the Company’s review of and compliance with newcorporate governance legislation.

 

Interest expense for the three months ended June 30,2003 was $15.9 million, compared to $24.7 million for the same period in 2002,a decrease of $8.8 million, or 35.6%. The decrease was primarily attributable to lower debt levels resultingfrom the Company’s repayment in 2002 of all of its outstanding indebtednessunder its senior credit facility and portions of its senior notes and seniorsubordinated notes pursuant to the par offers completed in September 2002, aswell as from reductions in effective interest rates relating to the Company borrowingsunder LIBOR and prime.  The Company hadinterest income, net, from its interest rate swaps of $691,000 and $509,000 forthe three months ended June 30, 2003 and 2002, and recorded it as a reductionof interest expense.

 

14

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The Company recorded a $2.2 million and $4.0 millionnon-cash change in market valuation of swaps for the three months ended June30, 2003 and 2002, respectively. The Company recorded $1.2 million and $2.2million  for the three months ended June30, 2003 and 2002, respectively, relating to the amortization of othercomprehensive loss in connection with its swap transactions entered into in2000 and terminated in June 2001;  and amark-to-market non-cash change in fair value of approximately $3.4 million and$6.2 million for the three months ended June 30, 2003 and 2002, respectively,for its current outstanding fair value hedges.

 

TheCompany recorded a loss on extinguishment of debt of $4.7 million in the secondquarter of 2002 relating to the permanent repayment of the term loan facilitiesunder the Company’s senior credit facilities (see “Liquidity and CapitalResources”).

 

On May 15, 2002, the Company completed the sale ofKCAL-TV to Viacom Inc. for $650.0 million, less purchase price adjustments. The Company recorded a gain on the sale ofapproximately $2.2 million and $153.9 million, net of a provision for incometaxes, for the three months ended June 30, 2003 and 2002, respectively. The Company recorded income fromdiscontinued operations, net of applicable taxes related to KCAL-TV, of$312,000 for the three months ended June 30, 2002.

 

As a result of the factors discussed above, the netloss for the Company was $4.6 million for the three months ended June 30, 2003,compared with net income of $156.5 million for the three months ended June 30,2002, a change of $161.1 million.

 

 

*Six Months Ended June 30, 2003Compared to Six Months Ended June 30, 2002*

 

The results fromcontinuing operations for the six months ended June 30, 2002 do not include theresults of operations for KCAL-TV. These results are reflected as discontinuedoperations.

 

Net revenue for the six months ended June 30, 2003 was$101.2 million, a decrease of $140,000, or 0.1%, compared to $101.0 million forthe six months ended June 30, 2002. The war in Iraq caused the networks topre-empt regularly scheduled programming in the last month of the first quarterof 2003 and caused several advertisers to cancel their advertising spots,resulting in a loss of revenue in the first quarter of 2003.  The Company estimated that the warnegatively impacted revenues in the first quarter of 2003 by approximately $2.0million to $2.5 million. Despite the pre-emptions and cancellations in the sixmonths ended June 30, 2003, the Company’s gross local and national revenuesincreased 6.3% and 8.7%, respectively compared to the six months ended June 30,2002. Network compensation for the six months ended June 30, 2003 was $5.1million, a decrease of $868,000, or 15.0%, compared to $5.9 million for the sixmonths ended June 30, 2002.  A portionof the decrease in network compensation was the result of the pre-emption ofscheduled programming as a result of the network coverage of the war in Iraq.The remaining decrease in network compensation was the result of a new networkaffiliation agreement entered into by the Company with the ABC network.  The new compensation agreement reduces theamount of compensation paid to our ABC network affiliates but gives thestations more advertising spots within network programming. Political revenuefor the six months ended June 30, 2003 was $851,000, a decrease of $5.5million. The decrease in political revenue was attributable to the existence ofstrongly contested local races in Iowa, California and South Dakota in 2002,while 2003 had only limited state and local elections.

 

Operating expenses and selling, general andadministrative expenses for the six months ended June 30, 2003 was $67.2million, an increase of $694,000, or 1.0%, compared to $66.5 million for thesix months ended June 30, 2002. This increase resulted from higher healthinsurance and property and casualty insurance costs, and various otherexpenses. On October 1, 2002, the Company implemented a reorganization plan atKRON-TV, intended to reduce expenses for 2003. This plan and the Company’s control over the operating costs of all ofits stations allowed this increase to be kept to a minimum. Included in theselling, general and

 

 

15

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administrative expenses is non-cash compensation of$603,000 and $681,000 for the six months ended June 30, 2003 and 2002,respectively.  All of this non-cashcompensation relates to the Company’s contribution of common stock to its401(k) plan.

 

Amortization of program license rights for the sixmonths ended June 30, 2003 was $9.0 million, compared to $8.4 million for thesix months ended June 30, 2002, an increase of $535,000, or 6.4%. All of thisincrease was the result of the purchase of the broadcast rights to the *Oprah* show in September 2002 at one of theCompany’s stations.

 

Depreciation of property and equipment andamortization of intangible assets was $11.8 million for the six months endedJune 30, 2003, compared with $12.0 million for the comparable period in 2002, adecrease of $169,000, or 1.4%.

 

Corporate overhead for the six months ended June 30,2003 was $6.4 million, compared to $5.8 million for the comparable period in2002, an increase of $676,000 or 11.8%. This increase was a result of additionalpersonnel fees relating to the promotion of three station general managers tonew corporate vice president positions, as well as increased legal andprofessional fees relating to the Company’s review of and compliance with newcorporate governance legislation.

 

Interest expense for the six months ended June 30,2003 was $31.9 million, compared to $51.5 million for the same period in 2002,a decrease of $19.6 million, or 38.1%. The decrease was primarily attributable to lower debt levels resultingfrom the Company’s repayment in 2002 of all of its outstanding indebtednessunder its senior credit facility and portions of its senior notes and seniorsubordinated notes pursuant to the par offers completed in September 2002, aswell as from reductions in effective interest rates relating to the Companyborrowings under LIBOR and prime.  TheCompany had interest income, net, from its interest rate swaps of $1.3 millionand $782,000 for the six months ended June 30, 2003 and 2002, and recorded itas a reduction of interest expense.

 

The Company recorded $732,000 of non-cash incomeduring the six months ended June 30, 2003 and $290,000 of non-cash expenseduring the six months ended June 30, 2002, related to changes in the marketvaluation of its swaps. The Company recorded $2.5 million and $4.5 million forthe six months ended June 30, 2003 and 2002, respectively, relating to theamortization of other comprehensive loss in connection with its swaptransactions entered into in 2000 and terminated in June 2001; and amark-to-market non-cash change in fair value of approximately $3.2 million and$4.2 million for the six months ended June 30, 2003 and 2002, respectively, forits current outstanding fair value hedges.

 

TheCompany recorded a loss on extinguishment of debt of $4.7 million in the secondquarter of 2002 relating to the permanent repayment of the term loan facilitiesunder the Company’s senior credit facilities (see “Liquidity and CapitalResources”).

 

On May 15, 2002, the Company completed the sale ofKCAL-TV to Viacom Inc. for $650.0 million, less purchase price adjustments. The Company recorded a gain on the sale ofapproximately $2.2 million and  $153.9million, net of a provision for income taxes, for the six months ended June 30,2003 and 2002, respectively. TheCompany recorded income from discontinued operations, net of applicable taxesrelated to KCAL-TV, of $3.2 million for the six months ended June 30, 2002.

 

Effective January 1, 2002, the Company recorded a cumulative effect ofaccounting change of $184.9 million net, net of tax benefits of approximately$123.3 million, relating to the adoption of Statement 142.

 

As a result of the factors discussed above, the netloss for the Company was $22.4 million for the six months ended June 30, 2003,compared with a net loss of $56.8 million for the six months ended June30,  2002, a change of $34.4 million.

 

 

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**Liquidity and Capital Resources**

 

Cash provided by operations for the six months endedJune 30, 2003 was $8.8 million compared to $4.1 million for the six monthsended June 30, 2002.  The war in Iraqcaused the networks to pre-empt regularly scheduled programming in the lastmonth of the first quarter of 2003 and caused several advertisers to canceltheir advertising spots, resulting in a loss of revenue in the first quarter of2003.  The Company estimated that thewar negatively impacted revenues in the first quarter of 2003 by approximately$2.0 million to $2.5 million. Political revenues decreased $5.5 million for thesix months ended June 30, 2003, compared to the same period in 2002. Thedecrease in political revenue was attributable to the existence of stronglycontested local races in Iowa, California and South Dakota in 2002, while 2003had only limited state and local elections. Trade accounts payable decreased $6.0 million for the six months endedJune 30, 2003, compared to an increase for the six months ended June 30, 2002of $722,000.  At December 31, 2002 theCompany had approximately $3.0 million in accounts payable relating to thereorganization plan at KRON-TV, which were paid in January 2003. The lower debtlevels and reduced effective interest rates relating to the Company’sborrowings in 2002 resulted in a decrease in accrued expenses of $8.5 millionfor the six months ended June 30, 2003 compared to a decrease of $6.2 millionfor the six months ended June 30, 2002. At December 31, 2002, the Company recorded an incometax receivable of $28.8 million, of which $28.0 million was received in thefirst quarter of 2003. On March 15, 2003, the Company paid $1.0 million inestimated income tax. Accounts receivable decreased by $1.4 million for the sixmonths ended June 30, 2003, compared to a decrease in accounts receivable of$18.4 million for the six months ended June 30, 2002.  The decline of advertising revenue in the San Francisco marketduring 2002, the loss of the NBC affiliation at KRON-TV on January 1, 2002 andthe resulting impact on ratings which negatively affected the revenues at KRON-TV,as well as the sale of KCAL-TV on May 15, 2002, combined to cause accountsreceivable to decrease sharply for the six months ended June 30, 2002.  As of December 31, 2002, the Company hadaccrued approximately $7.5 million of expenses related to the sale of KCAL-TVand the Company’s obligation to reimburse Viacom Inc. for certain costs.Payments and adjustments relating to this accrual were finalized in the secondquarter of 2003.

 

The performance of KRON-TV has a significant impact on the Company’soperating results. Consequently, the Company is particularly susceptible toeconomic conditions in the San Francisco advertising market.  While revenues in the first half of 2003 atKRON-TV were stronger than those in the same period last year, the continuinguncertain economic and geopolitical climate makes the outlook unclear.

 

Cash used in investing activities for the six months ended June 30,2003 was $7.4 million, compared to cash provided by investing activities of$625.9 million for the six months ended June 30, 2002. During 2002 and 2003,the Company incurred significant capital expenditures for building digitaltransmission facilities, as required by Federal Communications Commissionregulations. The timing of these projects has been constrained by regulatoryapprovals, equipment availability, construction crew availability and weatherconditions. Deposits for the Company increased $1.5 million and $4.6 millionfor the six months ended June 30, 2003 and 2002, respectively. The increase indeposits in 2003 was from additions to construction-in-progress for the digitalconversion and a new accounting system currently being implemented by theCompany. Construction-in-progress balances at June 30, 2003 and December 31,2002 were $9.7 million and $8.1 million, respectively. The Company estimatesthat, by the end of the third quarter of 2003, $8.9 million of capital expenditures which are currently categorizedas  construction-in-progress will beplaced in service and recorded as an addition to capital expenditures. For2003, $5.9 million of capital expenditures have been placed in service,however, since approximately $2.3 million of the capital expenditures were paidfor in 2002, the cash payments in 2003 relating to capital expenditures wereapproximately $3.6 million.

 

Cash used in financing activities was $155,000 and $146.6 million forthe six months ended June 30, 2003 and 2002, respectively. During the first sixmonths of 2002, the Company used approximately $225.3 million of the netproceeds from the sale of KCAL-TV to repay in full all indebtedness thenoutstanding under its senior credit facilities. The remaining net proceeds,after closing costs and tax provisions, was used in the

 

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third quarter of 2002 to repay outstanding indebtedness under theCompany’s Senior Notes and Senior Subordinated Notes (see details below).  The Company made payments under capitallease obligation of $332,000 and $486,000 for the six months ended June 30,2003 and 2002, respectively, a decrease of $154,000 or 31.7%.  All of this decrease was the result theelimination of several capital lease obligations in 2002 for KCAL-TV.

 

As of June 30, 2003, the Company had $111.6 million of cash-on-handavailable for general corporate purposes. All of these funds were invested inshort-term, risk-averse investments, in accordance with the terms of theCompany’s indentures.

 

On June 26, 2000, the Company entered into a new senior credit facilitywhich provided for borrowings of up to an aggregate of $600.0 million (the “NewSenior Credit Facility”) in the form of an amortizing term loan facility in theamount of $125.0 million (“Term A”) that matures on November 30, 2005, and anamortizing term loan facility in the amount of $475.0 million (“Term B”) thatmatures on December 31, 2006. Upon the sale of KCAL-TV, all indebtednessoutstanding under these term loans was repaid in full. In addition, on June 26,2000, the Company amended and restated its existing senior credit facility (asamended, the “Amended and Restated Credit Facility”), to provide for borrowingsof up to an aggregate of $200.0 million, in the form of a $50.0 million termloan and a revolving credit facility in the amount of $150.0 million, both ofwhich mature on November 30, 2005. Upon the closing of the sale of KCAL-TV, allindebtedness outstanding under this term loan and under the revolving facilitywas repaid in full. Pursuant to Amendment No. 6 to the Amended and RestatedCredit Facility, the revolving credit portion of the loan facility was reducedto $100.0 million. The New Senior Credit Facility and the Amended and RestatedCredit Facility are referred to collectively as the “Senior Credit Facility.”

 

Pursuant to the Senior Credit Facility, the Company is prohibited frommaking investments or advances to third parties exceeding $15.0 million unlessthe third party becomes a guarantor of the Company’s obligation. In addition,the Company may utilize the undrawn amounts under the revolving portion of theSenior Credit Facility to retire or prepay subordinated debt, subject to thelimitations set forth in the indentures.

 

Interest under the Senior Credit Facility is payable at the LIBOR rate,“CD Rate” or “Base Rate.” In addition to the index rates, the Company pays a floatingpercentage tied to the Company’s ratio of total debt to operating cash flow;ranging, in the case of LIBOR rate loans, from 1.75%, based upon a ratio under5.0:1, to 3.5%, based upon a 7.0:1 or greater ratio for the Term A advances andrevolver facility; and 3.75% for the Term B advances.

 

Each of the Company’s subsidiaries has guaranteed the Company’sobligations under the Senior Credit Facility. The Senior Credit Facility issecured by the pledge of all the stock of the Company’s subsidiaries and afirst priority lien on all of the assets of the Company and its subsidiaries.

 

The Senior Credit Facility requires the Company to maintain certainfinancial ratios. Pursuant to Waiver and Amendment No. 7 to the Company’sSenior Credit Facility, compliance with all applicable financial ratios hasbeen waived commencing for the quarter ended June 30, 2002 until December 30,2003, and the Company is limited to $10.0 million of borrowing under therevolving facility until such time as the Company is in compliance with allapplicable financial ratios (without giving effect to the waivers). Effectivewith the issuance of the Senior Notes, as defined below, the Company is notrequired to maintain a total debt to operating cash flow ratio until June 30,2004, when the commencing ratio will be 7.35x, the Company is required tomaintain a senior debt to operating cash flow ratio ranging from 3.50x to4.00x, and the Company is required to maintain until December 31, 2004 a seniorsecured debt to operating cash flow ratio ranging from 1.75x to 2.00x.

 

The Senior Credit Facility requires the Company to apply on April 30 ofeach year 50% to 75% (depending upon the level of the Company’s debt tooperating cash flow ratio at the end of such year) of its “Excess

 

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Cash Flow” for the preceding completed fiscal year, beginning withFiscal Year 2001, to reduce indebtedness outstanding under the Senior CreditFacility  in proportion to theoutstanding principal amount of such advances. The Senior Credit Facility alsocontains a number of customary covenants including, among others, limitationson investments and advances, mergers and sales of assets, liens on assets,affiliate transactions and changes in business. As of December 31, 2002, therewas no debt outstanding under the Senior Credit Facility and thus nocalculation of “Excess Cash Flow” was made for 2002.

 

On December 7, 2001, the Company completed a private offering of $250.0million principal amount of its 81⁄2% Senior Notes due 2008 (the “Senior Notes”). TheSenior Notes were initially offered to qualified institutional buyers underRule 144A and to persons outside the United States under Regulation S. TheCompany used all of the net proceeds of approximately $243.1 million to repay aportion of its outstanding indebtedness under its Senior Credit Facility,including prepayment premiums, and to pay fees related to the Senior Notes. OnJuly 2, 2002, the Company exchanged the Senior Notes for notes of the Companywith substantially identical terms of the Senior Notes, except the new notes donot contain terms with respect to transfer restrictions.

 

Concurrent with the closing of the Senior Notes, the Senior Notesindenture required the Company to place into an escrow account, for the benefitof the holders of the Senior Notes, an amount sufficient to pay the first fourinterest payments on the Senior Notes (the “Escrow Account”). The EscrowAccount of $41.4 million was funded by the Company from borrowings under itsSenior Credit Facility. The Company entered into an escrow agreement toprovide, among other things, that funds may be disbursed from the EscrowAccount only to pay interest on the Senior Notes (or, if a portion of theSenior Notes has been retired by the Company, funds representing the interestpayment on the retired Senior Notes will be released to the Company as long asno default exists under the indenture), and, upon certain repurchases orredemptions thereof, to pay principal of and premium, if any, thereon. Allfunds placed in the Escrow Account were invested on December 7, 2001 inTreasury Bills, Treasury Principal Strips and Treasury Interest Strips withmaturity dates in correlation with the interest payments for the first twoyears.  As of June 30, 2003 there was$6.7 million remaining in the Escrow Account, which amount will be used to fundthe interest payment due on the Senior Notes on December 15, 2003. Afterpayment of interest due on December 15, 2003, the Escrow Account will beterminated.

 

On August 12, 2002, the Company commencedoffers to purchase for cash all of its Senior Notes and a portion of itsoutstanding 9% Senior Subordinated Notes due 2006, 83⁄4% Senior SubordinatedNotes due 2007, and 10% Senior Subordinated Notes due 2011 (collectively referredto as the “Senior Subordinated Notes,” and the Senior Notes and the SeniorSubordinated Notes are collectively referred to as the “Notes”). These offerswere made with the net proceeds from the sale of KCAL-TV, in accordance withthe terms of the indentures governing the Notes. The net proceeds of theKCAL-TV sale, pursuant to the terms of the indentures, were approximately$350.0 million. The purchase price for the Notes in the offers was equal to$1,000 per $1,000 principal amount of the notes tendered and accepted, plusaccrued and unpaid interest through September 17, 2002 in the case of theSenior Notes and September 24, 2002 in the case of the Senior SubordinatedNotes. The offers expired in accordance with their terms on September 12, 2002.

 

On September 18, 2002, pursuant to the termsof the Senior Note offer, the Company purchased $93.1 million aggregateprincipal amount of the Senior Notes (constituting all of the Senior Notesvalidly tendered and not withdrawn in the offer) and paid accrued interest ofapproximately $2.0 million thereon. On October 17, 2002, as a result of thepurchase of Senior Notes and in accordance with the escrow agreement relatingto the Senior Notes, approximately $11.8 million was released from the escrowaccount and is available to the Company for general corporate purposes.

 

On September 25, 2002, pursuant to the termsof the Senior Subordinated Note offer, the Company purchased $38.9 millionaggregate principal amount of its 9% Senior Subordinated Notes, $62.3 millionaggregate principal amount of its 83⁄4% Senior Subordinated Notes and $155.7million aggregate principal amount of its 10% Senior Subordinated Notes andpaid accrued interest of approximately $681,100, $1.5

 

 

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million and $1.0 million, respectively,thereon. The principal amount of the Senior Subordinated Notes paid wasdetermined based on the pro-ration provisions of the indentures governing theSenior Subordinated Notes.

 

Debt amounts outstanding at  June 30, 2003 were as follows (dollars inthousands):

 
|                                         |   | **6/30/03** |    | **Annualized  Interest****Amounts(1)** |   |
|----------------------------------------------|--------|-------------|---------|----------------------------------------|--------|
| Senior Credit  Facility                      |   | $           | —  |                                   | $      | — |   |
| 81⁄2% Senior Notes  due 2008              |   | 156,890     |    | 13,336                                 |   |
| 9% Senior  Subordinated Notes due 2006       |   | 86,081      |    | 7,747                                  |   |
| 83⁄4% Senior  Subordinated Notes due 2007 |   | 137,730     |    | 12,051                                 |   |
| 10% Senior  Subordinated Notes due 2011      |   | 344,299     |    | 34,430                                 |   |
| Total Debt  (excluding capital leases)       |   | $           | 725,000 |                                   | $      | 67,564 |   |

 

(1)The annualized interest amounts are calculations ofthe outstanding principal amounts at 6/30/03 multiplied by the interest ratesof the related notes.

 

The Company’s total debtat June 30, 2003 was approximately $726.7 million, consisting of $568.1 millionof Senior Subordinated Notes, $156.9 million of Senior Notes and $1.7 millionof capital leases. In addition, at June 30, 2003, the Company had an additional$100.0 million of unused available borrowings under the revolving creditportion of the Senior Credit Facility; provided, however, pursuant to Waiverand Amendment No. 7 to the Senior Credit Facility, the Company is limited to$10.0 million of borrowings under the revolving facility until such time as theCompany is in compliance with all applicable financial ratios (without givingeffect to the waivers).

 

On June 27, 2001, the Company entered into interest rate swapsagreements for a total notional amount of $100.0 million with two commercialbanks who are also lenders under the Senior Credit Facility. The swap’seffective date was September 4, 2001 and expires on March 1, 2011. The Companypays a floating interest rate based upon a six month LIBOR rate and the Companyreceives interest from the commercial banks, at a fixed rate of 10.0%. The netinterest rate differential received was recognized as an adjustment to interestexpense. The interest swaps are accounted for at market value and do notqualify for hedge accounting. The Company received approximately $14.0 millionat the inception of the swap agreements, which was used to pay the outstandingliability upon the termination of the old cash flow hedges, and recorded a swapliability. The Company recorded $2.5 million and $4.5 million for the sixmonths ended June 30, 2002 and 2003, respectively  relating to the amortization of the old swap liability. The swapliability is being adjusted to fair value on a quarterly basis as a charge tocurrent period interest expense over the term of the swap, which began onSeptember 4, 2001. The Company recorded a mark-to-market change in fair valueof $3.2 million and $4.2 million for the six months ended June 30, 2003 and2002, respectively, for its current outstanding hedges.

 

 

It is anticipated that the Company will be able to meet the workingcapital needs of its stations, scheduled principal and interest payments underthe Company’s Senior Notes and Senior Subordinated Notes and capitalexpenditures, from cash on hand, cash flows from operations and funds availableunder the Senior Credit Facility.

 

**Income Taxes**

 

The Company files aconsolidated federal income tax return and such state and local tax returns asare required. During the second quarter of 2002, the Company recorded a gain onthe sale of KCAL-TV of $153.9 million, net of a provision for income taxes of$132.0 million. As a result of this income, the Company was able to realize atax benefit from the utilization of the loss from operations for the year endedDecember 31, 2002, tax loss carryforwards, and the cumulative effect of anaccounting change. In addition,

 

 

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the Company has recordeda deferred tax asset of $6.0 million and $2.0 million as of December 31, 2002and June 30, 2003, respectively, related to existing temporary differences thatare expected to generate future tax losses that can be carried back to 2002.  The Company recorded an income taxreceivable at December 31, 2002 of $28.8 million, of which $28.0 million wasreceived in the first quarter of 2003.

 

**ContractualObligations and Other Commercial Commitments**

 

The Company hasobligations and commitments under its long-term debt agreements and instrumentsto make future payments of principal and interest. The Company also hasobligations and commitments under certain contractual arrangements to makefuture payments for goods and services. These arrangements secure the futurerights to various assets and services to be used in the normal course ofoperations. Under generally accepted accounting principles, certain of thesearrangements (i.e., programming contracts that are currently available forairing) are recorded as liabilities in the Company’s consolidated balancesheet, while others (i.e., operating lease arrangements and programming notcurrently available) are not reflected as liabilities.

 

The following tablesummarizes separately the Company’s material obligations and commitments atJune 30, 2003 and the timing of payments required in connection therewith andthe effect that such payments are expected to have on the Company’s liquidityand cash flow in future periods.  The Companyexpects to fund the current obligations with cash on hand, cash flow fromoperations and funds available under its Senior Credit Facility.

 

 
|                                   |   |                        |    | **Payments  Due by Period** |   |
|----------------------------------------|--------|-----------------------------|---------|-----------------------------|--------|
|                                   |   | **Total**                   |    | **Less than  1 year**       |   | **1 - 3  years** |   | **4 - 5  years** |   | **After 5  years** |   |
| **Contractual Obligations**            |   | **(dollars  in thousands)** |    |
| Long-Term Debt  (principal only)       |   | $                           | 725,000 |                        | $      | — |   | $ | 86,081 |   | $ | 294,620 |   | $ | 344,299 |   |
| Capital Lease  Obligations             |   | 1,710                       |    | 582                         |   | 1,128 |   | — |   | — |   |
| Operating Leases                       |   | 8,568                       |    | 2,032                       |   | 4,012 |   | 965 |   | 1,559 |   |
| Unconditional  Purchase Obligations(1) |   | 4,905                       |    | 3,952                       |   | 953 |   | — |   | — |   |
| Other Long-Term  Obligations (2)       |   | 64,217                      |    | 17,182                      |   | 37,447 |   | 4,500 |   | 5,088 |   |
| Total  Contractual Cash Obligations    |   | $                           | 804,400 |                        | $      | 23,748 |   | $ | 129,621 |   | $ | 300,085 |   | $ | 350,946 |   |

 

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(1) Unpaid programlicense liability reflected on the June 30, 2003 balance sheet.

(2) Obligations for programming that has beencontracted for, but not recorded on the June 30, 2003 Balance Sheet because the programs were not currently availablefor airing.

 

**Recently Issued Accounting Standards**

 

InJune 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 143, *Accountingfor Asset Retirement Obligations* (“FAS 143”), effective for fiscalyears beginning after June 15, 2002. This standard provides the accounting forthe cost of legal obligations associated with the retirement of long-livedassets. FAS 143 requires that companies recognize the fair value of a liabilityfor asset retirement obligations in the period in which the obligations areincurred and capitalize that amount as a part of the book value of thelong-lived asset. That cost is then depreciated over the remaining life of theunderlying long-lived asset. The provisions of FAS No. 143 became effective forthe Company during the first quarter of 2003. The Company has assessed theimpact of this new standard and determined that the adoption of FAS No. 143 didnot have a material effect on the Company’s financial statements.

 

In April 2003, the FASB issued Statement of Financial AccountingStandards No. 149, *Amendment of Statement133 on Derivative Instruments and Hedging Activities*(“Statement149”), effective for contracts entered into or modified after June 30, 2003,and hedging relationships designated after June 30, 2003.  The

 

 

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Company’s adoption of this new standard is not expected to have amaterial impact on the results of operating and financial position.

 

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*(“Statement150”), effective immediately to instruments entered into or modified after May31, 2003 and to all other instruments that exist as of the beginning of thefirst interim financial reporting period beginning**after June 15, 2003. Application to pre-existing instruments should be recognized as thecumulative effect of a change in accounting principle (application byretroactive restatement is precluded). Early adoption of Statement 150 is not permitted.  The Company’s adoption of this new standardis not expected to have a material impact on the results of operating andfinancial position.

 

In January 2003, the FASB issued FASB Interpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN 46”), which requires variable interest entities (commonly referred to asSPEs) to be consolidated by the primary beneficiary of the entity if certaincriteria are met.  FIN 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003.  For variable interestentities created or acquired prior to February 1, 2003, the provision of FIN 46become effective for the Company during the third quarter of 2003.  For variable interest entities acquiredprior to February 1, 2003, any difference between the net amount added to thebalance sheet and the amount of any previously recognized interest in thevariable interest entity would be recognized as a cumulative effect of anaccounting change.  The Company has notcompleted its review regarding FIN 46, however the Company’s adoption of thisinterpretation is not expected to have a material impact on the results ofoperating and financial position.

 

 

**Item3**. ***Quantitative and Qualitative Disclosure******AboutMarket Risk.***

 

The Company’s Senior Credit Facility, with no amountsoutstanding as of June  30, 2003, bearsinterest at floating rates. Accordingly, to the extent there are amountsoutstanding under the Senior Credit Facility, the Company is exposed topotential losses related to changes in interest rates.

 

The Company’s Senior Notes of approximately $156.9million outstanding as of June 30, 2003 have a fixed rate of interest of 81⁄2%and mature in 2008. The annualized interest expense on the outstanding seniornotes is approximately $13.3 million.

 

The Company’s Senior Subordinated Notes ofapproximately $568.1 million outstanding as of June 30, 2003 are generalunsecured obligations of the Company and are subordinated in right of paymentto all senior debt, including all indebtedness of the Company under the SeniorCredit Facility and the Senior Notes. The Senior Subordinated Notes have fixedrates of interest ranging from 83⁄4% to 10% and are ten-year notes maturing invarious years commencing 2006. The annualized interest expense on theoutstanding Senior Subordinated Notes is approximately $54.2 million.

 

The Company does not enter into derivatives or otherfinancial instruments for trading or speculative purposes; however, in order tomanage its exposure to interest rate risk, the Company entered into derivativefinancial instruments in June 2001. These derivative financial instruments areinterest rate swap agreements that expire in 2011. The Company does not applyhedge accounting to these instruments.

 

**Item4. *Controls and Procedures*****.**

 

 

Our management carried out an evaluation, with theparticipation of our Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of our disclosure controls and procedures as of June 30,2003. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to ensure that information required to be disclosed by us in reports

 

 

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that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported, within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission.

 

There has not been any change in our internal control over financialreporting in connection with the evaluation required by Rule 13a-15(d) underthe Exchange Act that occurred during the quarter ended June 30, 2003 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

 

**PART II****.  OTHER INFORMATION**

 

**Item1.  *LegalProceedings******.***

 

Julian Graham &Julian Graham Chevrolet, Inc. v. Young Broadcasting Inc.,

Young Broadcasting ofRichmond, Inc. and Richard Real

Case No. LP 1723-1(Circuit Court, City of Richmond, Virginia)

 

On July 31, 2002, Plaintiffs served upon Young Broadcasting Inc., YoungBroadcasting of Richmond, Inc. (“WRIC-TV”) and Richard Real a complaintalleging that Defendants defamed Plaintiffs in a news story concerning JulianGraham Chevrolet that aired in April and May of 2002. Specifically, the newsstory of television station WRIC-TV reported that Julian Graham Chevrolet hadfiled for bankruptcy. Neither Julian Graham nor Julian Graham Chevrolet hadfiled for bankruptcy. The Company has responded to the complaint and obtained adismissal of one of Plaintiffs’ two claims. As a result of the dismissal of oneclaim, the total amount sought in the case is $57.0 million.  Trial is set for October 20, 2003. The Companyhas vigorously defended this matter.  Itis too early to estimate the likelihood of Plaintiffs’ chances of recovery, ora potential amount of recovery. In November 2002, Plaintiffs offered to settlefor $10.0 million. The Company has not responded to that offer.  The Company has $35.0 million in insurancefor this claim.

 

The Company is involved in other legal proceedings and litigationarising in the ordinary course of business. In the Company’s opinion, theoutcome of such proceedings and litigation currently pending will notmaterially affect the Company’s financial condition or results of operations.

 

 

**Item4. * Submission of Matters******to aVote of Security Holders.***

 

                On May 6, 2003,the Company held its 2003 annual meeting of stockholders to (i) elect ninedirectors of the Company to serve for a term of one year, (ii) approve theYoung Broadcasting Inc. Annual Incentive Plan, and (iii) ratify the selectionof Ernst & Young LLP as the Company’s independent auditors for the yearending December 31, 2003.

 

The following individuals were elected to serve asdirectors until the next annual meeting:

 
|                   |   | **Vote For** |   | **Vote  Withheld** |   |
|------------------------|--------|--------------|--------|--------------------|--------|
| Vincent J. Young       |   | 35,712,232   |   | 1,188,812          |   |
| Adam Young             |   | 35,712,232   |   | 1,188,812          |   |
| Ronald J.  Kwasnick    |   | 35,712,232   |   | 1,188,812          |   |
| James A. Morgan        |   | 35,712,232   |   | 1,188,812          |   |
| Bernard F. Curry       |   | 36,393,666   |   | 507,378            |   |
| Alfred J.  Hickey, Jr. |   | 36,393,666   |   | 507,378            |   |
| Leif Lomo              |   | 36,433,666   |   | 467,378            |   |
| Richard Lowe           |   | 34,653,100   |   | 2,247,944          |   |
| David C. Lee           |   | 36,393,666   |   | 507,378            |   |

 

 

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                Such individualsconstituted the entire Board of Directors and served as directors of theCompany immediately preceding the meeting.

 

                The stockholdersapproved the Young Broadcasting Inc. Annual Incentive Plan. The result of thevote was as follows: 31,686,080 votes were for the approval of the AnnualIncentive Plan, 2,618,298 votes were against the approval of the AnnualIncentive Plan and 8,281 abstained.

 

                The stockholdersratified the selection of Ernst & Young LLP as the Company’s independentauditors for the year ending December 31, 2003. The result of the vote was asfollows: 36,499,871 votes were for the selection, 396,523 votes were againstthe selection and 4,650 abstained.

 

**Item6. * Exhibits and Reports******onForm 8-K.***

***               ***(a) *Exhibits.*

 
| **Exhibit  Number** |   | **Exhibit Description**                         |
|---------------------|--------|-------------------------------------------------|
|                |   |                                            |
| 11                  |   | Statement Re Computation of Per Share Earnings. |
| 31                  |   | Rule 13a-14(a)/15d-14(a) Certifications         |
| 32                  |   | Section 1350 Certifications                     |

 

b)  *Reports on Form 8-K.*

 

During the quarter ended June 30, 2003, the Company filed or furnishedthe following current reports on Form 8-K with the Securities & ExchangeCommission:

 

Current report on Form 8-K, dated May 12, 2003, was furnished on May12, 2003. The items reported were:

 

•                  Item 7 — Financial Statements and Exhibits, which identified theexhibit furnished with the Form 8-K; and

 

•                  Item 9 — Regulation FD Disclosure, which reported the issuance of apress release announcing the Company’s financial results for the quarter endedMarch 31, 2003.

 

Current report on Form 8-K, dated May 12, 2003, was furnished on May12, 2003. The items reported were:

 

•                  Item 9 — Regulation FD Disclosure, which furnished the Section 906certification that accompanied the Company’s quarterly report on Form 10-Q forthe quarter ended March 31, 2003.

 

 

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**SIGNATURES**

 

                Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |            | YOUNG BROADCASTING INC. |
|--------|-----------------|-------------------------|
|   |            |                    |   |
| Date:  | August 14, 2003 | By:                     | /s/ Vincent J. Young |
|   |            |                    | Vincent J. Young |
|   |            |                    | Chairman |
|   |            |                    |   |
| Date:  | August 14, 2003 | By:                     | /s/ James A. Morgan |
|   |            |                    | James A. Morgan |
|   |            |                    | Executive Vice President and Chief Financial Officer  (principal financial officer) |

 

 

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