**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.   20549**

 

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**FORM10-Q**

 

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**Quarterly Report Pursuant toSection 13 or 15 (d) of the****Securities Exchange Act of 1934**

 
| **For the quarterly period ended  June 30, 2004** | ** ** | **Commission file number:  0-25042** |
|---------------------------------------------------|------------|--------------------------------------|

 

**YOUNG BROADCASTINGINC.**

(Exact name of registrant as 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  telephone number, including area  code:          **(212)  754-7070** |

 

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Indicate by check mark whether the registrant(1) has filed 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 whether the registrantis an accelerated filer (as defined in Rule 12b-2 of theExchange Act).    Yes  ý   No  o

 

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Number of shares of Common Stock outstandingas of July 28, 2004: 17,816,435 shares of Class ACommon Stock, and 2,081,533 shares of Class B Common Stock.

 

 

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**YOUNG BROADCASTING INC.**

 

**FORM 10-Q**

 

**Table of Contents**

 
| Part I     | Financial Information                    |                                                                                              |
|------------|------------------------------------------|---------------------------------------------------------------------------------------------------|
|       |                                     |                                                                                              |
|       | Item 1. Financial Statements (unaudited) |                                                                                              |
|       |                                     |                                                                                              |   |
|       |                                     | Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004                             |   |
|       |                                     |                                                                                              |   |
|       |                                     | Consolidated Statements of Operations for  the Three and Six Months Ended  June 30, 2003 and 2004 |   |
|       |                                     |                                                                                              |   |
|       |                                     | Consolidated Statements of Stockholders’  Equity for the Six Months  Ended June 30, 2004     |   |
|       |                                     |                                                                                              |   |
|       |                                     | Consolidated Statements of Cash Flows for  the Six Months Ended  June 30, 2003 and 2004           |   |
|       |                                     |                                                                                              |   |
|       |                                     | Notes to Consolidated Financial Statements                                                        |   |
|       |                                     |                                                                                              |   |
|       | Item 2.                                  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations       |   |
|       |                                     |                                                                                              |   |
|       | Item 3.                                  | Quantitative and Qualitative Disclosure  About Market Risk                                        |   |
|       |                                     |                                                                                              |   |
|       | Item 4.                                  | Controls and Procedures                                                                           |   |
|       |                                     |                                                                                              |   |
| Part II    |                                     |                                                                                              |   |
|       |                                     |                                                                                              |   |
|       | Item 1.                                  | Legal Proceedings                                                                                 |   |
|       |                                     |                                                                                              |   |
|       | Item 4.                                  | Submission of Matters to a Vote of Security  Holders                                              |   |
|       |                                     |                                                                                              |   |
|       | Item 6.                                  | Exhibits and Reports on Form 8-K                                                                  |   |
|       |                                     |                                                                                              |   |
| Signatures |                                     |

 

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**Part****I****  Financial****Information**

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

 

Young Broadcasting Inc. and Subsidiaries

ConsolidatedBalance Sheets

 
| ** **                                                                                                                                            | ** ** | **December 31,  2003** | ** **    | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|--------------------|------------|
| ** **                                                                                                                                            | ** ** | ** **             | ** **    | **(Unaudited)**    | ** ** |
| **Assets**                                                                                                                                            |       |                   |          | ** **         | ** ** |
| Current assets:                                                                                                                                       |       |                   |          | ** **         | ** ** |
| Cash and cash equivalents                                                                                                                             |       | $                      | 331,150,335   |               | **$**      | **85,097,683** | ** ** |
| Trade accounts receivable, less allowance  for doubtful accounts of  $1,125,000 in  2003 and $1,264,000 in 2004                                  |       | 43,287,278             |          | **42,375,581**     | ** ** |
| Current portion of program license rights                                                                                                             |       | 14,041,957             |          | **5,944,537**      | ** ** |
| Prepaid expenses                                                                                                                                      |       | 3,150,901              |          | **1,674,901**      | ** ** |
| Total current assets                                                                                                                                  |       | 391,630,471            |          | **135,092,702**    | ** ** |
|                                                                                                                                                  |       |                   |          | ** **         | ** ** |
| Property and equipment, less accumulated  depreciation and amortization of   $159,898,113 in 2003 and $168,992,853 in 2004                       |       | 95,008,191             |          | **92,965,753**     | ** ** |
| Program license rights, excluding current  portion                                                                                                    |       | 680,428                |          | **464,379**        | ** ** |
| Deposits and other assets                                                                                                                             |       | 7,454,872              |          | **7,728,730**      | ** ** |
| Indefinite-lived intangible assets                                                                                                                    |       | 475,995,697            |          | **475,995,697**    | ** ** |
| Definite-lived intangible assets, net                                                                                                                 |       | 77,053,891             |          | **74,907,274**     | ** ** |
| Deferred charges, net                                                                                                                                 |       | 13,840,698             |          | **11,948,551**     | ** ** |
| **Total Assets**                                                                                                                                      |       | $                      | 1,061,664,248 |               | **$**      | **799,103,086** | ** ** |
| ** **                                                                                                                                            |       |                   |          | ** **         | ** ** |
| **Liabilities and stockholders’ equity**                                                                                                         |       |                   |          | ** **         | ** ** |
| Current liabilities:                                                                                                                                  |       |                   |          | ** **         | ** ** |
| Trade accounts payable                                                                                                                                |       | $                      | 8,725,654     |               | **$**      | **10,080,675** | ** ** |
| Accrued interest                                                                                                                                      |       | 16,075,312             |          | **18,147,953**     | ** ** |
| Accrued expenses                                                                                                                                      |       | 17,220,773             |          | **14,222,810**     | ** ** |
| Current installments of program license  liability                                                                                                    |       | 13,425,084             |          | **3,219,637**      | ** ** |
| Current installments of long-term debt                                                                                                                |       | 223,811,000            |          | **—**         | ** ** |
| Current installments of obligations under  capital leases                                                                                             |       | 1,026,959              |          | **751,229**        | ** ** |
| Total current liabilities                                                                                                                             |       | 280,284,782            |          | **46,422,304**     | ** ** |
| Program license liability, excluding  current installments                                                                                            |       | 847,988                |          | **431,546**        | ** ** |
| Long-term debt, excluding current  installments                                                                                                       |       | 741,559,285            |          | **740,647,759**    | ** ** |
| Other liabilities                                                                                                                                     |       | 10,408,276             |          | **12,346,922**     | ** ** |
| Obligations under capital leases, excluding  current installments                                                                                     |       | 234,154                |          | **190,940**        | ** ** |
| **Total liabilities**                                                                                                                                 |       | 1,033,334,485          |          | **800,039,471**    | ** ** |
| Stockholders’ equity*:*                                                                                                                          |       |                   |          | ** **         | ** ** |
| Class A Common Stock, $.001 par value.  Authorized 40,000,000 shares; issued and outstanding 17,695,857 shares at  2003 and 17,783,527 shares at 2004 |       | 17,696                 |          | **17,784**         | ** ** |
| Class B Common Stock, $.001 par value.  Authorized 20,000,000 shares; issued and outstanding 2,129,414 shares at 2003  and 2,083,033 at 2004          |       | 2,129                  |          | **2,083**          | ** ** |
| Additional paid-in capital                                                                                                                            |       | 377,802,562            |          | **379,402,756**    | ** ** |
| Accumulated other comprehensive loss                                                                                                                  |       | (2,082,402             | )             | **(2,082,402**     | **)**      |
| Accumulated deficit                                                                                                                                   |       | (347,410,222           | )             | **(378,276,606**   | **)**      |
| Total stockholders’ equity (deficit)                                                                                                             |       | 28,329,763             |          | **(936,385**       | **)**      |
| **Total liabilities and stockholders’ equity**                                                                                                   |       | $                      | 1,061,664,248 |               | **$**      | **799,103,086** | ** ** |

** **

*See accompanying notes to consolidatedfinancial statements*

 

2

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**Young Broadcasting Inc. and Subsidiaries**

**Consolidated Statements of Operations**

(Unaudited)

 
| ** **                                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                    | ** ** | **2003**                         |       | **2004**                       | ** ** | **2003** |   | **2004** | ** ** |
| Net operating revenue                                                         |       | $                                | 53,939,029 |                           | **$**      | **58,332,722** | ** ** | $ | 101,176,951 |   | **$** | **109,282,066** | ** ** |
| ** **                                                                    | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Operating expenses, excluding depreciation  expense                           |       | 18,852,229                       |       | **18,494,785**                 | ** ** | 37,359,207 |   | **36,941,861** | ** ** |
| Amortization of program license rights                                        |       | 4,328,652                        |       | **4,492,667**                  | ** ** | 8,954,048 |   | **9,253,473** | ** ** |
| Selling, general and administrative  expenses, excluding depreciation expense |       | 14,791,088                       |       | **16,088,123**                 | ** ** | 29,830,602 |   | **31,807,622** | ** ** |
| Depreciation and amortization                                                 |       | 6,583,583                        |       | **6,412,399**                  | ** ** | 13,310,274 |   | **12,912,619** | ** ** |
| Corporate overhead, excluding depreciation  expense                           |       | 3,290,376                        |       | **3,793,051**                  | ** ** | 6,427,671 |   | **9,618,492** | ** ** |
| Operating income                                                              |       | 6,093,101                        |       | **9,051,697**                  | ** ** | 5,295,149 |   | **8,747,999** | ** ** |
| ** **                                                                    | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Interest (expense), net                                                       |       | (15,897,779                      | )          | **(15,870,853**                | **)**      | (31,917,822 | ) | **(32,856,796** | **)** |
| Non-cash change on market valuation of  swaps                                 |       | 2,193,453                        |       | **(2,538,324**                 | **)**      | 732,447 |   | **(1,276,640** | **)** |
| Loss on extinguishment of debt                                                |       | —                           |       | **—**                     | ** ** | — |   | **(5,323,375** | **)** |
| Other income (expense), net                                                   |       | 41,552                           |       | **(206,881**                   | **)**      | (131,201 | ) | **(157,572** | **)** |
|                                                                          | ** ** | (13,662,774                      | )          | **(18,616,058**                | **)**      | (31,316,576 | ) | **(39,614,383** | **)** |
| ** **                                                                    | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Loss from continuing operations                                               |       | (7,569,673                       | )          | **(9,564,361**                 | **)**      | (26,021,427 | ) | **(30,866,384** | **)** |
| Income from discontinued operations, net of  taxes                            |       | 2,190,335                        |       | **—**                     | ** ** | 2,190,335 |   | **—** | ** ** |
| Net loss                                                                      |       | $                                | (5,379,338 | )                              | **$**      | **(9,564,361** | **)** | $ | (23,831,092 | ) | **$** | **(30,866,384** | **)** |
| ** **                                                                    | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Basic and diluted net loss per common  share:                                 | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Loss from continuing operations                                               |       | $                                | (0.38      | )                              | **$**      | **(0.48** | **)** | $ | (1.32 | ) | **$** | **(1.55** | **)** |
| Income from discontinued operations                                           |       | 0.11                             |       | **—**                     | ** ** | 0.11 |   | **—** | ** ** |
| Net loss per common share                                                     |       | $                                | (0.27      | )                              | **$**      | **(0.48** | **)** | $ | (1.21 | ) | **$** | **(1.55** | **)** |
| ** **                                                                    | ** ** | ** **                       |       | ** **                     | ** ** | ** ** |   | ** ** | ** ** |
| Weighted average shares – Basic and  dilutive                            |       | 19,770,090                       |       | **19,863,843**                 | ** ** | 19,755,027 |   | **19,853,917** | ** ** |

 

*Seeaccompanying notes to consolidated financial statements.*

 

3

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Young Broadcasting Inc. and Subsidiaries

 

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 
| ** **                                                            | ** ** | **Common Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Comprehensive  Loss** | ** **  | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|--------------------------|------------|--------------------------------------|-------------|---------------------------------------|------------|
| ** **                                                            | ** ** | ** **       | ** ** | ** **                       | ** ** | ** **               |
| ** **                                                            | ** ** | **Class A**      | ** ** | **Class B**                      | ** ** | ** **               | ** ** | ** **                           | ** **  |
| Balance at December 31, 2003                                          |       | $                | 17,696     |                             | $          | 2,129                    |       | $                                    | 377,802,562 |                                  | $          | (347,410,222 | ) | $ | (2,082,402 | ) | $ | 28,329,763 |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Contribution of shares into Company’s  defined contribution plan |       | 30               |       |                             |       | 547,964                  |       |                                 |        |                                  |       | 547,994 |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Conversion of Class B Common Stock to Class  A Common Stock           |       | 46               |       | (46                              | )          |                     |       |                                 |        |                                  |       |   |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Non-cash stock compensation                                           |       |             |       |                             |       | 830,250                  |       |                                 |        |                                  |       | 830,250 |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Employee stock purchase plan                                          |       | 8                |       |                             |       | 152,087                  |       |                                 |        |                                  |       | 152,095 |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Exercise of stock options                                             |       | 4                |       |                             |       | 69,893                   |       |                                 |        |                                  |       | 69,897 |   |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Net loss for the six months ended June 30,  2004                      |       |             |       |                             |       |                     |       | (30,866,384                          | )           |                                  |       | (30,866,384 | ) |
|                                                                  |       |             |       |                             |       |                     |       |                                 |        |                                  |       |   |   |
| Balance at June 30, 2004                                              |       | $                | 17,784     |                             | $          | 2,083                    |       | $                                    | 379,402,756 |                                  | $          | (378,276,606 | ) | $ | (2,082,402 | ) | $ | (936,385 | ) |

 

*Seeaccompanying notes to consolidated financial statements*

 

4

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**Young Broadcasting Inc. and Subsidiaries**

** **

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                                 | ** ** | **2003**                      |        | **2004** | ** ** |
| **Operating activities**                                                                   | ** ** | ** **                    |        | ** ** | ** ** |
| Net loss                                                                                   |       | $                             | (23,831,092 | ) | **$** | **(30,866,384** | **)** |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: | ** ** | ** **                    |        | ** ** | ** ** |
| Gain on sale of KCAL-TV                                                                    |       | (2,190,335                    | )           | **—** | ** ** |
| Depreciation and amortization of property  and equipment                                   |       | 9,158,528                     |        | **9,542,927** | ** ** |
| Amortization of program license rights                                                     |       | 8,954,048                     |        | **9,253,473** | ** ** |
| Amortization of intangibles and deferred  charges                                          |       | 4,151,746                     |        | **3,369,692** | ** ** |
| Non-cash compensation                                                                      |       | 603,340                       |        | **1,416,002** | ** ** |
| Non-cash change on market valuation of swap                                                |       | (732,447                      | )           | **1,276,640** | ** ** |
| Loss on extinguishment of debt                                                             |       | —                        |        | **1,305,790** | ** ** |
| Loss on sale of fixed assets                                                               |       | 7,735                         |        | **11,855** | ** ** |
| Income from escrow deposits                                                                |       | (70,063                       | )           | **—** | ** ** |
| Income tax refund, net of estimated payment                                                |       | 27,000,000                    |        | **—** | ** ** |
| Interest payments from escrow account                                                      |       | 6,667,825                     |        | ** ** | ** ** |
| Payments on programming license liabilities                                                |       | (9,062,900                    | )           | **(9,120,776** | **)** |
| Decrease in trade accounts receivable                                                      |       | 1,418,969                     |        | **1,283,104** | ** ** |
| Decrease in prepaid expenses                                                               |       | 1,317,941                     |        | **1,476,003** | ** ** |
| Decrease in trade accounts payable                                                         |       | (6,033,466                    | )           | **(937,729** | **)** |
| Decrease in accrued expenses and other  liabilities                                        |       | (8,548,687                    | )           | **(1,517,448** | **)** |
| Net cash provided by (used in) operating  activities                                       |       | 8,811,142                     |        | **(13,506,851** | **)** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Investing activities**                                                                   | ** ** | ** **                    |        | ** ** | ** ** |
| Capital expenditures                                                                       |       | (5,935,798                    | )           | **(7,578,127** | **)** |
| Increase in deposits and other assets                                                      |       | (1,491,963                    | )           | **(310,817** | **)** |
| Net cash used in investing activities                                                      |       | (7,427,761                    | )           | **(7,888,944** | **)** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Financing activities**                                                                   | ** ** | ** **                    |        | ** ** | ** ** |
| Redemption of senior subordinated notes                                                    |       | —                        |        | **(223,811,000** | **)** |
| Deferred debt financing costs incurred                                                     |       | —                        |        | **(596,809** | **)** |
| Principal payments under capital lease  obligations                                        |       | (332,022                      | )           | **(318,945** | **)** |
| Proceeds from exercise of stock options                                                    |       | 173,800                       |        | **69,897** | ** ** |
| Proceeds from other financing activities                                                   |       | 3,311                         |        | **—** | ** ** |
| Net cash used in financing activities                                                      |       | (154,911                      | )           | **(224,656,857** | **)** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Net increase (decrease) in cash**                                                        |       | 1,228,470                     |        | **(246,052,652** | **)** |
| Cash and cash equivalents at beginning of  year                                            |       | 110,406,572                   |        | **331,150,335** | ** ** |
| **Cash and cash equivalents at June 30**                                                   |       | $                             | 111,635,042 |   | **$** | **85,097,683** | ** ** |
| ** **                                                                                 | ** ** | ** **                    |        | ** ** | ** ** |
| **Supplemental disclosure of cash flow  information**                                      | ** ** | ** **                    |        | ** ** | ** ** |
| Interest paid                                                                              |       | $                             | 32,915,484  |   | **$** | **32,149,944** | ** ** |
| Income tax refund, net of estimated payment                                                |       | $                             | 26,809,998  |   | **$** | **—** | ** ** |

 

*See accompanying notes to consolidated financial statements.*

 

5

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**Young Broadcasting Inc. and Subsidiaries**

** **

**Notes to Consolidated Financial Statements**

**(Unaudited)**

** **

**1.  Description of Business and Basis ofPresentation**

 

The business operations ofYoung Broadcasting Inc. and subsidiaries (the “Company”) consist of ten networkaffiliated stations (six with ABC, three with CBS, and one with NBC) and oneindependent commercial television broadcasting station. The markets served arelocated in Lansing, Michigan, Green Bay, Wisconsin, Lafayette, Louisiana,Rockford, Illinois, Nashville and Knoxville, Tennessee, Albany, New York,Richmond, Virginia, Davenport, Iowa, Sioux Falls, South Dakota and SanFrancisco, California. In addition, the accompanying condensed consolidatedfinancial statements include the Company’s wholly owned national televisionsales representation firm. Significant intercompany transactions and accountshave been eliminated.

 

The accompanying condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial statements and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. The interim financial statements are unaudited but include alladjustments, which are of a normal recurring nature, that the Company considersnecessary for a fair presentation of the consolidated financial position andthe consolidated results of operations and cash flows for such period.

 

Operating results of interimperiods are not necessarily indicative of results for a full year.  For further information, refer to theconsolidated financial statements and footnotes included in the Company’sannual report on Form 10-K for the year ended December 31, 2003.

 

**2.  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.

 

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 the Company.For awards that generate compensation expense as defined under APB 25, theCompany calculates the amount of compensation expense and recognized theexpense over the vesting period of the award.

 

Thefollowing table illustrates the effect on net loss and earnings per share ifthe Company had applied the fair value recognition provisions of Statement 123.

 

6

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** **
| ** **                                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(dollars in thousands, except per share data)**                                                | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
| Net loss-as reported                                                                             |       | $                                | (5,379     | )                              | $          | (9,564 | ) | $ | (23,831 | ) | $ | (30,866 | ) |
| Add stock based employee compensation  expense included in reported net loss                     |       | —                      |       | —                    |       | —  |   | 830  |   |
| Deduct total stock-based employee  compensation expense determined under fair value based method |       | (1,225                           | )          | (932                           | )          | (2,451 | ) | (1,850 | ) |
| Net loss-pro forma                                                                               |       | $                                | (6,604     | )                              | $          | (10,496 | ) | $ | (26,282 | ) | $ | (31,886 | ) |
| Net loss per basic common share-as reported                                                      |       | $                                | (0.27      | )                              | $          | (0.48 | ) | $ | (1.21 | ) | $ | (1.55 | ) |
| Net loss per basic common share-pro forma                                                        |       | $                                | (0.33      | )                              | $          | (0.53 | ) | $ | (1.33 | ) | $ | (1.61 | ) |

 

**3.  Intangible Assets**

 

Intangible assets, whichinclude broadcasting licenses, network affiliation agreements, and otherintangibles, are carried on the basis of cost, less accumulated amortization.Cost is based upon appraisals performed at the time of acquisition. Broadcastlicenses are considered to have an indefinite life. Network affiliationagreements and other definite-lived intangible assets are amortized overperiods up to 25 years.

 

The following table sets forththe additional disclosures related to intangible assets required underStatement 142:

 
| ** **                          | ** ** | **As of December 31, 2003** | ** ** | **As of June 30, 2004**       | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands)**  | ** ** |
| ** **                          | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
| Indefinite-lived intangible assets: |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Broadcast licenses                  |       | $                           | 475,996    |                          | —     |   | $ | 475,996 |   | $ | 475,996 |   | — |   | $ | 475,996 |   |
|                                |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Definite-lived intangible assets:   |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Network Affiliations                |       | $                           | 93,193     |                          | $          | (25,957 | ) | $ | 67,236 |   | $ | 93,193 |   | $ | (27,419 | ) | $ | 65,774 |   |
| Other intangible assets             |       | 14,045                      |       | (4,227                        | )          | 9,818 |   | 14,045 |   | (4,912 | ) | 9,133 |   |
|                                |       | $                           | 107,238    |                          | $          | (30,184 | ) | $ | 77,054 |   | $ | 107,238 |   | $ | (32,331 | ) | $ | 74,907 |   |

 

Aggregate amortization expensefor the six months ended June 30, 2003 and 2004 was $3.1 million and $2.2million, respectively.  Aggregateamortization expense for the three months ended June 30, 2003 and 2004 was $1.6million and $1.1 million, respectively.

 

It is the Company’s policy toaccount for other definite-lived intangible assets at the lower of amortizedcost or estimated realizable value. As part of an ongoing review of thevaluation and amortization of other intangible assets of the Company and itssubsidiaries, management assesses the carrying value of other definite-livedintangible assets if facts and circumstances suggest that there may beimpairment. If this review indicates that other definite-lived intangibleassets will not be recoverable as determined by a non-discounted cash flowanalysis of the operating assets over the remaining amortization period, thecarrying value of other intangible assets would be reduced to estimated fairvalue.

 

7

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**4.  Long -Term Debt**

 

On December 23, 2003, theCompany completed a private add-on offering of $90.0 million principal amountof its 8 1⁄2% Senior Notes due 2008 (the “Senior Notes Add-On”). The Senior NotesAdd-On were offered to qualified institutional buyersunder Rule 144A and to persons outside the United States under Regulation S.The Senior Notes Add-On was sold at a premium of approximately $6.2 million. OnJanuary 22, 2004, the Company used the net proceeds of approximately $94.1 millionto redeem all of the Company’s 9% senior subordinated notes due 2006 plusaccrued interest.  On July 1, 2004, theCompany exchanged the Senior Notes Add-On for notes of the Company withsubstantially identical terms of the Senior Notes Add-On, except the new notesdo not contain terms with respect to transfer restrictions.

 

On December 23, 2003, theCompany completed a private offering of $140.0 million principal amount of its83⁄4% Senior Subordinated Notes due 2014 (the “December 2003 Notes”). The December 2003 Notes were offered to qualified institutionalbuyers under Rule 144A and to persons outside the United States underRegulation S. On January 22, 2004, the Company used the net proceeds ofapproximately $136.5 million to redeem all of the Company’s 83⁄4% SeniorSubordinated Notes due 2007, plus a redemption premium and accrued interest. OnJuly 1, 2004, the Company exchanged the December 2003 Notes for notes of theCompany with substantially identical terms of the December 2003 Notes, exceptthe new notes do not contain terms with respect to transfer restrictions.

 

On December 22, 2003, theCompany amended and restated its senior credit facility (as amended, the“Senior Credit Facility”). The Senior Credit Facility consists of a revolvingcredit facility in the amount of $20.0 million that is currently available tothe Company and that matures in June 2008. Pursuant to the Senior CreditFacility, the Company is prohibited from making investments or advances tothird parties exceeding $15.0 million unless the third party becomes aguarantor of the Company’s obligation. At June 30, 2004, the Company had nooutstanding borrowings under the Senior Credit Facility.

 

Long-term debt at December 31,2003 and June 30, 2004 consisted of the following:

 
| ** **                                   | ** ** | **12/31/03** | ** ** | **6/30/04** | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|
|                                         |       |         |       |        |       |
| Senior Credit Facility                       |       | $            | —     |        | $          | — |   |
| 81⁄2% Senior Notes due 2008               |       | 253,109      | (1)        | 252,487     | (1)        |
| 8 3⁄4% Senior Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       |
| 9% Senior Subordinated Notes due 2006        |       | 86,081       | (2)        | —      |       |
| 83⁄4% Senior Subordinated Notes due 2007  |       | 137,730      | (2)        | —      |       |
| 10% Senior Subordinated Notes due 2011       |       | 348,450      | (3)        | 348,161     | (3)        |
| Total Debt (excluding capital leases)        |       | $            | 965,370    |        | $          | 740,648 |   |

 

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(1)        Includes an unamortized premium balance of $6.2million and $5.6 million as of    December 31, 2003 and June 30, 2004, respectively.

 

(2)        Redeemed in full on January 22, 2004

 

(3)        Includes unamortized premium balances of $4.2million and $3.9 million as of   December 31, 2003 and June 30, 2004, respectively.

 

8

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**5.  Income Taxes**

 

Notax benefit was recorded with respect to the loss for 2004, as the utilizationof such loss is not more likely than not to be realized. The Company provides avaluation allowance for deferred tax assets for which it does not considerrealization of such assets to be more likely than not. At December 31, 2003,the Company had net operating loss (“NOL”) carryforwards for tax purposes ofapproximately $129.9 million expiring at various dates through 2023, for whicha full valuation allowance has been provided.

 

**6.  Employee Benefit Plans**

 

The Company’s defined benefitpension plan covers the IBEW Local 45 of KRON-TV employees.

 

The Company expects tocontribute between $250,000 and $350,000 to the benefit plan in 2004.

 

Components of the net periodicbenefit (cost) were as follows:

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Expected return of plan assets                                   |       | $                                | (166,026   | )                              | $          | (164,966 | ) | $ | (332,053 | ) | $ | (329,931 | ) |
| Service cost                                                     |       | (86,906                          | )          | (102,095                       | )          | (173,812 | ) | (204,191 | ) |
| Interest cost                                                    |       | (144,560                         | )          | (151,061                       | )          | (289,119 | ) | (302,121 | ) |
| Amortization of the unrecognized obligation  or transition asset |       | (5,932                           | )          | (5,932                         | )          | (11,865 | ) | (11,865 | ) |
| Recognized (gains or loss)                                       |       | 158,223                          |       | 20,765                         |       | 316,446 |   | 41,530  |   |
| Recognized prior service costs                                   |       | 14,044                           |       | 14,044                         |       | 28,088 |   | 28,088 |   |
| Net periodic benefit (cost)                                      |       | $                                | (231,157   | )                              | $          | (389,245 | ) | $ | (462,315 | ) | $ | (778,490 | ) |

 

**7.  Earnings Per Share**

 

Theweighted average number of shares outstanding during the period has been usedto calculate earnings per share.   Thestock options outstanding have not been included in the computation of earningsper share because they would be anti-dilutive.

 

9

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**Item 2.*****Management’sDiscussion and Analysis of Financial 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 theCompany’s stations is derived primarily from advertising revenue and, to a muchlesser extent, from compensation paid by the networks to the stations forbroadcasting network programming. The stations’ primary operating expenses arefor employee compensation, newsgathering, production, programming and promotioncosts. A high proportion of the operating expenses of the stations are fixed.

 

Advertising is sold forplacement within and adjoining a station’s network and locally originatedprogramming.  Advertising is sold in timeincrements and is priced primarily on the basis of a program’s popularity amongthe specific audience an advertiser desires to reach, as measured principallyby periodic audience surveys.  In addition,advertising rates are affected by the number of advertisers competing for theavailable time, the size and demographic makeup of the market served by thestation and the availability of alternative advertising media in the marketarea.  Rates are highest during the mostdesirable viewing hours, with corresponding reductions during other hours.  The ratings of a local station affiliatedwith a national television network can be affected by ratings of networkprogramming.

 

Most advertising contracts areshort-term, and generally run only for a few weeks. Most of the Company’sannual gross revenue is generated from local advertising, which is sold by astation’s sales staff directly to local accounts. The remainder of theadvertising revenue primarily represents national advertising, which is sold byAdam Young Inc. (“AYI”), a wholly owned national advertising salesrepresentative. The stations generally pay commissions to advertising agencieson local, regional and national advertising.

 

The advertising revenue of theCompany’s stations is generally highest in the second and fourth quarters ofeach year, due in part to increases in consumer advertising in the spring andretail advertising in the period leading up to and including the holidayseason.  In addition, advertising revenueis generally higher during even numbered election years due to spending bypolitical candidates, which spending typically is heaviest during the fourthquarter.

 

**RecentDevelopments**

 

*Digital Upgrades*.  TheCompany has completed the upgrade of its television stations to enable them tobroadcast with digital technology.  As ofJuly 27, 2004, the FCC has not granted the digital construction permitapplication for WTEN-TV (Albany) because the FCC and the Canadian

 

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government have to resolve certain interference issues.However, it is expected that temporary reduced power operation for WTEN’sdigital station will be authorized in the near future.

 

*Network Affiliation Agreements.** *TheCompany has received notice from CBS with respect to WLNS and KLFY, from NBCwith respect to KWQC and from ABC with respect to WKRN, WTEN, WRIC, WATE andWBAY, that the respective network will not renew the affiliation agreementscurrently in place and that the networks wish to negotiate new agreements. Theagreements with CBS expire on September 30, 2004, the agreement with NBCexpires on November 1, 2004 and the agreements with ABC expire on October 1,2004.  Negotiations have commenced withall three networks. While the Company is unable to predict the terms of any newaffiliation agreements, the Company believes that these stations will havenetwork affiliations in place at the expiration date of the currentaffiliations. In the event, however, of the Company’s inability to secure newaffiliation agreements, the respective station may no longer be able to carryprogramming of the relevant network. This loss of network programming wouldrequire the Company to obtain replacement programming, which may involve highercosts and which may not be as attractive to audiences, resulting in reducedrevenues.

 

**CriticalAccounting Policies**

 

The Company’s criticalaccounting policy for the impairment of property, equipment and intangibleassets is assessing the recoverability by making assumptions regardingestimated future cash flows and other factors to determine the fair value ofthe respective assets. If these estimates or related assumptions materiallychange in the future, the Company may be required to record impairment chargesnot previously recorded for these assets. At June 30, 2004, the Company had$93.0 million in net property and equipment, $476.0 million of indefinite-livedintangible assets and $74.9 million of definite-lived intangible assets, net.The Company will perform its 2004 annual impairment test of indefinite-livedintangible assets in the fourth quarter of 2004 unless impairment indicatorsexist before the fourth quarter.

 

**TelevisionRevenues**

 

Set forth below are theprincipal types of television revenues received by the Company’s stations forthe periods indicated and the percentage contribution of each to the Company’stotal revenue, as well as agency and national sales representative commissions:

 
| ** **       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **       | ** ** | **2003**                        | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **       | ** ** | **Amount**                      | ** ** | **%**                         | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| ** **       | ** ** | **(dollars in thousands)**      | ** ** |
| Revenues         | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Local            |       | $                               | 35,429     |                          | 56.8       |   | $ | 36,806 |   | 54.2 |   | $ | 66,671 |   | 57.0 |   | $ | 68,714 |   | 54.0 |   |
| National         |       | 22,675                          |       | 36.4                          |       | 22,785 |   | 33.6 |   | 41,704 |   | 35.6 |   | 41,737 |   | 32.8 |   |
| Network          |       | 2,648                           |       | 4.2                           |       | 2,548 |   | 3.8 |   | 5,079 |   | 4.4 |   | 5,068 |   | 4.0 |   |
| Political        |       | 671                             |       | 1.1                           |       | 4,587 |   | 6.8 |   | 851 |   | 0.7 |   | 8,597 |   | 6.8 |   |
| Production/Other |       | 951                             |       | 1.5                           |       | 1,118 |   | 1.6 |   | 2,743 |   | 2.3 |   | 3,023 |   | 2.4 |   |
| Total            |       | 62,374                          |       | 100.0                         |       | 67,844 |   | 100.0 |   | 117,048 |   | 100.0 |   | 127,139 |   | 100.0 |   |
|             |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commissions      |       | (8,435                          | )          | (13.5                         | )          | (9,511 | ) | (14.0 | ) | (15,871 | ) | (13.6 | ) | (17,857 | ) | (14.0 | ) |
|             |       |                            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Revenue      |       | $                               | 53,939     |                          | 86.5       |   | $ | 58,333 |   | 86.0 |   | $ | 101,177 |   | 86.4 |   | $ | 109,282 |   | 86.0 |   |

 

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**Results ofOperations**

 

*ThreeMonths Ended June 30, 2004 Compared to Three Months Ended June 30, 2003*

 

Net revenue for the threemonths ended June 30, 2004 was $58.3 million, an increase of $4.4 million, or 8.2%,compared to $53.9 million for the three months ended June 30, 2003. Politicalrevenue for the three months ended June 30, 2004 was $4.6 million, an increaseof $3.9 million, compared to $671,000 for the three months ended June 30, 2003.The increase in political revenue was attributable to the existence of stronglycontested local races in Iowa, California and South Dakota in 2004, thenational Democratic primaries, as well as significant spending for thepresidential campaign, while 2003 had only limited state and local elections.The Company’s gross local revenues increased 3.9% for the three months endedJune 30, 2004 compared to the three months ended June 30, 2003 and the nationalrevenues remained flat compared to the prior year period. Network compensationfor the three months ended June 30, 2004 was $2.5 million, a decrease of$100,000, or 3.8%, compared to $2.6 million for the three months ended June 30,2003.

 

Operating expenses, includingselling, general and administrative expenses, for the three months ended June30, 2004 were $34.6 million, compared to $33.6 million for the three monthsended June 30, 2003, an increase of $940,000, or 2.8%. Approximately $195,000of this increase is attributable to the increase in local sales commissions paidto employees because of the increase in local revenues. The Company hadincreases to its health insurance and property and casualty insurance costs ofapproximately $149,000. The Company relocated several managers to fillpositions within the station group, the cost of which was approximately$200,000.  Included in the selling,general and administrative expenses is non-cash compensation of $274,000 forthe three months ended June 30, 2004, compared to non-cash compensation of$289,000 for the three months ended June 30, 2003.

 

Amortization of program licenserights for the three months ended June 30, 2004 was $4.5 million, compared to$4.3 million for the three months ended June 30, 2003, an increase of $164,000,or 3.8%.

 

Depreciation of property and equipmentand amortization of intangible assets was $6.4 million for the three monthsended June 30, 2004, compared with $6.6 million for the comparable period in2003, a decrease of $171,000, or 2.6%. On February 17, 2004, the Companyannounced that it had adopted a new policy for recognizing the useful lives ofits network affiliation agreements and that suchintangibles will be amortized over a period of 25 years.  Previously, these assets were accounted foras having an indefinite life.  As aresult of this decision, the Company restated its earnings for the full yearended December 31, 2002 and for the first three quarters of 2003.

 

Corporate overhead for thethree months ended June 30, 2004 was $3.8 million, compared to $3.3 million forthe comparable period in 2003, an increase of $503,000 or 15.3%.  Approximately $138,000 of this increase isattributable to higher costs of the directors and officers’ liability insurancepolicy. The Company’s review of and compliance with corporategovernance legislation resulted in additional legal, professional andconsulting fees of approximately $241,000 in the second quarter of 2004.

 

The Company recorded a $2.5million non-cash loss and $2.2 million non-cash gain in connection with thechange in the market value of interest rate swaps for the three months endedJune 30, 2004 and 2003, respectively. The Company recorded $1.2 million of non-cash interest expense for thethree months ended June 30, 2003 relating to the amortization of othercomprehensive loss in connection with its swap transactions entered into in2000 and terminated in June 2001. The Company also recorded a mark-to-marketnon-cash gain of approximately $3.4 million for the

 

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threemonths ended June 30, 2003, for the change in the fair value of its thenoutstanding fair value economic hedges (see “Liquidity and Capital Resources”).

 

On May 15, 2002, the Companycompleted the sale of KCAL-TV to Viacom Inc. for $650.0 million, less purchaseprice adjustments. The Companyrecorded a gain related to the sale of approximately $2.2 million, net of aprovision for income taxes, for the three months ended June 30, 2003.

 

As a result of the factorsdiscussed above, the net loss for the Company was $9.6 million for the threemonths ended June 30, 2004, compared with a net loss of $5.4 million for thethree months ended June 30, 2003, a change of $4.2 million.

 

*Six MonthsEnded June 30, 2004 Compared to Six Months Ended June 30, 2003*

 

Net revenue for the six monthsended June 30, 2004 was $109.3 million, an increase of $8.1 million, or 8.0%,compared to $101.2 million for the six months ended June 30, 2003. Politicalrevenue for the six months ended June 30, 2004 was $8.6 million, an increase of$7.7 million, compared to $851,000 for the six months ended June 30, 2003. Theincrease in political revenue was attributable to the existence of stronglycontested local races in Iowa, California and South Dakota in 2004, thenational Democratic primaries in the first quarter of 2004, as well assignificant spending for the presidential campaign, while 2003 had only limitedstate and local elections. The Company’s gross local revenues increased 3.1%for the six months ended June 30, 2004 compared to the six months ended June 30,2003 and the national revenues remained flat compared to the prior year period.Network compensation for the six months ended June 30, 2004 and 2003 was $5.1million.

 

Operating expenses, includingselling, general and administrative expenses, for the six months ended June 30,2004 were $68.7 million, compared to $67.2 million for the six months endedJune 30, 2003, an increase of $1.5 million, or 2.2%. Approximately $250,000 ofthis increase is attributable to the increase in local sales commissions paidto employees because of the increase in local revenues. The Company hadincreases to its health insurance and property and casualty insurance costs ofapproximately $376,000. The Company relocated several managers to fillpositions within the station group the cost of which was approximately$275,000. Included in the selling, general and administrative expenses isnon-cash compensation of $586,000 for the six months ended June 30, 2004,compared to non-cash compensation of $603,000 for the six months ended June 30,2003.

 

Amortization of program licenserights for the six months ended June 30, 2004 was $9.3 million, compared to$9.0 million for the six months ended June 30, 2003, an increase of $299,000,or 3.3%.

 

Depreciation of property andequipment and amortization of intangible assets was $12.9 million for the sixmonths ended June 30, 2004, compared with $13.3 million for the comparableperiod in 2003, a decrease of $398,000, or 3.0%. On February 17, 2004, theCompany announced that it had adopted a new policy for recognizing the usefullives of its network affiliation agreements and thatsuch intangibles will be amortized over a period of 25 years.  Previously, these assets were accounted foras having an indefinite life.  As aresult of this decision, the Company restated its earnings for the full yearended December 31, 2002 and for the first three quarters of 2003.

 

Corporate overhead for the sixmonths ended June 30, 2004 was $9.6 million, compared to $6.4 million for thecomparable period in 2003, an increase of $3.2 million or 50.0%. Approximately$2.2 million of this increase related to the severance package provided to theCompany’s former president, who retired on March 31, 2004.  Approximately $125,000 of this increase wasthe

 

13

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resultof additional personnel fees relating to the promotion of three station generalmanagers to new corporate vice president positions in May 2003.  The Company also experienced increases in thedirectors and officers’ liability insurance policy, which accounted forapproximately $298,000 of this increase. The Company’s review of and compliance with corporategovernance legislation resulted in additional legal, professional andconsulting fees of approximately $241,000 in the second quarter of 2004.

 

Interest expense for the sixmonths ended June 30, 2004 was $32.9 million, compared to $31.9 million for thesame period in 2003, an increase of $940,000, or 2.9%.  The increase was primarily attributable tohigher debt levels for the first twenty-two days of 2004 associated with theCompany’s redemption on January 22, 2004 of its 9% senior subordinated notesdue 2006 and 8 3⁄4% senior subordinated notes due 2007.  The Company received payments on its interestrate swaps of $871,000 and $1.3 million for the six months ended June 30, 2004and 2003, which was recorded as a reduction of interest expense.

 

The Company recorded a $1.3million non-cash loss and $732,000 non-cash gain in connection with the changein the market value of interest rate swaps for the six months ended June 30,2004 and 2003, respectively.    TheCompany recorded $2.5 million of non-cash interest expense for the six monthsended June 30, 2003 relating to the amortization of other comprehensive loss inconnection with its swap transactions entered into in 2000 and terminated inJune 2001. The Company also recorded a mark-to-market non-cash gain ofapproximately $3.2 million for the six months ended June 30, 2003, for thechange in fair value of its outstanding fair value economic hedges (see“Liquidity and Capital Resources”).

 

The Company recorded a loss onextinguishment of debt resulting from the write-off of related unamortizeddeferred financing costs for the six months ended June 30, 2004 of $5.3 millionrelating to the redemption on January 22, 2004 of its 9% senior subordinatednotes due 2006 and 8 3⁄4% senior subordinated notes due 2007 (see “Liquidity andCapital Resources”).

 

On May 15, 2002, the Companycompleted the sale of KCAL-TV to Viacom Inc. for $650.0 million, less purchaseprice adjustments. The Companyrecorded a gain related to the sale of approximately $2.2 million, net of aprovision for income taxes, for the six months ended June 30, 2003.

 

As a result of the factorsdiscussed above, the net loss for the Company was $30.9 million for the sixmonths ended June 30, 2004, compared with a net loss of $23.8 million for thesix months ended June 30, 2003, a change of $7.1 million.

 

**Liquidityand Capital Resources**

 

Cash used in operations for thesix months ended June 30, 2004 was $13.5 million as compared to cash providedby operations of $8.8 million for the same period in 2003.  Political revenue for the six months endedJune 30, 2004 was $8.6 million, an increase of $7.7 million, compared to$851,000 for the six months ended June 30, 2003. The increase in politicalrevenue was attributable to the existence of strongly contested local races inIowa, California and South Dakota in 2004, the national Democratic primaries inthe first quarter of 2004, as well as significant spending for the presidentialcampaign, while 2003 had only limited state and local elections. Amortizationof program license rights on the Consolidated Statements of Cash Flows was $9.3million and $9.0 million for the six months ended June 30, 2004 and 2003,respectively, an increase of $299,000. Similarly, payments on program licenseliabilities on the Consolidated Statements of Cash Flows were $9.1 million forthe six months ended June 30, 2004 and 2003. Trade accounts payable decreased$937,000 and $6.0 million for the six months ended June 30, 2004 and 2003,respectively. At December 31, 2002, the Company had approximately $3.0

 

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millionin accounts payable relating to the reorganization plan at KRON-TV, which werepaid in January 2003.  Accrued expenses decreased $1.5 million and$8.5 million for the six months ended June 30, 2004 and 2003, respectively.Accounts receivable decreased by $1.3 million and $1.4 million for the sixmonths ended June 30, 2004 and 2003, respectively. In the first quarter of2003, the Company received $27.0 million in income tax refunds, net ofestimated payments, because of overpayments in 2002.

 

The performance of KRON-TV hasa large proportionate impact on the Company’s operating results. Consequently,the Company is particularly susceptible to economic conditions in the SanFrancisco advertising market. While revenues in the first half of 2004 atKRON-TV were stronger than those in the first half of 2003, the continuinguncertain economic climate in San Francisco makes the outlook unclear.

 

Cash used in investingactivities was $7.9 million and $7.4 million for the six months ended June 30,2004 and 2003, respectively. Capital expenditures for the six months ended June30, 2004 and 2003 were $7.6 million and $5.9 million, respectively. Depositsand other assets for the Company increased $310,000 and $1.5 million for thesix months ended June 30, 2004 and 2003, respectively.

 

Cash used in financingactivities was $224.7 million and $155,000 for the six months ended June 30,2004 and 2003, respectively. On December 23, 2003, the Company received theproceeds from the sale of the December 2003 Notes (as defined) of $140.0million principal amount (see below). On January 22, 2004, the Company used thenet proceeds of approximately $136.5 million to redeem the 83⁄4% SeniorSubordinated Notes due 2007, plus a redemption premium and accruedinterest.  In addition, on December 23,2003, the Company received the proceeds from the sale of the Senior NotesAdd-On (as defined) of $90.0 million principal amount and a premium ofapproximately $6.2 million (see below). On January 22, 2004, the Company usedall of the net proceeds of approximately $94.1 million to redeem all of theCompany’s 9% Senior Subordinated Notes due 2006 plus accrued interest (seebelow). In connection with the December 2003 Notes and the Senior Notes Add-On,the Company recorded approximately $597,000 of deferred debt financing coststhat will be amortized over the lives of the respective notes. In January 2004,upon the redemption of the 83⁄4% Senior Subordinated Notes due 2007 and the 9%Senior Subordinated Notes due 2006, the Company wrote off all the remainingrelated deferred debt financing costs, net of accumulated amortization, ofapproximately $1.3 million and recorded it as a loss on extinguishment ofdebt.  The Company made payments under capital lease obligations of $319,000 and$332,000 for the six months ended June 30, 2004 and 2003, respectively. TheCompany received proceeds from the exercise of stock options of $70,000 and$174,000 for the six months ended June 30, 2004 and 2003, respectively.

 

As of June 30, 2004, theCompany had $85.1 million of cash-on-hand available for general corporatepurposes. All of these funds were invested in short-term, risk-averseinvestments, in accordance with the indentures.

 

On December 22, 2003, theCompany amended and restated its senior credit facility (as amended, the“Senior Credit Facility”). The Senior Credit Facility consists of a revolvingcredit facility in the amount of $20.0 million that is currently available tothe Company and that matures in June 2008.

 

Pursuant to the Senior CreditFacility, the Company is prohibited from making investments or advances tothird parties exceeding $15.0 million unless the third party becomes aguarantor of the Company’s obligation. In addition, the Company may utilize theundrawn amounts under the

 

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Senior Credit Facility toretire or prepay subordinated debt, subject to the limitations set forth in theindentures.

 

At June 30, 2004, the Companyhad no outstanding borrowings under the Senior Credit Facility. The Companypays an annual commitment fee tied to the Company’s ratio of total debt tooperating cash flow, ranging from 1.0%, if the ratio is greater than or equalto 7.0x; 0.75% if the ratio is greater than or equal to 5.0x and less than7.0x; and 0.50% per annum at any time that the ratio is less than 5.0x of theunused available borrowings under the Senior Credit Facility.

 

The Senior Credit Facilityprovides, at the option of the Company, that borrowed funds bear interest basedupon the London Interbank Offered Rate (LIBOR), the customary “CD Rate” or“Base Rate.”  In addition to the indexrate, the Company pays a fixed incremental percentage at 2.25% with the BaseRate and 3.25% with LIBOR.

 

Each of the Company’ssubsidiaries has guaranteed the Company’s obligations under the Senior CreditFacility. The Senior Credit Facility is secured by the pledge of all the stockof the Company’s subsidiaries and a first priority lien on all of the assets ofthe Company and its subsidiaries.

 

The Senior Credit Facilityrequires the Company to maintain a senior secured debt to operating cash flowratio of not more than 1.75x (net of cash up to $50.0million).  The Company is also requiredto maintain a cash and short-term investment balance of at least $50.0 million.

 

On December 23, 2003, theCompany completed a private add-on offering of $90.0 million principal amountof its 8 1⁄2% Senior Notes due 2008 (the “Senior Notes Add-On”). The Senior NotesAdd-on were offered to qualified institutional buyersunder Rule 144A and to persons outside the United States under Regulation S.The Senior Notes Add-On was sold at a premium of approximately $6.2 million. OnJanuary 22, 2004, the Company used the net proceeds of approximately $94.1million to redeem all of the Company’s 9% senior subordinated notes due 2006plus accrued interest. On July 1, 2004, the Company exchanged the Senior NotesAdd-On for notes of the Company with substantially identical terms of theSenior Notes Add-On, except the new notes do not contain terms with respect totransfer restrictions.

 

On December 23, 2003, theCompany completed a private offering of $140.0 million principal amount of its83⁄4 % Senior Subordinated Notes due 2014 (the “December 2003 Notes”). The December 2003 Notes were offered to qualified institutionalbuyers under Rule 144A and to persons outside the United States underRegulation S. On January 22, 2004, the Company used the net proceeds ofapproximately $136.5 million to redeem all of the Company’s 83⁄4% SeniorSubordinated Notes due 2007, plus a redemption premium and accrued interest. OnJuly 1, 2004, the Company exchanged the December 2003 Notes for notes of theCompany with substantially identical terms of the December 2003 Notes, exceptthe new notes do not contain terms with respect to transfer restrictions.

 

Debtamounts outstanding at December 31, 2003 and June 30, 2004 were as follows(dollars in thousands):

 
| ** **                                   | ** ** | **12/31/03** | ** ** | **6/30/04** | ** ** | **Annualized  Interest Payments(1)** | ** ** |
|----------------------------------------------|------------|--------------|------------|-------------|------------|--------------------------------------|------------|
| Senior Credit Facility                       |       | $            | —     |        | $          | —                               |       | $ | — |   |
| 81⁄2% Senior Notes due 2008               |       | 253,109      | (2)        | 252,487     | (2)        | 20,986                               |       |
| 8 3⁄4% Senior Subordinated Notes due 2014 |       | 140,000      |       | 140,000     |       | 12,250                               |       |
| 9% Senior Subordinated Notes due 2006        |       | 86,081       | (3)        | —      |       | —                               |       |
| 83⁄4% Senior Subordinated Notes due 2007  |       | 137,730      | (3)        | —      |       | —                               |       |
| 10% Senior Subordinated Notes due 2011       |       | 348,450      | (4)        | 348,161     | (4)        | 34,430                               |       |
| Total Debt (excluding capital leases)        |       | $            | 965,370    |        | $          | 740,648                              |       | $ | 67,666 |   |

 

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(1)   The annualized interest payments are calculatedbased on the outstanding principal amounts at June 30, 2004, multiplied by theinterest rates of the related notes.

(2)   Includes an unamortized premium balance of $6.2million and $5.6 million as of December 31, 2003 and June 30, 2004,respectively.

(3)   Redeemed in full on January 22, 2004

(4)   Includes unamortized premium balances of $4.2million and $3.9 million as of December 31, 2003 and June 30, 2004,respectively.

 

The Company’s total debt atJune 30, 2004 was approximately $741.6 million, consisting of $484.3 million ofSenior Subordinated Notes, $246.9 million of Senior Notes, $9.5 million of bondpremiums and $942,000 of capital leases. In addition, at June 30, 2004, theCompany had an additional $20.0 million of unused available borrowings underthe Senior Credit Facility.

 

Management believes that cashflows from operations, cash and cash equivalents and borrowings available underthe Senior Credit Facility will be sufficient to fund the working capital,capital expenditures, debt service and other liquidity needs of the Company forthe foreseeable future.

 

**IncomeTaxes**

 

The Company files aconsolidated federal income tax return and such state or local tax returns asare required. For the year endedDecember 31, 2003, the Company recorded a $3.6 million benefit from incometaxes related to the reversal of prior year overprovision for state taxes. Notax benefit was recorded with respect to the loss for 2004, as its utilizationis not more likely than not to be realized. The Company provides a valuationallowance for deferred tax assets for which it does not consider realization ofsuch assets to be more likely than not. At December 31, 2003, the Company hadnet operating loss (“NOL”) carryforwards for tax purposes of approximately$129.9 million expiring at various dates through 2023, for which a fullvaluation allowance has been provided.

 

**ContractualObligations and Other Commercial Commitments**

 

The Company has obligations andcommitments under its long-term debt agreements and instruments to make futurepayments of principal and interest. The Company also has obligations andcommitments under certain contractual arrangements to make future payments forgoods and services. These arrangements secure the future rights to variousassets and services to be used in the normal course of operations. Undergenerally accepted accounting principles, certain of these arrangements (i.e.,programming contracts that are currently available for airing) are recorded asliabilities on the Company’s consolidated balance sheet, while others (i.e.,operating lease arrangements and programming not currently available) are notreflected as liabilities.

 

The following tables summarizeseparately the Company’s material obligations and commitments at June 30, 2004and the timing of payments required in connection therewith and the effect thatsuch payments are expected to have on the Company’s liquidity and cash flow infuture periods.  The Company expects tofund these obligations with cash on hand, cash flow from operations and fundsavailable under its Senior Credit Facility.

 

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| ** **                            | ** ** | ** **                 | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**          | ** ** | **Total**                  | ** ** | **Less than  1 year**      | ** ** | **1 – 3 years** | ** ** | **4 – 5 years** | ** ** | **After 5  years** | ** ** |
| ** **                            | ** ** | **(dollars in thousands)** | ** ** |
| Long-Term Debt (principal only)       |       | $                          | 731,189    |                       | $          | — |   | $ | — |   | $ | 246,890 |   | $ | 484,299 |   |
| Capital Lease Obligations             |       | 942                        |       | 751                        |       | 191 |   | — |   | — |   |
| Operating Leases                      |       | 6,363                      |       | 1,571                      |       | 3,204 |   | 930 |   | 658 |   |
| Unconditional Purchase Obligations(1) |       | 3,651                      |       | 3,220                      |       | 431 |   | — |   | — |   |
| Other Long-Term Obligations(2)        |       | 82,729                     |       | 6,786                      |       | 52,715 |   | 12,308 |   | 10,920 |   |
| Total Contractual Cash Obligations    |       | $                          | 824,874    |                       | $          | 12,328 |   | $ | 56,541 |   | $ | 260,128 |   | $ | 495,877 |   |

 

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(1)   Unpaid program license liability reflected on theJune 30, 2004 balance sheet.

(2)   Obligations for programming that has been contractedfor, but not recorded on the June 30, 2004 Balance Sheet because the programswere not currently available for airing.

 

**Impact ofRecently Issued Accounting Standards**

 

InJanuary 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 effective immediately for all new variable interestentities created or acquired after January 31, 2003. For variable interestentities created or acquired prior to February 1, 2003, the provisionof FIN 46 become effective for the Company during the third quarter of2003.  For variable interest entitiesacquired prior to February 1, 2003, any difference between the net amount addedto the balance sheet and the amount of any previously recognized interest inthe variable interest entity would be recognized as a cumulative effect of anaccounting change.  In December 2003, theFASB delayed the implementation date of FIN 46 until March 31, 2004 forentities that are not “special purpose entities” under existing GAAP. TheCompany’s equity investments do not qualify as SPE’s, therefore, managementelected to defer adoption of FIN 46 until March 31, 2004.  The Company’s adoption of this new standarddid not have a material impact on the results of operating and financialposition.

 

**Item 3**.  ***Quantitative and Qualitative Disclosure About Market Risk.***

 

The Company’s Senior Credit Facility,with no amounts outstanding as of June 30, 2004, bears interest at floatingrates. Accordingly, to the extent there are amounts outstanding under theSenior Credit Facility, we are exposed to potentiallosses related to changes in interest rates.

 

The Company’s SeniorSubordinated Notes of approximately $484.3 million outstanding principal as ofJune 30, 2004 are general unsecured obligations of the Company and aresubordinated in right of payment to all senior debt, including all indebtednessof the Company under the Senior Credit Facility and the Senior Notes. TheSenior Subordinated Notes have fixed rates of interest ranging from 83⁄4% to 10%and are ten-year notes maturing in various years commencing 2011. Theannualized interest expense on the outstanding Senior Subordinated Notes isapproximately $46.7 million.

 

The Company’s Senior Notes ofapproximately $246.9 million outstanding principal as of June 30, 2004 have afixed rate of interest of 81⁄2% and mature in 2008. The annualized interest expenseon the outstanding Senior Notes is approximately $21.0 million.

 

The Company does not enter intoderivatives or other financial instruments for trading or speculative purposes;however, in order to manage its exposure to interest rate risk, the Company enteredinto a derivative financial instrument in June 2001. The derivative financialinstrument is

 

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aninterest rate swap agreement that expires in 2011. The Company does not applyhedge accounting to these instruments.

 

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

 

Our management carried out anevaluation, with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of June 30, 2004. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in reports that we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and Exchange Commission.

 

There has not been any changein our internal control over financial reporting in connection with theevaluation required by Rule 13a-15(d) under the Exchange Act that occurredduring the quarter ended June 30, 2004 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

**Item 1.****  *Legal Proceedings.***

 

The Company is involved inlegal proceedings and litigation arising in the ordinary course of business. Inthe Company’s opinion, the outcome of such proceedings and litigation currentlypending will not materially affect the Company’s financial condition or resultsof operations.

 

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

 

On May 4,2004, the Company held its 2004 annual meeting of stockholders to (i) electnine directors of the Company to serve for a term of one year, (ii) approve theYoung Broadcasting Inc. 2004 Equity Incentive Plan, (iii) approve the YoungBroadcasting Inc. 2003 Non-Employee Directors’ Deferred Stock Unit Plan, (iv)approve an amendment to the Company’s 2001 Employee Stock Purchase Plan toincrease the total number of shares available thereunder from 50,000 to100,000, and (v) ratify the selection of Ernst & Young LLP as the Company’sindependent auditors for the year ending December 31, 2004.

 

The following individuals were elected toserve as directors until the next annual meeting:

 
| ** **            | ** ** | **Vote For** | ** ** | **Vote Withheld** | ** ** |
|-----------------------|------------|--------------|------------|-------------------|------------|
| Vincent J. Young      |       | 32,151,969   |       | 4,000,675         |       |
| Adam Young            |       | 31,125,879   |       | 5,026,765         |       |
| Deborah A. McDermott  |       | 31,137,569   |       | 5,015,075         |       |
| James A. Morgan       |       | 32,132,965   |       | 4,019,679         |       |
| Bernard F. Curry      |       | 33,981,593   |       | 2,171,051         |       |
| Alfred J. Hickey, Jr. |       | 33,981,593   |       | 2,171,051         |       |
| Leif Lomo             |       | 33,994,593   |       | 2,158,051         |       |
| Richard Lowe          |       | 31,119,019   |       | 5,033,625         |       |
| David C. Lee          |       | 33,981,593   |       | 2,171,051         |       |

 

Except forDeborah A. McDermott, who was first elected as a director at the 2004 AnnualMeeting, such individuals served as directors of the Company immediatelypreceding the meeting.

 

Thestockholders approved the Young Broadcasting Inc. 2004 Equity Incentive Plan.The result of the vote was as follows: 26,859,484 votes were for the approvalof the Equity Incentive Plan, 6,532,104 votes were against the approval of theEquity Incentive Plan and 18,447 votes abstained.

 

Thestockholders approved the Young Broadcasting Inc. 2003 Non-Employee Directors’Deferred Stock Unit Plan. The result of the vote was as follows: 31,581,318votes were for the approval of the 2003 Non-Employee Directors’ Deferred StockUnit Plan, 1,797,690 votes were against the approval of the 2003 Non-EmployeeDirectors’ Deferred Stock Unit Plan and 31,027 votes abstained.

 

 The stockholders approved the amendment to theCompany’s 2001 Employee Stock Purchase Plan. The result of the vote was asfollows: 32,886,166 votes were for the approval of the amendment to theCompany’s 2001 Employee Stock Purchase Plan, 505,422 votes were against theapproval of the amendment to the Company’s 2001 Employee Stock Purchase Planand 18,447 votes abstained.

 

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Thestockholders ratified the selection of Ernst & Young LLP as the Company’sindependent auditors for the year ending December 31, 2004. The result of thevote was as follows: 35,768,860 votes were for the selection, 347,709 voteswere against the selection and 36,075 votes abstained.

 

**Item 6.***** Exhibits and Reports on Form 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.*  The Company filed the following report onForm 8-K during the second quarter of the year ending December 31, 2004.

 
| **Date of  Report** | ** ** | **Date Report  Filed with SEC** | ** ** | **Items Reported**                                    |
|---------------------|------------|---------------------------------|------------|-------------------------------------------------------|
|                |       |                            |       |                                                  |
| May 10, 2004        |       | May 10, 2004                    |       | Item  12-Results of Operation and Financial Condition |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   |            | YOUNG  BROADCASTING INC. |
|--------|-----------------|--------------------------|
|   |            |                     |   |
|   |            |                     |   |
| Date:  | August 6,  2004 | By:                      | /s/ Vincent  J. Young |   |
|   |            |                     | Vincent J.  Young |
|   |            |                     | Chairman and  Chief Executive Officer |
|   |            |                     |   |
|   |            |                     |   |
| Date:  | August 6,  2004 | By:                      | /s/ James A.  Morgan |   |
|   |            |                     | James A.  Morgan |
|   |            |                     | Executive  Vice President and |
|   |            |                     | Chief  Financial Officer |
|   |            |                     | (principal  financial officer) |
|        |                 |                          |  |  |  |

 

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