FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2005

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

FOR THE TRANSITION PERIOD FROM                                                 TO                                               

PAXSON COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		59-3212788 (IRS Employer Identification No.)
601 Clearwater Park Road West Palm Beach, Florida (Address of principal executive offices)		33401 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (561) 659-4122

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 þ NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES þ NO o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 29, 2005:

Class of Stock		Number of Shares
Common stock-Class A, $0.001 par value per share			64,569,508
Common stock-Class B, $0.001 par value per share			8,311,639

 

 

PAXSON COMMUNICATIONS CORPORATION

INDEX

		Page
Part I – Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004			3
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004			4
Unaudited Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2005			5
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 4. Controls and Procedures			44
Part II – Other Information
Item 1. Legal Proceedings			45
Item 4. Submission of Matters to a Vote of Security Holders			46
Item 6. Exhibits			47
Signature			49
Master Agreement for Overnight Programming
Section 302 CEO Certification
Section 302 CFO Certification
Section 906 CEO Certification
Section 906 CFO Certification

Item 1. Financial Statements

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
(in thousands except share data)

		June 30,				December 31,
		2005				2004
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	103,846			$	82,047
Short-term investments			¾				5,993
Accounts receivable, net of allowance for doubtful accounts of $603 and $648, respectively			21,496				24,961
Program rights			36,040				38,853
Amounts due from Crown Media			3,821				9,885
Deposits for programming letters of credit			¾				24,603
Prepaid expenses and other current assets			2,886				3,119
Total current assets			168,089				189,461
Property and equipment, net			95,005				103,540
Intangible assets:
FCC license intangible assets			843,492				843,777
Other intangible assets, net			38,379				40,448
Program rights, net of current portion			15,198				19,581
Amounts due from Crown Media, net of current portion			242				1,655
Investments in broadcast properties			2,154				2,205
Assets held for sale			2,227				2,227
Other assets, net			17,964				21,411
Total assets		$	1,182,750			$	1,224,305
LIABILITIES, MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities		$	42,444			$	40,500
Accrued interest			20,207				16,073
Current portion of obligations for program rights			6,955				18,436
Current portion of obligations to CBS			13,648				17,726
Current portion of obligations for cable distribution rights			2,729				2,896
Deferred revenue			14,925				16,344
Current portion of senior secured and senior subordinated notes			67				64
Total current liabilities			100,975				112,039
Obligations for program rights, net of current portion			502				1,703
Obligations to CBS, net of current portion			3,547				9,191
Deferred revenue, net of current portion			6,898				6,898
Deferred income taxes			163,922				194,706
Senior secured and senior subordinated notes, net of current portion			1,030,862				1,004,029
Mandatorily redeemable preferred stock			504,939				471,355
Other long-term liabilities			11,469				10,980
Total liabilities			1,823,114				1,810,901
Mandatorily redeemable and convertible preferred stock			821,467				740,745
Commitments and contingencies (See Notes to Unaudited Consolidated Financial Statements)
Stockholders’ deficit:
Class A common stock, $0.001 par value; one vote per share; 215,000,000 shares authorized, 64,564,092 and 60,545,269 shares issued and outstanding			65				61
Class B common stock, $0.001 par value; ten votes per share; 35,000,000 shares authorized and 8,311,639 shares issued and outstanding			8				8
Class C non-voting common stock, $0.001 par value, 77,500,000 shares authorized, no shares issued and outstanding			—				—
Common stock warrants and call option			66,663				66,663
Additional paid-in capital			541,763				542,138
Deferred stock-based compensation			(7,179	)			(10,687	)
Accumulated deficit			(2,063,151	)			(1,925,524	)
Total stockholders’ deficit			(1,461,831	)			(1,327,341	)
Total liabilities, mandatorily redeemable and convertible preferred stock, and stockholders’ deficit		$	1,182,750			$	1,224,305

The accompanying notes are an integral part of the consolidated financial statements

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Unaudited)								(Unaudited)
NET REVENUES (net of agency commissions of $10,838, $12,070, $22,371 and $24,364, respectively)		$	63,270			$	69,877			$	131,580			$	141,171
EXPENSES:
Programming and broadcast operations (excluding depreciation and amortization shown separately below and stock-based compensation of $133, $241, $313 and $620, respectively)			13,554				13,642				28,248				27,461
Program rights amortization			17,131				10,843				33,375				26,533
Selling, general and administrative (excluding depreciation and amortization shown separately below and stock-based compensation of $1,087, $2,292, $1,749 and $4,135, respectively)			27,489				33,322				58,921				63,536
Depreciation and amortizations			10,119				11,437				19,071				21,697
Insurance recoveries			(15,652	)			¾				(15,652	)			—
Time brokerage and affiliation fees			1,145				1,101				2,290				2,202
Stock-based compensation (excluding restructuring charges of $12, $0, $1,120, and $0, respectively)			1,220				2,533				2,062				4,755
Restructuring charges			1,855				¾				4,247				¾
Reserve for state taxes			121				467				(134	)			597
Total operating expenses			56,982				73,345				132,428				146,781
(Loss) gain on sale or disposal of broadcast and other assets, net			(510	)			6,067				(567	)			5,958
Operating income (loss)			5,778				2,599				(1,415	)			348
OTHER INCOME (EXPENSE):
Interest expense			(29,998	)			(23,065	)			(55,207	)			(45,630	)
Dividends on mandatorily redeemable preferred stock			(17,086	)			(14,888	)			(33,584	)			(29,265	)
Interest income			656				711				1,225				1,474
Other income (expense), net			31				(1	)			3,461				1,100
Gain (loss) on extinguishment of debt			—				7				—				(6,286	)
Gain on modification of program rights obligations			371				371				741				741
Loss before income taxes			(40,248	)			(34,266	)			(84,779	)			(77,518	)
Income tax benefit (expense)			31,508				(2,886	)			27,874				(8,316	)
Net loss			(8,740	)			(37,152	)			(56,905	)			(85,834	)
Dividends and accretion on redeemable and convertible preferred stock			(33,010	)			(11,624	)			(80,722	)			(23,173	)
Net loss attributable to common stockholders		$	(41,750	)		$	(48,776	)		$	(137,627	)		$	(109,007	)
Basic and diluted loss per common share		$	(0.60	)		$	(0.72	)		$	(2.00	)		$	(1.61	)
Weighted average shares outstanding			69,243,242				68,134,814				68,972,375				67,837,758

The accompanying notes are an integral part of the consolidated financial statements.

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Six Months Ended June 30, 2005 (Unaudited)
(in thousands)

										Common
										Stock
										Warrants				Additional				Deferred								Total
		Common Stock								And Call				Paid-in				Stock-based				Accumulated				Stockholders’
		Class A				Class B				Option				Capital				Compensation				Deficit				Deficit
Balance, January 1, 2005		$	61			$	8			$	66,663			$	542,138			$	(10,687	)		$	(1,925,524	)		$	(1,327,341	)
Stock-based compensation			¾				¾				¾				¾				3,140				¾				3,140
Deferred stock-based compensation			¾				¾				¾				(368	)			368				¾				¾
Restricted stock exchanged for options			2				—				—				(11	)			—				—				(9	)
Stock options exercised			2				—				—				4				—				—				6
Dividends on redeemable and convertible preferred stock			¾				¾				¾				¾				¾				(80,469	)			(80,469	)
Accretion on redeemable and convertible preferred stock			¾				¾				¾				¾				¾				(253	)			(253	)
Net loss			¾				¾				¾				¾				¾				(56,905	)			(56,905	)
Balance, June 30, 2005		$	65			$	8			$	66,663			$	541,763			$	(7,179	)		$	(2,063,151	)		$	(1,461,831	)

The accompanying notes are an integral part of the consolidated financial statements.

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		For the Six Months Ended
		June 30,
		2005				2004
		(Unaudited)
Cash flows from operating activities:
Net loss		$	(56,905	)		$	(85,834	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			19,071				21,697
Stock-based compensation			2,062				4,755
Loss on extinguishment of debt			¾				6,286
Restructuring charges (stock-based compensation expense)			1,120				¾
Program rights amortization			33,375				26,533
Payments for cable distribution rights			(188	)			¾
Non-cash barter			39				—
Program rights payments and deposits			(38,860	)			(44,897	)
Provision for doubtful accounts			88				347
Deferred income tax (benefit) provision			(30,784	)			8,114
Loss (gain) on sale or disposal of broadcast and other assets, net			567				(5,958	)
Dividends and accretion on 141/4% mandatorily redeemable preferred stock			33,584				29,265
Accretion on senior subordinated discount notes			26,867				23,856
Gain on modification of program rights obligations			(741	)			(741	)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable			3,338				(3,070	)
Decrease in amounts due from Crown Media			7,477				6,769
Decrease in prepaid expenses and other current assets			133				679
(Increase) decrease in other assets			(6	)			3,635
Increase in accounts payable and accrued liabilities			1,807				1,887
Increase (decrease) in accrued interest			4,134				(206	)
Decrease in obligations to CBS			(8,981	)			(10,371	)
Net cash used in operating activities			(2,803	)			(17,254	)
Cash flows from investing activities:
Decrease in short-term investments			5,993				5,957
Refund of (deposits for) programming letters of credit			24,603				(856	)
Purchases of property and equipment			(4,941	)			(8,065	)
Proceeds from sale of broadcast assets			¾				9,988
Proceeds from sale of property and equipment			3				8
Other			(1,022	)			(44	)
Net cash provided by investing activities			24,636				6,988
Cash flows from financing activities:
Borrowings of long-term debt			¾				365,000
Repayments of long-term debt			(31	)			(335,657	)
Payments of loan origination costs			¾				(11,432	)
Payments of employee withholding taxes on exercises of stock options, net			(8	)			¾
Proceeds from exercise of common stock options, net			5				3
Proceeds from stock subscription notes receivable			¾				73
Net cash (used in) provided by financing activities			(34	)			17,987
Increase in cash and cash equivalents			21,799				7,721
Cash and cash equivalents, beginning of period			82,047				97,123
Cash and cash equivalents, end of period		$	103,846			$	104,844

The accompanying notes are an integral part of the consolidated financial statements.

PAXSON COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     Paxson Communications Corporation (the “Company”), a Delaware corporation, was organized in 1993. The Company is a network television broadcasting company which owns and operates the largest broadcast television station group in the United States, as measured by the number of television households in the markets the Company’s stations serve. The Company provides network programming seven days per week, 24 hours per day, through its broadcast television station group and pursuant to distribution arrangements with cable and satellite distribution systems.

     The Company’s business operations presently do not provide sufficient cash flow to support its debt service and to pay cash dividends on its preferred stock. In September 2002, the Company engaged Bear, Stearns & Co. Inc. and in August 2003 the Company engaged Citigroup Global Markets Inc. to act as the Company’s financial advisors to assess the Company’s business plan, capital structure and future capital needs and to explore strategic alternatives for the Company. The Company terminated these engagements in March 2005 as no viable strategic transactions had been developed on terms that the Company believed would be in the best interests of the Company’s stockholders. While the Company will continue to consider strategic alternatives that may arise, which may include the sale of all or part of the Company’s assets, finding a strategic partner who would provide the financial resources to enable the Company to redeem, restructure or refinance the Company’s debt and preferred stock, or finding a third party to acquire the Company through a merger or other business combination or through a purchase of the Company’s equity securities, the Company’s principal efforts are focused on improving core business operations and increasing cash flow.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These financial statements, footnotes and discussions should be read in conjunction with the financial statements and related footnotes and discussions contained in the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004 (the “Fiscal 2004 Form 10-K”) and the definitive proxy statement for the annual meeting of stockholders of the Company held on June 10, 2005, both of which were filed with the United States Securities and Exchange Commission. Certain reclassifications have been made to the prior period’s financial statements to conform to the 2005 presentation

     The financial information contained in the financial statements and notes thereto as of June 30, 2005 and for the three and six month periods ended June 30, 2005 and 2004 is unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial information have been included. These adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     For the three and six months ended June 30, 2005 and 2004, the amounts of net income and comprehensive income were the same.

     The preparation of financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. The Company believes the most significant estimates involved in preparing the Company’s financial statements include estimates related to the net realizable value of programming rights, barter revenue recognition, and estimates related to the impairment of long-lived assets and Federal Communications Commission (“FCC”) licenses. The Company bases its estimates on historical experience and various other assumptions it believes are reasonable. Actual results could differ from those estimates. The Company’s significant accounting policies are described in “Note 1. Nature of the Business and Summary of Significant Accounting Policies” in the notes to the Company’s consolidated financial statements included in the Company’s Fiscal 2004 Form 10-K and as follows:

Accounts Receivable

     The Company carries accounts receivable at the amount it believes to be collectible. Accordingly, the Company provides allowances for accounts receivable it believes to be uncollectible based on management’s best estimates. In determining the necessary allowance for doubtful accounts receivable, the Company analyzes its historical bad debt experience, the credit worthiness of its customers and the aging of its accounts receivable. If the provision for doubtful accounts were to change by 10%, it would have resulted in additional expense of approximately $10,000 for the six months ended June 30, 2005. The amounts of accounts receivable

that ultimately become uncollectible could vary significantly from the Company’s estimates.

Revenue Recognition

     Revenue is recognized as commercial spots or long form programming are aired and, for the majority of network commercial spots only, as ratings guarantees to advertisers are achieved. Net revenues, therefore, have been recorded net of the change in the liability for shortfalls in ratings guarantees, exclusive of the effect of any cash refunded to advertisers. For the three months ended June 30, 2005 and 2004, the liability for shortfalls in ratings guarantees increased by $0.6 million and decreased by $0.2 million, respectively. For the six months ended June 30, 2005 and 2004, the liability for shortfalls in ratings guarantees increased by $2.6 million and decreased by $1.7 million, respectively. Included in deferred revenues in the accompanying consolidated balance sheets are liabilities for ratings shortfalls as of June 30, 2005 and 2004 amounting to $7.2 million and $5.2 million, respectively.

Long-Lived Assets

     The Company reviews long-lived assets and reserves for impairment whenever events or changes in circumstances indicate that, based on estimated undiscounted future cash flows, the carrying amount of the assets may not be fully recoverable. If the Company’s analysis indicates that a possible impairment exists, the Company is required to then estimate the fair value of the asset determined either by third party appraisal or estimated discounted future cash flows.

     The Company holds FCC licenses for full power stations which are authorized to broadcast over either an analog or digital signal on channels 52-69 (“the 700 MHz band”), a portion of the broadcast spectrum that is currently allocated to television broadcasting by the FCC. As part of the nationwide transition from analog to digital broadcasting, the 700 MHz band is in the process of being transitioned to use by new wireless and public safety entities. A federal statute requires that, after December 31, 2006, or the date on which 85% of television households in a television market are capable of receiving digital services, incumbent broadcasters must surrender analog signals and broadcast only on their allotted digital frequency. Several members of Congress have advocated establishing December 31, 2006 as a firm date for the surrender of the analog spectrum without regard to whether the 85% capability threshold has been reached. The FCC is considering a proposal to extend the date for the surrender of the analog signals to December 31, 2008. In some cases, broadcasters, including the Company, have been given a digital channel allocation within the 700 MHz band of spectrum. During this transition these new wireless and public safety entities are permitted to operate in the 700 MHz band provided they do not interfere with incumbent or allotted analog and digital television operations. In January 2003 the FCC commenced rulemaking proceedings in which it is considering aspects of the implementation of this 2006 statutory deadline for completion of the digital transition. Issues such as interference protection, rights of incumbent broadcasters and broadcasters’ ability to modify authorized facilities are being addressed in these proceedings. These proceedings remain pending. The Company cannot predict when it will abandon, by private agreement, or as required by law, the broadcast service of its stations occupying the 700 MHz spectrum. It is possible that the estimated life of certain long-lived assets will be reduced significantly in the near term due to the anticipated industry migration from analog to digital broadcasting. If and when the Company becomes aware of such a reduction of useful lives, depreciation expense will be adjusted prospectively to ensure assets are fully depreciated upon migration. As of June 30, 2005, the aggregate book value of the Company’s assets which may have limited or no use as a result of the future migration from analog to digital amounted to approximately $17.0 million.

2. RESTRUCTURING

     During the six months ended June 30, 2005, the Company adopted a plan to substantially reduce or eliminate the sales of spot advertisements that are based on audience ratings and to focus its sales efforts on long form paid programming, non-rated spot advertisements and sales of blocks of air time to third party programmers. In connection with this plan the Company:

	•		notified all of its joint sales agreements (“JSA”) partners, other than NBC Universal, Inc. (“NBC”), that the Company was exercising its right to terminate the JSA, effective June 30, 2005;
	•		exercised its right to terminate all of its network affiliation agreements, effective June 30, 2005;
	•		notified NBC that the Company was removing, effective June 30, 2005, all of its stations from its national sales agency agreement with NBC, pursuant to which NBC sells national spot advertisements for 49 of the Company’s 60 stations; and
	•		reduced personnel by 68 employees.

     The Company and NBC have entered into a number of agreements affecting the Company’s business operations, including an agreement under which NBC provided network sales, marketing and research services. Pursuant to the terms of the JSAs between the Company’s stations and NBC’s owned and operated stations serving the same markets, the NBC stations sold all non-network spot

advertising of the Company’s stations and received commission compensation for such sales. Certain Company station operations, including sales operations, were integrated with the corresponding functions of the related NBC station and the Company reimbursed NBC for the cost of performing these operations. For the three months ended June 30, 2005 and 2004, the Company incurred $5.8 million and $6.1 million, respectively, for commission compensation and cost reimbursements to NBC in connection with these arrangements. For the six months ended June 30, 2005 and 2004, the Company incurred $11.4 million and $11.0 million for compensation and cost reimbursements to NBC in connection with these arrangements. The Company began discussions with NBC as to the termination of the Company’s network sales agreement and each of the Company’s JSAs with NBC (covering 14 of the Company’s stations in 12 markets). Other than sales support services with respect to network advertising sold prior to July 2005 which the Company has yet to air, NBC no longer provides services to the Company under these agreements. The Company expects that the performance of the Company’s business during 2005 will be affected by the costs of terminating these arrangements, including the possible disruption of the Company’s network advertising sales efforts resulting from the transfer of this function from NBC to the Company’s own employees.

     For the three months ended June 30, 2005 and 2004, the Company incurred $5.3 million, and $5.5 million, respectively, for commission compensation and cost reimbursement to non-NBC JSA partners. For the six months ended June 30, 2005 and 2004, the Company incurred $10.5 million and $10.9 million, respectively, for commission compensation and cost reimbursement to non-NBC JSA partners.

     In connection with the termination of the Company’s JSAs, the Company expects to relocate up to 22 of its station master controls which are currently located in its JSA partner’s facility. The relocation of the Company’s station master controls is expected to require a total cash outlay of between $5.0 million and $7.0 million, primarily for moving expenses and new equipment. As of June 30, 2005, the Company has incurred $0.2 million in connection with moving its station master controls. The Company expects that the performance of its business during 2005 will be affected by the terms on which it is able to effect some or all of the remaining relocations.

     The Company accounts for restructuring costs pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to when there is a commitment to a restructuring plan. Through the second quarter of 2005, the Company recorded a restructuring charge in the amount of $4.2 million in connection with the aforementioned restructuring activities. The restructuring charge primarily consisted of one-time termination benefits in connection with personnel reductions at the Company (including $1.1 million in stock-based compensation expense) and personnel reductions for the Company’s JSA partners and NBC. The Company presently is unable to determine the amount of additional restructuring charges, if any, that it may incur in connection with the termination of certain of its contractual arrangements with NBC.

     Restructuring charges are reflected in a separate line item in the accompanying consolidated statements of operations. As of June 30, 2005, approximately $1.8 million of restructuring costs had not yet been paid and were included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

     The Company shortened the amortizable lives of certain leasehold improvements at JSA locations to coincide with the termination of the related JSA agreements. Included in depreciation and amortization for the second quarter of 2005 is $1.2 million of amortization expense associated with leasehold improvements at JSA locations.

     The following summarizes the activity in the Company’s restructuring reserves for the six months ended June 30, 2005 (in thousands):

						Amounts Charged
		Balance				to
		December 31,				Costs and				Cash				Balance
		2004				Expenses				Deductions				June 30, 2005
Restructuring
Accrued liabilities:
Lease and other costs		$	—			$	21			$	(12	)		$	9
Severance			—				3,106				(1,285	)			1,821
		$	—			$	3,127			$	(1,297	)		$	1,830
Stock-based compensation expense						$	1,120
						$	4,247

3. ASSETS HELD FOR SALE

     Assets held for sale consist of certain broadcast towers, for which the buyer has not effectuated title transfer, with a carrying value of $2.2 million as of both June 30, 2005 and December 31, 2004.

4. SENIOR SECURED AND SENIOR SUBORDINATED NOTES

     Senior secured and senior subordinated notes consist of the following as of (in thousands):

		June 30,				December 31,
		2005				2004
Senior Secured Floating Rate Notes due 2010, secured by substantially all of the assets of the Company		$	365,000			$	365,000
121/4% Senior Subordinated Discount Notes due 2009			496,263				496,263
103/4% Senior Subordinated Notes due 2008			200,000				200,000
Other			412				443
			1,061,675				1,061,706
Less: discount on Senior Subordinated Discount Notes			(30,746	)			(57,613	)
Less: current portion			(67	)			(64	)
		$	1,030,862			$	1,004,029

     On January 12, 2004, the Company completed a private offering of $365 million of senior secured floating rate notes (“Senior Secured Notes”). The Senior Secured Notes bear interest at the rate of LIBOR plus 2.75% per year and will mature on January 10, 2010. The Senior Secured Notes may be redeemed by the Company at any time at specified redemption prices and are secured by substantially all of the Company’s assets. In addition, a substantial portion of the Senior Secured Notes are unconditionally guaranteed, on a joint and several senior secured basis, by all of the Company’s subsidiaries. The proceeds from the offering were used to repay in full the outstanding indebtedness under the Company’s previously existing senior credit facility, pre-fund letters of credit supported by the revolving credit portion of the Company’s previously existing senior credit facility and pay fees and expenses incurred in connection with the transaction. The refinancing resulted in a charge in the first quarter of 2004 in the amount of $6.3 million related to the debt issuance costs associated with the senior credit facility.

     During the year ended December 31, 2004 the Company issued letters of credit to support its obligation to pay for certain original programming. As of December 31, 2004, there were approximately $24.6 million of outstanding letters of credit all of which had been pre-funded by the Company and are reflected as “Deposits for programming letters of credit” in the accompanying consolidated balance sheets. In the first quarter of 2005, the Company settled its obligations to pay for certain original programming and was refunded all of its deposits for programming letters of credit.

     The indentures governing the Senior Secured Notes, the 12 ¹/4% Notes and the 10³/4% Notes contain certain covenants which, among other things, limit the Company’s ability to incur additional indebtedness, other than refinancing indebtedness, restrict the Company’s ability to pay dividends or redeem its outstanding capital stock, restrict the Company’s ability to make certain investments or to enter into transactions with affiliates, restrict the Company’s ability to incur liens or merge or consolidate with any other person, require the Company to pay all material taxes prior to delinquency, require any asset sales the Company may conduct to comply with certain requirements, including as to the use of asset sale proceeds, restrict the Company’s ability to sell interests in its subsidiaries, and require the Company, in the event it experiences a change of control, to make an offer to purchase the notes outstanding under such indentures on specified terms. Events of default under the indentures include the failure to pay interest within 30 days of the due date, the failure to pay principal when due, a default under any other debt in an amount greater than $10.0 million, the entry of a money judgment against the Company in an amount greater than $10.0 million which remains unsatisfied for 60 days, the failure to perform any covenant or agreement under the indentures which continues for 60 days after the Company receives notice of default from the indenture trustee or holders of at least 25% of the outstanding notes, and the occurrence of certain bankruptcy events. The 12¹/4% Notes and 10³/4% Notes are general unsecured obligations of the Company subordinate in right of payment to all existing and future senior indebtedness of the Company and senior in right to all future subordinated indebtedness of the Company. As of June 30, 2005, the Company was in compliance with its debt covenants.

5. MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK

     The following represents a summary of the changes in the Company’s mandatorily redeemable and convertible preferred stock for the six months ended June 30, 2005 (in thousands except share data):

		93/4%				28.3% Series B
		Convertible				Convertible
		Preferred				Exchangeable
		Stock				Preferred Stock				Total
Mandatorily redeemable and convertible preferred stock:
Balance at January 1, 2005		$	140,042			$	600,703			$	740,745
Accretion			253				¾				253
Accrual of cumulative dividends			6,961				73,508				80,469
Balance at June 30, 2005		$	147,256			$	674,211			$	821,467
Aggregated liquidation preference and accumulated dividends at June 30, 2005		$	148,019			$	674,211			$	822,230
Shares authorized			17,500				41,500				59,000
Shares issued and outstanding			14,801				41,500				56,301
Accrued dividends		$	—			$	259,211			$	259,211

		141/4% Junior
		Exchangeable
		Preferred
		Stock
Mandatorily redeemable preferred stock:
Balance at January 1, 2005		$	471,355
Accrual of cumulative dividends			33,584
Balance at June 30, 2005		$	504,939
Aggregate liquidation preference and accumulated dividends at June 30, 2005		$	504,939
Shares authorized			72,000
Shares issued and outstanding			49,610
Accrued dividends		$	8,837

     On November 13, 2003, the Company received notice from NBC that NBC was exercising its right under its investment agreement with the Company to demand that the Company redeem or arrange for a third party to acquire (the ‘‘Redemption’’), by payment in cash, all 41,500 outstanding shares of the Company’s Series B preferred stock held by NBC. The aggregate redemption price payable in respect of the 41,500 preferred shares, including accrued dividends thereon, was $674.2 million as of June 30, 2005.

     Between November 13, 2003 and November 13, 2004 the Company was unable to consummate the Redemption as the terms of the Company’s outstanding debt and preferred stock prohibited the Redemption and the Company did not have sufficient funds on hand to consummate the Redemption. On August 19, 2004, NBC filed a complaint against the Company in the Court of Chancery of the State of Delaware seeking a declaratory ruling as to the meaning of the terms “Cost of Capital Dividend Rate” and “independent” investment bank as used in the certificate of designation of the Company’s Series B preferred stock held by NBC. On September 15, 2004, the annual rate at which dividends accrue on the Series B preferred stock was reset from 8% to 16.2% in accordance with the procedure specified in the terms of the Series B preferred stock. The Company engaged CIBC World Markets Corp. (“CIBC”), a nationally recognized independent investment banking firm, to determine the adjusted dividend rate as of the fifth anniversary of the original issue date of the Series B preferred stock.

     On October 14, 2004, the Company filed its answer and a counterclaim to NBC’s complaint. The Company’s answer largely denies the allegations of the NBC complaint and the Company’s counterclaim seeks a declaratory ruling that the Company is not obligated to redeem, and will not be in default under the terms of the agreement under which NBC made its initial $415.0 million investment in the Company if the Company does not redeem, the Series B preferred stock on or before November 13, 2004. NBC has alleged that the Company is obligated to redeem, and will be in default if the Company does not redeem, NBC’s investment on or before November 13, 2004.

     The Company and NBC each moved for judgment on the pleadings in the Delaware litigation. On April 29, 2005, the court held that the dividend rate on the Company’s Series B preferred stock should be reset to 28.3% per annum as of September 15, 2004. The adjusted dividend rate continues to apply only to the original issue price of $415.0 million of the Series B preferred stock, and not to accumulated and unpaid dividends. For the six months ended June 30, 2005, the Company recorded $73.5 million of dividends using a 28.3% rate, $14.8 million of which pertained to the increased rate to be applied for the period from September 15, 2004 through December 31, 2004.

     The court ruled in the Company’s favor as to the independence of CIBC and certain interpretive issues relating to the dividend rate reset, and denied the motions by both NBC and the Company for judgment on the pleadings and NBC’s alternative motion for summary judgment as to whether the Company has an obligation to redeem the Series B preferred stock held by NBC based on NBC’s demand for redemption.

     The Company has been advised by its legal counsel that because the litigation regarding whether the Company has an obligation to redeem the Series B preferred stock held by NBC is still pending, absent certain certifications by the court, the court’s decision regarding the dividend rate reset is not final. The Company is requesting certification from the court to pursue an immediate appeal of the court’s ruling.

     If a court were to grant a judgment against the Company requiring it to pay the redemption amount, it would have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. In addition, if the Company were unable to satisfy any such judgment, the Company would be in default under the indentures governing its senior secured notes and senior subordinated notes, which would also have a material adverse effect on its consolidated financial position, results of operations and cash flows.

     The certificates of designation of the preferred stock contain certain covenants which, among other things, restrict additional indebtedness, payment of dividends, transactions with related parties, certain investments and transfers or sales of assets. As of June 30, 2005, the Company was in compliance with its preferred stock covenants.

6. INCOME TAXES

     The Company structured the disposition of its radio division in 1997 and the acquisition of its television stations during the period following this disposition in a manner that the Company believed would qualify these transactions as a ‘‘like-kind’’ exchange under Section 1031 of the Internal Revenue Code and would permit the Company to defer recognizing for income tax purposes up to approximately $333.0 million of gain. The IRS has examined the Company’s 1997 tax return and has issued it a ‘‘30-day letter’’ proposing to disallow all of the gain deferral. In addition, the ‘‘30-day letter’’ offered an alternative position that, in the event the IRS is unsuccessful in disallowing all of the gain deferral, approximately $62.0 million of the $333.0 million gain deferral would be disallowed on the basis that some of the assets were not “like-kind.” The Company filed a protest to these positions with the IRS appeals division.

     In June 2005, the Company reached a tentative settlement on this matter with the IRS that would result in the recognition, for income tax purposes, of an additional $200.0 million of the gain resulting from the disposition of its radio division in 1997. Because the Company had net operating losses in the years subsequent to 1997 in excess of the additional gain to be recognized, the Company would not be liable for any federal tax deficiency, but would be liable for state income taxes. The Company has estimated the amount of state income taxes for which it would be liable as of June 30, 2005 to be approximately $2.9 million. In addition, the Company would be liable for interest on the tax liability for the period prior to the carry back of net operating losses and for interest on any state income taxes that may be due. The Company has estimated the amount of federal interest and state interest as of June 30, 2005 to be $2.0 million and $1.7 million, respectively. Because the Company previously established a deferred tax liability at the time of the “like-kind” exchange and because the Company previously established a valuation allowance against its net operating losses, the use of losses to offset the additional gain to be recognized results in a reduction of the established valuation allowance in the amount of $37.7 million. The settlement with the IRS is subject to the execution of a closing agreement. As a result of reaching the settlement with the IRS, the Company has concluded that it is more likely than not that its net operating losses, up to the amount of the additional gain to be recognized, will be realized and that it is probable that additional state income taxes as well as federal and state interest expense will be incurred. As a result, in the second quarter of 2005, the Company recognized an income tax benefit in the amount of $34.8 million resulting from the realization of its net operating losses, net of state income taxes. In addition, the Company recognized interest expense in the amount of $3.7 million resulting from federal and state income taxes.

     For the three and six month periods ended June 30, 2005, the Company recorded a provision for income taxes in the amount of $3.3 million and $6.9 million, respectively. For the three and six month periods ended June 30, 2004, the Company recorded a provision for income taxes in the amount of $2.9 million and $8.3 million, respectively. The provision for income taxes is determined based on the estimated annual effective income tax rate (exclusive of the net income tax benefit resulting from the tentative settlement with the IRS as discussed above). As of June 30, 2005 and 2004, the Company has recorded a valuation allowance for its deferred tax assets (primarily resulting from tax losses generated during the periods) net of those deferred tax liabilities which are expected to reverse in determinate future periods, as it believes it is more likely than not that it will be unable to utilize its remaining net deferred tax assets.

     As of December 31, 2004 and June 30, 2005, the liability for deferred income taxes amounted to $194.7 million and $163.9 million, respectively. The decrease in the liability for deferred income taxes from December 31, 2004 to June 30 2005, primarily resulted from the tentative settlement reached with the IRS as described above, which resulted in a net decrease of $38.0 million to the Company’s deferred tax asset associated with net operating losses, a net decrease of $37.7 million in the deferred tax liability associated with the Company’s FCC licenses and a net decrease of $37.7 million in the Company’s net deferred tax asset valuation allowance.

7. PER SHARE DATA

     Basic and diluted loss per common share was computed by dividing net loss less dividends and accretion on redeemable and convertible preferred stock by the weighted average number of common shares outstanding during the period. The effect of stock options and warrants is antidilutive. Accordingly, basic and diluted loss per share is the same for all periods presented.

     As of June 30, 2005 and 2004, the following securities, which could potentially dilute earnings per share in the future, were not included in the computation of earnings per share, because to do so would have been antidilutive (in thousands):

		June 30,
		2005				2004
Stock options			2,237				2,555
Class A common stock warrants and restricted Class A common stock			35,563				35,598
Class A common stock reserved for issuance under convertible securities			41,147				40,298
			78,947				78,451

8. STOCK-BASED COMPENSATION

     Employee stock options are accounted for using the intrinsic value method. When options are granted to employees, a non-cash charge representing the difference between the exercise price and the quoted market price of the common stock underlying the vested

options on the date of grant is recorded as stock-based compensation expense with the balance deferred and amortized over the remaining vesting period. Stock-based compensation to non-employees is accounted for using the fair value method.

     For the six months ended June 30, 2005, the Company granted options under its 1998 Stock Incentive Plan, as amended (the “Plan”), to purchase 794,000 shares of Class A common stock at an exercise price of $0.01 per share to certain employees and directors. Of these options, 729,000 provided for a one business day exercise period and were exercised for unvested shares of Class A common stock, which are subject to vesting restrictions. These unvested shares will vest over a three year period. The remaining 65,000 options that did not provide for an exercise period of one business day were not exercised and vest in 2005

     In April 2005, the Company amended the terms of the stock option agreements of eligible holders to permit those persons holding unvested stock options to exercise, during a one business day period, the unvested options and purchase unvested shares of Class A common stock. As a result of this offer, eligible holders exercised unvested options resulting in the issuance of 2,678,175 unvested shares of Class A common stock, which will vest according to the same vesting schedule originally applicable to the options. This exercise did not result in any additional stock-based compensation expense.

     As of June 30, 2005, the Company had 2,237,223 stock options outstanding (all of which are fully vested other than 65,000 which vest in 2005) and 3,531,013 unvested shares of Class A common stock outstanding that will vest as follows: 636,346 during the remainder of 2005, 661,667 in 2006, 455,333 in 2007, 1,662,667 in 2008, 83,000 in 2009 and 32,000 in 2010. The Company will recognize stock-based compensation expense of approximately $1.7 million during the remainder of 2005, $2.4 million in 2006, and $3.1 million between 2007 and 2010 related to these stock options and unvested shares For the three and six months ended June 30, 2005, the Company recognized approximately $1.2 million and $3.2 million in stock based compensation expense, which included approximately $1.1 million resulting from the restructuring described in Note 2 that is included in “restructuring charges” in the accompanying consolidated statements of operations.

     Had compensation expense for the Company’s option plans been determined using the fair value method, the Company’s net loss and net loss per share would have been as follows (in thousands except per share data):

		Three Months Ended June 30,								Six Months Ended June 30,
		2005				2004				2005				2004
Net loss attributable to common stockholders:
As reported		$	(41,750	)		$	(48,776	)		$	(137,627	)		$	(109,007	)
Add: Stock-based compensation expense included in reported net loss			1,232				2,533				3,182				4,755
Deduct: Total stock-based compensation expense determined under the fair value method			(1,232	)			(2,539	)			(3,182	)			(4,975	)
Pro forma net loss attributable to common stockholders		$	(41,750	)		$	(48,782	)		$	(137,627	)		$	(109,227	)
Basic and diluted net loss per share:
As reported		$	(0.60	)		$	(0.72	)		$	(2.00	)		$	(1.61	)
Pro forma			(0.60	)			(0.72	)		$	(2.00	)		$	(1.61	)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model assuming a dividend yield of zero for all periods and the following assumptions:

		Three Months Ended June 30 ,								Six Months Ended June 30,
		2005				2004				2005				2004
Risk-free interest rate		3.8% to 3.9%					3.2	%		3.0% to 3.9%					3.2	%
Expected option term		1 day				1 day				1 day to 1.5 years				1 day
Expected volatility		74% to 91%					72	%		74% to 91%					72	%

9. SUPPLEMENTAL CASH FLOW INFORMATION

     Supplemental cash flow information and non-cash financing activities are as follows (in thousands):

		For the Six Months
		Ended June 30,
		2005				2004
Supplemental disclosures of cash flow information:
Cash paid for interest		$	20,611			$	18,413
Cash paid for income taxes		$	158			$	176
Non-cash financing activities:
Dividends accrued on redeemable and convertible preferred stock		$	80,469			$	22,921
Discount accretion on redeemable and convertible securities		$	253			$	252
Repayment of stock subscription notes receivable through offset of deferred and other compensation		$	—			$	37

10. NEW ACCOUNTING PRONOUNCEMENTS

     In June 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 replaces Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retroactively with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset must be accounted for as a change in estimate (prospectively) that was affected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005.

     In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, an interpretation of SFAS No. 143 (“FIN 47”), which clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations”. FIN 47 provides that an asset retirement obligation is conditional when either the timing and/or method of settling the obligation is conditioned on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be considered in the measurement of the liability when sufficient information exists. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently evaluating the effect, if any, of FIN 47 on its financial position, results of operations and cash flows.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123R supersedes APB No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach to accounting for share-based payments in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values (i.e., pro forma footnote disclosure is no longer an alternative to financial statement recognition). The Company does not expect the adoption of SFAS No. 123R to have a significant impact on its financial position, results of operations or cash flows. As announced, the Securities and Exchange Commission (“SEC”) will permit companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005 as originally required by SFAS No. 123R.

     In October 2004, the FASB ratified Emerging Issues Task Force (“EITF”) 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share.” The new rules require companies to include shares issuable upon conversion of contingently convertible debt in their diluted earnings per share calculations regardless of whether the

debt has a market price trigger that is above the current fair market value of the company’s common stock that makes the debt currently not convertible. The new rules are effective for reporting periods ending on or after December 15, 2004. The Company does not have any convertible debt and, therefore, EITF 04-8 did not have any effect on its financial position, results of operations or cash flows.

     In September 2004, the EITF issued Topic D-108, “Use of the Residual Method to Value Acquired Assets Other than Goodwill”. Topic D-108 states that the residual method should no longer be used to value intangible assets other than goodwill. Rather, a direct method should be used to determine the fair value of all intangible assets required to be recognized under SFAS No. 141, “Business Combinations”. Issuers who have applied the residual method to the valuation of intangible assets for purposes of impairment testing under Statement 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), must perform an impairment test using a direct value method on all intangible assets that were previously valued using the residual method by no later than the beginning of their first fiscal year beginning after December 15, 2004. The Company has historically used a direct value method in testing its intangible assets for impairment as required by SFAS No. 142. As a result, the adoption of EITF Topic D-108 did not have any effect on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets,” which amends a portion of the guidance in APB No. 29, “Accounting for Non-monetary Transactions.” Both SFAS No. 153 and APB No. 29 require that exchanges of non-monetary assets should be measured based on fair value of the assets exchanged. APB No. 29 allowed for non-monetary exchanges of similar productive assets. SFAS No. 153 eliminates that exception and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for non-monetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. Any non-monetary asset exchanges will be accounted for under SFAS No. 153. The Company does not expect SFAS No. 153 to have a material effect on its financial position, results of operations or cash flows.

11. OTHER

     CNI Master Agreement – In June 2005, the Company entered into an agreement with The Christian Network, Inc. (“CNI”), amending the Master Agreement for Overnight Programming, Use of Digital Capacity and Public Interest Programming (“Master Agreement”) that the Company and CNI entered into in September 1999. As discussed in the Company’s Fiscal 2004 Form 10-K, CNI is a section 501(c)(3) not-for-profit corporation to which Mr. Paxson, the majority stockholder of the Company, has been a substantial contributor and of which he was a member of the Board of Stewards through 1993. Under the Master Agreement, the Company provided CNI the right to broadcast its programming on the Company’s analog television stations during the hours of 1:00 a.m. to 6:00 a.m. and to use a portion of the digital broadcasting capacity of the Company’s television stations in exchange for CNI’s providing public interest programming. CNI also has the right to require those of the Company’s television stations that have commenced broadcasting multiple digital programming streams (“digital multicasting”) to carry CNI’s programming up to 24 hours per day, seven days per week, on one of the station’s digital programming streams (a “digital channel”). The Master Agreement has a term of 50 years and is automatically renewable for successive ten-year periods.

     Pursuant to the June 2005 amendment, effective July 1, 2005, CNI relinquished its right to require the Company to broadcast CNI’s programming during the overnight hours on the analog signal of each of the Company’s stations, and accelerated the exercise of its right under the Master Agreement to require those of the Company’s television stations that have commenced digital multicasting (currently 45 of the Company’s 57 owned television stations) to carry CNI’s programming up to 24 hours per day, seven days per week, on one of the station’s digital channels. CNI retains its existing right to require those of the Company’s stations that have not yet commenced digital multicasting (an additional 12 stations) to carry CNI’s programming on one of the station’s digital channels promptly following the date each such station commences digital multicasting.

     As consideration for the June 2005 amendment, the Company agreed to pay CNI an aggregate of $3.25 million, of which $1.0 million was payable upon execution of the amendment, with the remaining $2.25 million due as follows: $500,000 due on September 29, 2005, December 31, 2005, March 31, 2006 and June 30, 2006, respectively, and $250,000 due on September 29, 2006. As of July 1, 2005, the Company ceased carrying CNI’s programming during the overnight hours on the analog signal of each of the Company’s stations, and commenced airing long form paid programming during these hours.

     Network Operations Center – The Company and CNI have also entered into a letter agreement, dated June 13, 2005 (the “Services Agreement”), pursuant to which the Company has agreed to provide satellite up-link and related services to CNI with respect to CNI’s digital television programming, and CNI has agreed to pay the Company a monthly fee of $19,432 for such services. The Company has the right to adjust the foregoing fee on an annual basis effective as of January 1 of each year during the term, commencing January

1, 2006, such that the fee is increased to an amount which proportionately reflects increases in the Company’s direct cost of providing the services plus an administrative charge of 10% of such direct costs. The term of the Services Agreement commenced July 1, 2005 and terminates December 31, 2010. CNI has the right to terminate the Services Agreement at any time upon the provision of 30 days’ prior written notice to the Company.

     NBC Demand for Arbitration – In May 2005, NBC filed a demand for arbitration under its investment agreement with the Company, in which NBC asserts that the changes in the Company’s business described in Note 2, including the termination of the Company’s network and national sales agency agreements and JSAs with NBC, constitute a breach by the Company of the investment agreement in that they could reasonably be expected to have a material adverse effect on the Company. NBC has also asserted that the Company’s actions in terminating these agreements constitute a breach of each of these agreements, and seeks damages for alleged breaches and a declaratory judgment that each of these agreements remains in force. The Company took action to terminate these agreements with the expectation that its operating results would be improved, and does not believe its actions constitute a breach of the investment agreement with NBC. Although the Company intends to vigorously contest NBC’s claims, the Company can provide no assurance that it will prevail. An award of material damages to NBC, or a decision that requires the Company to maintain these agreements in effect, could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.

     World Trade Center Litigation Settlement - The Company’s antenna, transmitter and other broadcast equipment for its New York television station (WPXN) were destroyed upon the collapse of the World Trade Center on September 11, 2001. The Company filed property damage, business interruption and extra expense insurance claims with its insurer. In March 2003, the insurer filed an action against the Company in the U.S. District Court for the Southern District of New York seeking a declaratory ruling as to certain aspects of the insurance policy, which the Company purchased from it. On April 30, 2005, the Company settled its claims against the insurer for $24.5 million (less $7.7 million previously paid). On May 3, 2005, the Company received payment of $16.8 million pursuant to the aforementioned settlement. Of the $16.8 million settlement received on May 3, 2005, $1.1 million was recorded as an offset against expenses incurred in connection with this litigation, which are included in selling, general and administrative expenses in the accompanying statements of operations, and the remainder was recorded as insurance recoveries in the accompanying statements of operations.

     Accelerated Vesting of Unvested Shares and Options of Former Directors - During the first six months of 2005, the Company’s board of directors approved accelerated vesting of an aggregate of 136,000 shares of Class A common stock, and options exercisable for 64,000 shares, held by former directors of the Company, effective upon conclusion of their service as directors, resulting in $0.4 million of additional stock based compensation expense for the six months ended June 30, 2005.

12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

     Paxson Communications Corporation (the “Parent Company”) and its wholly owned subsidiaries are joint and several guarantors under the Company’s debt obligations. There are no restrictions on the ability of the guarantor subsidiaries or the Parent Company to issue dividends or transfer assets to any other subsidiary guarantors. The accounts of the Parent Company include network operations, network sales, programming and other corporate departments. The accounts of the wholly owned subsidiaries primarily include the television stations owned and operated by the Company.

     The accompanying unaudited condensed consolidated financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered.” This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.

CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)

		As of June 30, 2005 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Assets
Current assets		$	158,137			$	9,952			$	—			$	168,089
Receivable from wholly owned subsidiaries			891,601				—				(891,601	)			—
Intangible assets, net			48,723				833,148				—				881,871
Investment in and advances to wholly owned subsidiaries			19,287				—				(19,287	)			—
Property, equipment and other assets, net			42,249				90,541				—				132,790
Total assets		$	1,159,997			$	933,641			$	(910,888	)		$	1,182,750
Liabilities, Mandatorily Redeemable and Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities		$	89,468			$	11,507			$	—			$	100,975
Deferred income taxes			163,922				—				—				163,922
Senior secured notes, senior subordinated notes and bank financing, net of current portion			1,030,862				—				—				1,030,862
Notes payable to Parent Company			—				891,601				(891,601	)			—
Mandatorily redeemable preferred stock			504,939				—				—				504,939
Other long-term liabilities			11,170				11,246				—				22,416
Total liabilities			1,800,361				914,354				(891,601	)			1,823,114
Mandatorily redeemable and convertible preferred stock			821,467				—				—				821,467
Commitments and contingencies
Stockholders’ deficit			(1,461,831	)			19,287				(19,287	)			(1,461,831	)
Total liabilities, mandatorily redeemable and convertible preferred stock, and stockholders’ deficit		$	1,159,997			$	933,641			$	(910,888	)		$	1,182,750

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended June 30, 2005 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Net revenues		$	38,101			$	25,169			$	—			$	63,270
EXPENSES:
Programming and broadcast operations			2,562				10,992				—				13,554
Program rights amortization			17,131				—				—				17,131
Selling, general and administrative			12,512				14,977				—				27,489
Depreciation and amortization			3,404				6,715				—				10,119
Insurance recoveries			(15,652	)			—				—				(15,652	)
Stock-based compensation			1,220				—				—				1,220
Restructuring charges			12				1,843				—				1,855
Other operating expenses			121				1,145				—				1,266
Total operating expenses			21,310				35,672				—				56,982
Loss on sale or disposal of broadcast and other assets, net			—				(510	)			—				(510	)
Operating income (loss)			16,791				(11,013	)			—				5,778
OTHER INCOME (EXPENSE):
Interest expense			(3,182	)			(26,816	)			—				(29,998	)
Dividends on mandatorily redeemable preferred stock			(17,086	)			—				—				(17,086	)
Other income (expense), net			1,058				—				—				1,058
Equity in losses of consolidated subsidiaries			(37,829	)			—				37,829				—
Loss before income taxes			(40,248	)			(37,829	)			37,829				(40,248	)
Income tax benefit			31,508				—				—				31,508
Net loss			(8,740	)			(37,829	)			37,829				(8,740	)
Dividends and accretion on redeemable and convertible preferred stock			(33,010	)			—				—				(33,010	)
Net loss attributable to common stockholders		$	(41,750	)		$	(37,829	)		$	37,829			$	(41,750	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

		Six Months Ended June 30, 2005 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Net revenues		$	79,722			$	51,858			$	—			$	131,580
EXPENSES:
Programming and broadcast operations			6,178				22,070				—				28,248
Program rights amortization			33,375				—				—				33,375
Selling, general and administrative			28,681				30,240				—				58,921
Depreciation and amortization			6,484				12,587				—				19,071
Insurance recoveries			(15,652	)			—				—				(15,652	)
Stock-based compensation			2,062				—				—				2,062
Restructuring charges			2,357				1,890				—				4,247
Other operating expenses			(134	)			2,290				—				2,156
Total operating expenses			63,351				69,077				—				132,428
Loss on sale or disposal of broadcast and other assets, net			—				(567	)			—				(567	)
Operating income (loss)			16,371				(17,786	)			—				(1,415	)
OTHER INCOME (EXPENSE):
Interest expense			(1,607	)			(53,600	)			—				(55,207	)
Dividends on mandatorily redeemable preferred stock			(33,584	)			—				—				(33,584	)
Other income, net			5,427				—				—				5,427
Equity in losses of consolidated subsidiaries			(71,386	)			—				71,386				—
Loss before income taxes			(84,779	)			(71,386	)			71,386				(84,779	)
Income tax benefit			27,874				—				—				27,874
Net loss			(56,905	)			(71,386	)			71,386				(56,905	)
Dividends and accretion on redeemable and convertible preferred stock			(80,722	)			—				—				(80,722	)
Net loss attributable to common stockholders		$	(137,627	)		$	(71,386	)		$	71,386			$	(137,627	)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)

		Six Months Ended June 30, 2005 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Net cash (used in) provided by operating activities		$	(5,641	)		$	2,838			$	—			$	(2,803	)
Cash flows used in investing activities:
Decrease in short term investments			5,993				—				—				5,993
Refund of programming letters of credit			24,603				—				—				24,603
Purchases of property and equipment			(2,119	)			(2,822	)			—				(4,941	)
Proceeds from sale of broadcast assets			3				—				—				3
Other			(1,000	)			(22	)			—				(1,022	)
Net cash provided by (used in) investing activities			27,480				(2,844	)			—				24,636
Cash flows from financing activities:
Repayments of long-term debt			(31	)			—				—				(31	)
Payments of employee withholding taxes on exercise of stock options, net			(8	)			—				—				(8	)
Proceeds from exercise of common stock options, net			5				—				—				5
Net cash used in financing activities			(34	)			—				—				(34	)
Increase (decrease) in cash and cash equivalents			21,805				(6	)			—				21,799
Cash and cash equivalents, beginning of period			82,015				32				—				82,047
Cash and cash equivalents, end of period		$	103,820			$	26			$	—			$	103,846

CONDENSED CONSOLIDATING BALANCE SHEETS (UNAUDITED)

		As of December 31, 2004 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Assets
Current assets		$	177,900			$	11,561			$	—			$	189,461
Receivable from wholly owned subsidiaries			891,601				—				(891,601	)			—
Intangible assets, net			50,790				833,435				—				884,225
Investment in and advances to wholly owned subsidiaries			33,837				—				(33,837	)			—
Property, equipment and other assets, net			50,003				100,616				—				150,619
Total assets		$	1,204,131			$	945,612			$	(925,438	)		$	1,224,305
Liabilities, Mandatorily Redeemable and Convertible Preferred Stock and Stockholders’ Deficit
Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities		$	102,792			$	9,247			$	—			$	112,039
Deferred income taxes			194,706				—				—				194,706
Senior secured and senior subordinated notes, net of current portion			1,004,029				—				—				1,004,029
Notes payable to Parent Company			—				891,601				(891,601	)			—
Mandatorily redeemable preferred stock			471,355				—				—				471,355
Other long-term liabilities			17,845				10,927				—				28,772
Total liabilities			1,790,727				911,775				(891,601	)			1,810,901
Mandatorily redeemable and convertible preferred stock			740,745				—				—				740,745
Commitments and contingencies Stockholders’ deficit			(1,327,341	)			33,837				(33,837	)			(1,327,341	)
Total liabilities, mandatorily redeemable and convertible preferred stock, and stockholders’ deficit		$	1,204,131			$	945,612			$	(925,438	)		$	1,224,305

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)

		Three Months Ended June 30, 2004 (in thousands)
						Wholly
		Parent				Owned				Consolidating				Consolidated
		Company				Subsidiaries				Adjustments				Group
Net revenues		$	42,965			$	26,912			$	—			$	69,877
EXPENSES:
Programming and broadcast operations			3,267				10,375				—				13,642
Program rights amortization			10,843				—				—				10,843
Selling, general and administrative			18,006				15,316				—				33,322
Stock-based compensation			2,533				—				—				2,533
Other operating expenses			467				1,101				—				1,568
Depreciation and amortization			3,379				8,058				—				11,437
Total operating expenses			38,495				34,850				—				73,345
Gain on sale or disposal of broadcast and other assets, net			1,001				5,066				—				6,067
Operating income(loss)			5,471				(2,872	)			—				2,599
OTHER INCOME (EXPENSE):
Interest expense			(22,994	)			(71	)			—				(23,065	)
Dividends on mandatorily redeemable preferred stock			(14,888	)			—				—				(14,888	)
Other income (expense), net			1,082				(1	)			—				1,081
Loss of extinguishment of debt			7				—				—				7
Equity in losses of consolidated subsidiaries			(2,944	)			—				2,944				—
Loss before income taxes			(34,266	)			(2,944	)			2,944				(34,266	)
Income tax provision			(2,886	)			—				—				(2,886	)
Net loss			(37,152	)			(2,944	)			2,944				(37,152	)
Dividends and accretion on redeemable and convertible preferred stock			(11,624	)			—				—				(11,624	)
Net loss attributable to common stockholders		$	(48,776	)		$	(2,944	)		$	2,944			$	(48,776	)