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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(MARK ONE)

FOR THE TRANSITION PERIOD FROM ____________________________ TO ____________________________

Commission File Number 1-13452

PAXSON COMMUNICATIONS CORPORATION

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   x   No    o

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

Yes   x   No    o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 31, 2003:

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PAXSON COMMUNICATIONS CORPORATION

INDEX

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Item 1. Financial Statements

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

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

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PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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PAXSON COMMUNICATIONS CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     Paxson Communications Corporation’s (the “Company”) financial information contained in the financial statements and notes thereto as of June 30, 2003 and for the three and six month periods ended June 30, 2003 and 2002 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. Except as described below, there have been no changes in accounting policies since the year ended December 31, 2002. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain reclassifications have been made to the prior year’s financial statements to conform to the 2003 presentation. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and the definitive proxy statement for the annual meeting of stockholders held May 16, 2003, both of which were filed with the United States Securities and Exchange Commission.

     In 1998, the Company began entering into cable distribution agreements for periods generally up to ten years in markets where the Company does not own a television station. Certain of these cable distribution agreements also provided the Company with some level of promotional advertising to be run at the discretion of the cable operator, primarily during the first few years to support the launch of the Company’s PAX TV network on the cable systems. The Company has been amortizing these assets on an accelerated basis which gave affect to the advertising component included in these agreements. In the second quarter of 2003, the Company determined that it had over amortized certain of these assets and recorded a $4 million reduction of its amortization expense. The remaining unamortized cost, which had been amortized over seven years, will be amortized over the remaining contractual life of the agreements.

2. RESTRUCTURING PLANS

     During the fourth quarter of 2002, the Company adopted a plan to consolidate certain of its operations, reduce personnel and modify its programming schedule in order to significantly reduce the Company’s cash operating expenditures. In connection with this plan, the Company recorded a restructuring charge of approximately $2.6 million in the fourth quarter of 2002 consisting of $2.2 million in termination benefits for 95 employees and $0.4 million in costs associated with exiting leased properties and the consolidation of certain operations. Through June 30, 2003, the Company has paid $2.1 million in termination benefits to 94 employees and paid $0.3 million of lease termination and other costs. The Company has accounted for these costs pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS No. 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 as set forth under EITF 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity”, which has been nullified under SFAS No. 146. As such, the Company will recognize additional restructuring costs as they are incurred.

     The Company has substantially completed its Joint Sales Agreement (“JSA”) restructuring plan entered into in the fourth quarter of 2000, except for contractual lease obligations for closed locations, the majority of which expire in 2004.

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     The following summarizes the activity in the Company’s restructuring reserves for the six months ended June 30, 2003 (in thousands):

     The following summarizes the activity in the Company’s JSA restructuring reserves for the six months ended June 30, 2002 (in thousands):

3. ASSET SALES

     The results of operations and the gain on sale of assets held for sale are included in the determination of the Company’s operating income (loss) from its continuing operations in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) since these assets do not constitute a component of the Company under SFAS 144. The Company generally maintains a geographic presence in the markets where assets have been sold by airing the PAX TV network through cable distribution agreements or the Company’s other owned or operated stations in the designated market areas.

     Assets held for sale consist of the following (in thousands):

     In June 2003, the Company entered into an agreement to sell the assets of its television station KPXJ, serving the Shreveport, Louisiana market, for a cash purchase price of $10.0 million. The sale, subject to receipt of regulatory approvals, is expected to close by the end of 2003.

     In May 2003, the Company completed the sale of the assets of its television station KAPX, serving the Albuquerque, New Mexico market, for a cash purchase price of $20.0 million resulting in a pre-tax gain of approximately $14.8 million.

     In April 2003, the Company completed the sale of the assets of its television stations WMPX, serving the Portland-Auburn, Maine market, and WPXO, serving the St. Croix, U.S. Virgin Islands market, for an aggregate cash purchase price of $10 million resulting in a pre-tax gain of approximately $4.2 million.

     In April 2003, the Company completed the sale of its limited partnership interest in television station WWDP, serving the Boston, Massachusetts market, for approximately $13.8 million resulting in a pre-tax gain of approximately $10.2 million.

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     In February 2003, the Company completed the sale of the assets of its television station KPXF, serving the Fresno, California market, for a cash purchase price of $35 million resulting in a pre-tax gain of approximately $26.8 million.

4. LONG-TERM DEBT

     Senior subordinated notes and bank financing consists of the following (in thousands):

     The Company’s senior bank credit facility, as amended and restated on May 5, 2003, contains various covenants restricting the Company’s ability and the ability of its subsidiaries to incur additional indebtedness, dispose of assets, pay dividends, repurchase or redeem capital stock and indebtedness, create liens, make capital expenditures, make certain investments or acquisitions and enter into transactions with affiliates and otherwise restricting its activities. The Company amended and restated the senior bank credit facility on May 5, 2003 to consolidate previous amendments and allow for the issuance of letters of credit, subject to availability under the Company’s $25 million revolving credit facility. At June 30, 2003, there was $23 million in borrowings outstanding under the revolving credit facility and $0.9 million of outstanding letters of credit. The Company paid a fee of $0.1 million in connection with this amendment and restatement. The senior bank credit facility, as amended, contains the following financial covenants: (1) twelve-month trailing minimum net revenue and minimum EBITDA (as defined under our senior bank credit facility) for each of the fiscal quarters ended June 30, 2001 through December 31, 2004, (2) maximum ratio of total senior debt to EBITDA, maximum ratio of total debt to EBITDA, minimum permitted interest coverage ratio and minimum permitted fixed charge coverage ratio, each beginning for each of the fiscal quarters ending on or after March 31, 2005, (3) maximum annual capital expenditures for 2001 through 2006, and (4) maximum annual programming payments for 2002 through 2006.

     Under the terms of the senior bank credit facility, as amended, the Company will be deemed to be in compliance with its trailing twelve-month minimum net revenue covenants for the quarters ending June 30, September 30 and December 31, 2003 if its trailing twelve-month net revenues for the quarter are at least $250 million and the Company has satisfied the requirement to pay a fee in the amount of 0.125% of the outstanding principal amount under the facility for each quarterly period that the Company’s trailing twelve-month net revenues are less than the original covenant minimums set forth in the credit agreement, but not less than $250 million. These terms are consistent with the terms of a waiver the Company obtained in March 2003, for which the Company paid a waiver fee of $0.5 million, and have now been incorporated into the amended and restated credit agreement.

     At June 30, 2003, the Company was in compliance with its amended covenants. The Company currently expects that it will continue to be in compliance with these amended covenants through the end of fiscal 2003, but that it will not be able to comply with certain of its covenants in 2004. Prior to December 31, 2003, the Company plans to seek a waiver from its lenders under the senior bank credit facility related to these 2004 covenants or possibly seek an amendment to the senior bank credit facility. There can be no assurance that the Company’s lenders will grant the Company any waiver or agree to any amendment which might become necessary. If the Company failed to meet any of its debt covenants and the Company’s lenders did not grant a waiver or amend the facility, the lenders would have the right to declare an event of default and seek remedies including acceleration of all outstanding amounts due under the senior bank credit facility. Should an event of default be declared under the senior bank credit facility, this would cause a cross default to occur under the Company’s senior subordinated note and senior subordinated discount note indentures, thus giving each trustee the right to accelerate repayment, and would give the holders of each of the Company’s three outstanding series of preferred stock the right to elect two directors per series to the Company’s Board of Directors. There can be no assurance that the Company would be successful in obtaining alternative sources of funding to repay these obligations should these events occur.

     See Note 11, New Accounting Pronouncements, for a discussion of SFAS 150 and its effect on the classification of the Company’s mandatorily redeemable preferred stock.

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5. MANDATORILY REDEEMABLE PREFERRED STOCK

     The following represents a summary of the changes in the Company’s mandatorily redeemable preferred stock during the six month period ended June 30, 2003 (in thousands):