##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K (Mark One)þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2004ORo
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from (No Fee Required)For the transition period from      to
 Commission File Number 1-13452   PAXSON COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE
    
    59-3212788(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)601 Clearwater Park Road, West Palm Beach, Florida
    
    33401(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (561) 659-4122   Securities Registered Pursuant to Section 12(b) of the Act:   Name of ExchangeTitle of Each Class
    
    on Which RegisteredClass A Common Stock, $0.001 par value
    
    American Stock Exchange
 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 twelve months
(or 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.þ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yesþ Noo The aggregate market value of common stock held by non-affiliates of the registrant was
$148,546,000 (based upon the $3.25 per share closing price on the American Stock Exchange) on the
last business day of the registrants most recently completed second fiscal quarter (June 30,
2004). For purposes of this calculation, the registrant has assumed that its directors and
executive officers are affiliates. The number of shares outstanding of each of the registrants classes of common stock, as of
March 4, 2005 was: 61,244,433 shares of Class A Common Stock, $0.001 par value, and 8,311,639
shares of Class B Common Stock, $0.001 par value. Documents Incorporated By Reference Parts of the definitive Proxy Statement for the Registrants Annual Meeting of Stockholders
to be held on June 10, 2005.




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TABLE OF CONTENTS Page Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    29Item 3.
    
    Legal Proceedings
    
    
    30Item 4.
    
    Submission of Matters to Vote of Security Holders
    
    
    30Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    31Item 6.
    
    Selected Financial Data
    
    
    32Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 8.
    
    Financial Statements and Supplementary Financial Data
    
    
    47Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    47Item 9A.
    
    Controls and Procedures
    
    
    47Item 9B
    
    Other Information
    
    
    49Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    50Item 11.
    
    Executive Compensation
    
    
    50Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    50Item 13.
    
    Certain Relationships and Related Transactions
    
    
    50Item 14.
    
    Principal Accountant Fees and Services
    
    
    50Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    50Employment Agreement - Lowell W. PaxsonEmployment Agreement - Anthony L. MorrisonEmployment Agreement - Dean M. GoodmanEmployment Agreement - Dean M. GoodmanEmployment Agreement - Seth A. GrossmanEmployment Agreement - Seth A. GrossmanEmployment Agreement - Richard GarciaEmployment Agreement - Adam K. WeinsteinSubsidiaries of the CompanyConsent of Ernst & Young LLPConsent of PricewaterhouseCoopers LLPSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CEO Certification
  2




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PART I 
 ITEM 1. Business General We are 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 our stations serve. We currently own and operate 60 broadcast television stations
(including three stations we operate under time brokerage agreements), all of which carry PAX TV,
including stations reaching all of the top 20 U.S. markets and 40 of the top 50 U.S. markets. We
operate PAX TV, a network that provides programming seven days per week, 24 hours per day, and
reaches approximately 95 million homes, or 87% of prime time television households in the U.S.,
through our broadcast television station group, and pursuant to distribution arrangements with
cable and satellite distribution systems and our broadcast station affiliates. PAX TVs
entertainment programming principally consists of shows originally developed by us and shows that
have appeared previously on other broadcast networks which we have purchased the right to air. The
balance of PAX TVs programming consists of long form paid programming (principally infomercials)
and public interest programming. We have obtained audience ratings and share, market rank and
television household data set forth in this report from the most recent information available from
Nielsen Media Research. We do not assume responsibility for the accuracy or completeness of this
data. We presently derive our revenues from the sale of network long form paid programming, network
spot advertising and station advertising:  
    Network Long Form Paid Programming. We sell air time for long form paid programming,
consisting primarily of infomercials, during broadcasting hours when we are not airing PAX
TV entertainment programming or public interest programming. Our network long form paid
programming represented approximately 39.8% of our net revenue during the year ended
December 31, 2004.
    Network Spot Advertising. We sell commercial air time to advertisers who want to reach
the entire nationwide PAX TV viewing audience with a single advertisement. Network spot
advertising rates are significantly affected by audience ratings and our ability to reach
audience demographics that are desirable to advertisers. Higher ratings generally enable
us to charge higher rates to advertisers. Our network spot advertising revenue represented
approximately 20.7% of our net revenue during the year ended December 31, 2004.
    Station Advertising. We sell commercial air time to advertisers who want to reach the
viewing audience in specific geographic markets in which we own and operate our television
stations. These advertisers may be local businesses or regional or national advertisers
who want to target their advertising in these markets. Station advertising rates are
affected by ratings and local market conditions. Our station advertising sales represented
approximately 39.5% of our net revenue during the year ended December 31, 2004 (including
22.8% of our net revenue during such year which was derived from local and national long
form paid programming). Beginning in January 2003, we modified our programming schedule by replacing entertainment
programming during the hours of 1 p.m. to 5 p.m. and 11:30 p.m. to midnight, Monday through Friday,
and 5 p.m. to 6 p.m. and 11 p.m. to midnight, Saturday and Sunday, with long form paid programming.
As a result, the percentage of our net revenues derived from long form paid programming has
increased from 46.4% in the year ended December 31, 2002, to 62.6% in the year ended December 31,
2004. We expect to continue to derive more than half of our net revenues from long form paid
programming for the foreseeable future. We have entered into joint sales agreements, or JSAs, with owners of broadcast stations in
markets served by our stations. Our JSA partners sales staff provides station spot and long form
advertising sales management and representation for our stations and in 22 of our stations we have
integrated and co-located our station operations with those of our JSA partners. As of March 4,
2005, 45 of our 60 owned and operated television stations operate under a JSA. In March 2005, we
notified our JSA partners other than NBC that we were exercising our right to terminate the JSAs,
effective June 30, 2005 and we began discussions with NBC as to the termination of each of our JSAs
with NBC (covering 14 of our stations in 12 markets). We intend that by the beginning of July
2005, our local advertising sales efforts, including long form paid programming and spot
advertisements, will be handled directly by our existing employees. Our primary operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses, programming expenses, employee compensation and costs
associated with cable and satellite distribution, ratings services and promotional advertising.
Programming amortization is a significant expense and is 3




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affected by several factors, including the mix of syndicated and original programming and the
frequency with which programs are aired. Our business model differs from that of both traditional television networks and
network-affiliated television station groups. Similar to traditional television networks, we
provide advertisers with nationwide reach through our extensive television distribution system.
Because we own and operate most of our distribution system, however, we receive advertising revenue
from the entire broadcast day (consisting of both entertainment and long form paid programming),
unlike traditional networks, which receive advertising revenue only from commercials aired during
network programming hours and network-affiliated stations, which receive advertising revenue only
from non-network commercials. In addition, because of the size and centralized operations of our
station group, we are able to achieve economies of scale with respect to our programming,
promotional, research, engineering, accounting and administrative expenses which we believe enable
us to have lower per station expenses than those of a typical network-affiliated station. Business Strategy Our business operations presently do not provide sufficient cash flow to support our debt
service and preferred stock dividend requirements. In September 2002, we engaged Bear, Stearns &
Co. Inc. and in August 2003 we engaged Citigroup Global Markets Inc. to act as our financial
advisors to assess our business plan, capital structure and future capital needs, and to explore
strategic alternatives for our company. We terminated these engagements in March 2005 as no viable
strategic transactions had been developed on terms that we believed would be in the best interests
of all of our stockholders. While we continue to consider strategic alternatives that may arise,
which may include the sale of all or part of our assets, finding a strategic partner for our
company who would provide the financial resources to enable us to redeem, restructure or refinance
our debt and preferred stock, or finding a third party to acquire our company through a merger or
other business combination or through a purchase of our equity securities, our principal efforts
are focused on improving our core business operations and increasing our cash flow. Our principal business objective is to improve our cash flow and increase our financial
flexibility, so that we may pursue refinancing alternatives with a view to reducing our cost of
capital. We believe that if we are able to improve our cash flow and reduce our cost of capital,
we will be able to improve our ability to take advantage of future opportunities to strengthen our
business that may arise due to changes in the regulatory or business environment for broadcasters
or other future developments in our industry. We seek to maintain an efficient operating structure
and a flexible programming strategy as we implement changes to our business operations. In 2004,
we entered into a consulting agreement with NBC Universal, Inc., or NBC, and committed significant
resources to the development of a number of new original entertainment programs, which we launched
on PAX TV at various times during the second half of the year. To date, these new programs have
not served to materially improve our audience ratings or advertising revenues. We are not
currently investing substantial additional amounts in new entertainment programming, and are
evaluating other programming strategies and opportunities that might be available to us which could
improve our cash flow. In March 2005, we began the process of ending certain contractual relationships involving most
of our stations which limit our ability to implement alternative programming and sales strategies
and to take advantage of other opportunities that might be available to us. The termination of
these relationships will allow us to eliminate a significant portion of the costs associated with
the sales of local and national spot advertisements and long form paid programming. We plan to
substantially reduce or eliminate our sales of spot advertisements that are based on audience
ratings, which are presently sold for us by our JSA partners and NBC, and to focus our sales
efforts on long form paid programming and non-rated spot advertisements. We intend that, by the
beginning of July 2005, our local advertising sales efforts, including long form paid programming
and spot advertisements, will be handled directly by our own employees. As part of this process, in March 2005, we notified all of our JSA partners other than NBC
that we were exercising our right to terminate the JSAs, effective June 30, 2005, we notified all
of our network affiliates that we were exercising our right to terminate the affiliation
agreements, effective June 30, 2005, and we notified NBC that we were removing, effective June 30,
2005, all of our stations from our national sales agency agreement with NBC, pursuant to which NBC
sells national spot advertisements for 49 of our 60 stations. In March 2005, we also began discussions with NBC as to the termination of our network sales
agency agreement with NBC and each of our JSAs with NBC (covering 14 stations in 12 markets). We
intend that, following resolution of these matters, our network advertising sales efforts will be
handled directly by our own employees. 4




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In connection with the termination of the JSAs, we will have to either relocate up to 22 of
our station master controls which are currently located in our JSA partners facility or lease
space from our JSA partner in order to keep our station master control located in our JSA partners
facility. We are also reviewing all of the elements of our business operations as we seek to implement
changes that we believe will improve our cash flow. Operating Strategy The principal components of our current operating strategy are:  
    Benefit from a Centralized, Efficient Operating Structure.We centralize many of the
functions of our owned and operated stations, including promotions, advertising, research,
engineering, accounting and sales traffic. Our stations average fewer than ten employees
compared to an average of 90 employees at network-affiliated stations, and an average of
60 employees at independent stations in markets of similar size to ours. We employ a
centralized programming strategy, which we believe enables us to keep our programming
costs per station significantly lower than those of comparable stations. We provide
programming for all of our stations and, except for local news and syndicated programming
provided by JSA partners, each station offers substantially the same programming schedule.
    Continue Airing Long Form Paid Programming. We air a substantial amount of long form
paid programming as we believe this provides us with a stable revenue base. In January
2003, we increased our inventory of air time available for long form paid programming by
approximately 42% by shifting 26.5 hours per week of non-prime time PAX TV network
entertainment programming to long form paid programming. The portion of our net revenues
which is derived from network advertising decreased to 20.7% for the year ended December
31, 2004 from 32.6% for the year ended December 31, 2002 and the portion of our net
revenues which is derived from network and station long form paid programming increased to
62.6% for the year ended December 31, 2004 from 46.4% for the year ended December 31,
2002.
    Maintain a Flexible Programming Strategy.An important element of our plan to improve
our business operations and cash flow is to maintain a flexible programming strategy that
allows us to take advantage of opportunities that may arise for us to improve our return
on our broadcast airtime while refraining from incurring substantial programming costs.
These opportunities may include selling blocks of time to third parties who would air
sports, entertainment or other programming. We are not currently investing substantial
additional amounts in the development of new original programming or the purchase of
rights to our syndicated programming, and intend to substantially reduce or eliminate our
sale of spot advertisements that are based on television audience ratings. The
termination of our JSAs and network affiliation agreements is a component of our
implementation of this programming strategy, as these agreements restrict our programming
flexibility by requiring us to continue airing a certain amount of network entertainment
programming and our ability to control our local advertising.
    Expand and Improve PAX TV Distribution. We intend to continue to expand our television
distribution system to reach as many U.S. television households as possible in a cost
efficient manner. We will seek to replace the distribution lost by the termination of our
network affiliation agreements through the negotiation of new, more flexible affiliation
agreements and carriage agreements with cable systems in the affected markets, as and if
such agreements can be concluded on cost efficient terms. We continue to improve the
channel positioning of our broadcast television stations on local cable systems across the
country, as we believe the ability to view our programming on one of the lower numbered
channel positions (generally below channel 21) on a cable system improves the likelihood
that viewers will watch our programming.
    Provide Quality Entertainment Programming. We believe there is significant demand,
including from adult demographic groups which are attractive to advertisers, for quality
entertainment programming which is free of excessive violence, explicit sexual themes and
foul language. We own or have the right to air a substantial amount of this type of
programming which we will continue to air to the extent we continue to carry entertainment
programming.
    Exploit Our Broadcast Station Groups Digital Television Platform. Our owned and
operated station group gives us a significant platform for digital broadcasting. We have
completed the construction of digital broadcast facilities for 49 of our 60 owned and
operated stations and intend to explore the most effective use of digital broadcast
technology for each of our stations. We believe that we are able to provide a significant
broadband platform on which to broadcast digital television, including multiple television
networks. While future applications of this technology and the time frame within which the
transition to digital broadcasting 5




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will be completed are uncertain, we believe that with our existing broadcast stations we are
well positioned to take advantage of future digital broadcasting opportunities. Joint Sales Agreements We have been managing the local operations of 45 of our stations through JSAs, including JSAs
between 41 of our stations and stations owned by NBC, or independently owned NBC affiliated
stations. Generally, JSAs are for ten-year terms. Substantially all JSA partners have the right
to terminate the JSA upon a sale by the JSA partner of its station that is the subject of the JSA.
Each JSA typically provides for the JSA partner to serve as our exclusive sales representative to
sell our station advertising, enabling our station to benefit from the strength of the JSA
partners sales organization and existing advertiser relationships. In about half of our JSA
arrangements, we have co-located many of our station operations, including our station master
control, with those of the JSA partner, seeking to reduce our costs through operating efficiencies
and economies of scale, including the elimination of redundant owned and leased facilities and
staffing. Our JSA partner may provide local news and syndicated programming, supplementing our
stations programming lineup. In March 2005, we notified all of our JSA partners other than NBC that we were exercising our
right to terminate the JSAs, effective June 30, 2005 and began discussions with NBC as to the
termination of each of the JSAs with NBC (covering 14 of our stations in 12 markets). We intend
that, by the beginning of July 2005, our local advertising sales efforts, including long form paid
programming and spot advertisements, will be handled directly by our own employees. In addition,
in connection with the termination of the JSAs, we will have to either relocate up to 22 of our
station master controls which are currently located in our JSA partners facility or lease space
from our JSA partner in order to keep our station master control located in our JSA partners
facility. Distribution We distribute PAX TV through a television distribution system comprised of our owned and
operated broadcast television stations, cable television systems in various markets not served by a
PAX TV station, satellite television providers and independently owned PAX TV affiliated broadcast
stations. According to Nielsen our programming currently reaches 87% of U.S. television households
(approximately 95 million homes). We seek to reach as many U.S. television households as possible in a cost efficient manner. In
evaluating opportunities to increase our television distribution, we consider factors such as the
attractiveness of specific geographic markets and their audience demographics to potential
television advertisers, the degree to which the increased distribution would improve our nationwide
audience reach or upgrade our distribution in a market in which we already operate, and the effect
of any changes in our distribution on our national ownership position under the Communications Act
of 1934, as amended, which we refer to as the Communications Act, and the rules and regulations of
the Federal Communications Commission, which we refer to as the FCC, restricting the ownership of
attributable interests in television stations. We have increased the number of U.S. television
households which can receive our programming by entering into agreements with cable system
operators and satellite television providers under which they carry our programming on a designated
channel of their cable system or satellite service. Our Owned and Operated Television Stations.We currently own and operate 60 broadcast
television stations (including three stations we operate under time brokerage agreements, or TBAs),
all of which carry PAX TV, including stations reaching all of the top 20 U.S. markets and 40 of the
top 50 U.S. markets. Our owned and operated station group reaches approximately 63% of U.S. prime
time television households, according to Nielsen. Our ownership of the stations providing most of
our television distribution enables us to receive advertising revenue from each stations entire
broadcast day and to achieve operating efficiencies typically not enjoyed by network affiliated
television stations. As nearly all of our owned and operated stations operate in the ultra high
frequency, or UHF, portion of the broadcast spectrum, only half of the number of television
households they reach are counted against the national ownership cap under the Communications Act.
By exercising our rights under the Communications Act to require cable television system operators
to carry the broadcast signals of our owned and operated stations, we reach many more television
households in each stations designated market area, or DMA, than we would if our stations were
limited to transmitting their broadcast signals over the airwaves. We operate three stations (WPXL, New Orleans; WPXX, Memphis; and WBNA, Louisville) pursuant to
time brokerage agreements, or TBAs, with the station owners. Under these agreements, we provide the
station with PAX TV programming and retain the advertising revenues from the sale of advertising
time during substantially all of our PAX TV programming hours, in the case of WPXL and WPXX, and
during half of our PAX TV programming hours, in the case of WBNA. We have options to acquire the
New Orleans and Memphis stations and a right of first refusal to acquire the Louisville station.
The owners of the two stations for which we have options have the right to require us to purchase
these stations at any time after January 1, 2007 through December 31, 2008. 6




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The table below provides information about our owned and operated stations (including stations
we operate pursuant to TBAs). Market
    
    
    Station Call
    
    Broadcast
    
    Total Market TVMarket Name
    
    Rank (1)
    
    
    Letters
    
    Channel
    
    Households (2)
    
    
    JSA Partner (3)New York
    
    
    1
    
    
    WPXN
    
    31
    
    
    7,355,710
    
    
    NBCLos Angeles
    
    
    2
    
    
    KPXN
    
    30
    
    
    5,431,140
    
    
    NBCChicago
    
    
    3
    
    
    WCPX
    
    38
    
    
    3,417,330
    
    
    NBCPhiladelphia
    
    
    4
    
    
    WPPX
    
    61
    
    
    2,919,410
    
    
    NBCBoston
    
    
    5
    
    
    WBPX
    
    68
    
    
    2,391,840
    
    
    Boston
    
    
    5
    
    
    WDPX
    
    58
    
    
    2,391,840
    
    
    Boston
    
    
    5
    
    
    WPXG
    
    21
    
    
    2,391,840
    
    
    San Francisco
    
    
    6
    
    
    KKPX
    
    65
    
    
    2,359,870
    
    
    NBCDallas
    
    
    7
    
    
    KPXD
    
    68
    
    
    2,292,760
    
    
    NBCWashington D.C.
    
    
    8
    
    
    WPXW
    
    66
    
    
    2,241,610
    
    
    NBCWashington D.C.
    
    
    8
    
    
    WWPX
    
    60
    
    
    2,241,610
    
    
    NBCAtlanta
    
    
    9
    
    
    WPXA
    
    14
    
    
    2,059,450
    
    
    Gannett Co., Inc.Detroit
    
    
    10
    
    
    WPXD
    
    31
    
    
    1,943,930
    
    
    Houston
    
    
    11
    
    
    KPXB
    
    49
    
    
    1,902,810
    
    
    Belo Corp.Seattle
    
    
    12
    
    
    KWPX
    
    33
    
    
    1,690,640
    
    
    Belo Corp.Tampa
    
    
    13
    
    
    WXPX
    
    66
    
    
    1,671,040
    
    
    Media General, Inc.Minneapolis
    
    
    14
    
    
    KPXM
    
    41
    
    
    1,665,540
    
    
    Gannett Co., Inc.Phoenix
    
    
    15
    
    
    KPPX
    
    51
    
    
    1,596,950
    
    
    Gannett Co., Inc.Cleveland
    
    
    16
    
    
    WVPX
    
    23
    
    
    1,556,670
    
    
    Gannett Co., Inc.Miami
    
    
    17
    
    
    WPXM
    
    35
    
    
    1,496,810
    
    
    NBCDenver
    
    
    18
    
    
    KPXC
    
    59
    
    
    1,401,760
    
    
    Gannett Co., Inc.Sacramento
    
    
    19
    
    
    KSPX
    
    29
    
    
    1,315,030
    
    
    Hearst-Argyle Television, Inc.Orlando
    
    
    20
    
    
    WOPX
    
    56
    
    
    1,303,150
    
    
    Hearst-Argyle Television, Inc.Portland, OR
    
    
    24
    
    
    KPXG
    
    22
    
    
    1,086,900
    
    
    Belo Corp.Indianapolis
    
    
    25
    
    
    WIPX
    
    63
    
    
    1,053,020
    
    
    Dispatch Broadcast GroupHartford
    
    
    27
    
    
    WHPX
    
    26
    
    
    1,017,530
    
    
    NBCRaleigh-Durham
    
    
    29
    
    
    WFPX
    
    62
    
    
    966,720
    
    
    NBCRaleigh-Durham
    
    
    29
    
    
    WRPX
    
    47
    
    
    966,720
    
    
    NBCNashville
    
    
    30
    
    
    WNPX
    
    28
    
    
    916,170
    
    
    Kansas City
    
    
    31
    

    
    KPXE
    
    50
    
    
    894,580
    
    
    Scripps Howard Broadcasting CompanyMilwaukee
    
    
    32
    
    
    WPXE
    
    55
    
    
    886,770
    
    
    Journal Broadcast Group, Inc.Salt Lake City
    
    
    36
    
    
    KUPX
    
    16
    
    
    800,000
    
    
    San Antonio
    
    
    37
    
    
    KPXL
    
    26
    
    
    748,950
    
    
    Clear Channel Broadcasting, Inc.Grand Rapids
    
    
    38
    
    
    WZPX
    
    43
    
    
    732,600
    
    
    LIN Television Corp.West Palm Beach
    
    
    39
    
    
    WPXP
    
    67
    
    
    729,010
    
    
    Scripps Howard Broadcasting CompanyBirmingham
    
    
    40
    
    
    WPXH
    
    44
    
    
    717,300
    
    
    NBCNorfolk
    
    
    41
    
    
    WPXV
    
    49
    
    
    707,750
    
    
    LIN Television Corp.New Orleans (4)(5)
    
    
    43
    
    
    WPXL
    
    49
    
    
    695,760
    
    
    Hearst-Argyle Television, Inc.Memphis (4)(5)
    
    
    44
    
    
    WPXX
    
    50
    
    
    658,250
    
    
    Raycom America, Inc.Oklahoma City
    
    
    45
    
    
    KOPX
    
    62
    
    
    655,250
    
    
    The New York Times CompanyBuffalo
    
    
    46
    
    
    WPXJ
    
    51
    
    
    651,970
    
    
    Gannett Co., Inc.Greensboro
    
    
    48
    
    
    WGPX
    
    16
    
    
    648,860
    
    
    Hearst-Argyle Television, Inc.Providence
    
    
    49
    
    
    WPXQ
    
    69
    
    
    644,980
    
    
    NBCLouisville (4)(6)
    
    
    50
    
    
    WBNA
    
    21
    
    
    637,680
    
    
    Jacksonville-Brunswick
    
    
    52
    
    
    WPXC
    
    21
    
    
    613,000
    
    
    Post-Newsweek Stations, Inc.Wilkes Barre
    
    
    53
    
    
    WQPX
    
    64
    
    
    592,560
    
    
    The New York Times CompanyAlbany
    
    
    55
    
    
    WYPX
    
    55
    
    
    555,640
    
    
    Knoxville
    
    
    59
    
    
    WPXK
    
    54
    
    
    513,630
    
    
    Raycom America, Inc.Tulsa
    
    
    60
    
    
    KTPX
    
    44
    
    
    510,960
    
    
    Scripps Howard Broadcasting CompanyCharleston, WV
    
    
    62
    
    
    WLPX
    
    29
    
    
    508,750
    
    
    Lexington
    
    
    64
    
    
    WUPX
    
    67
    
    
    481,120
    
    
    Roanoke
    
    
    67
    
    
    WPXR
    
    38
    
    
    445,670
    
    
    Media General, Inc.Honolulu
    
    
    71
    
    
    KPXO
    
    66
    
    
    417,120
    
    
    Des Moines
    
    
    73
    
    
    KFPX
    
    39
    
    
    412,230
    
    
    The New York Times CompanySyracuse
    
    
    77
    
    
    WSPX
    
    56
    
    
    395,400
    
    
    Raycom America, Inc.
 7




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Market
    
    
    Station Call
    
    Broadcast
    
    
    Total Market TVMarket Name
    
    Rank (1)
    
    
    Letters
    
    Channel
    
    Households (2)
    
    
    JSA Partner (3)Spokane
    
    
    80
    
    
    KGPX
    
    34
    
    
    384,060
    
    
    KHQ, IncorporatedCedar Rapids
    
    
    88
    
    
    KPXR
    
    48
    
    
    331,610
    
    
    Greenville-N. Bern
    
    
    105
    
    
    WEPX
    
    38
    
    
    270,200
    
    
    Greenville-N. Bern
    
    
    105
    
    
    WPXU
    
    35
    
    
    270,200
    
    
    Wausau
    
    
    133
    
    
    WTPX
    
    46
    
    
    181,780
    
    
    
   (1)
    
    Market rank is based on the number of television households in the television market or
Designated Market Area, or DMA, as used by Nielsen, effective as of September 2004.(2)
    
    Refers to the number of television households in the DMA as estimated by Nielsen, effective
as of September 2004.(3)
    
    Indicates the company with which we have entered into a JSA for the station. In March 2005,
we notified all of our JSA partners other than NBC that we were exercising our right to
terminate the JSAs, effective June 30, 2005, and we began discussions with NBC as to the
termination of each of the JSAs with NBC (covering 14 of our stations in 12 markets).(4)
    
    Station is independently owned and is operated by us under a time brokerage agreement.(5)
    
    We have the option to acquire the station and the current owner has the right to require us
to purchase the station at anytime after January 1, 2007 through December 31, 2008.(6)
    
    We have a right of first refusal to acquire the station. Cable and Satellite Distribution. In order to increase the distribution of our
programming, we have entered into carriage agreements with the nations largest cable multiple
system operators, as well as with other cable system operators and satellite television providers.
These cable and satellite system operators carry our programming on a designated channel of their
service. These carriage agreements enable us to reach television households in markets not served
by our owned or affiliated stations. Our carriage agreements with cable system operators generally
require us to pay an amount based upon television households reached. Our carriage agreements with
satellite television providers allow the satellite provider to sell and retain the advertising
revenue from a portion of the non-network advertising time during PAX TV programming hours. Some of
our carriage agreements with cable operators also provide this form of compensation to the cable
operator. We do not pay compensation for reaching households in DMAs already served by our
broadcast stations, even though the cable operator may provide our programming to these households,
because we have exercised our must carry rights under the Communications Act. We believe that the
ability to view our programming on one of the lower numbered channel positions (generally below
channel 21) on a cable system improves the likelihood that viewers will watch our programming, and
we have negotiated favorable channel positions with most of the cable system operators and
satellite television providers with whom we have carriage agreements. Through cable and satellite
distribution, we reach approximately 18% of U.S. prime time television households in DMAs not
already served by a PAX TV station. Our PAX TV Affiliated Stations. To increase the distribution of PAX TV, we have entered into
affiliation agreements with stations in markets where we do not otherwise own or operate a
broadcast station. These stations include full power and low power television stations. Each
affiliation agreement gives the particular station the right to broadcast PAX TV programming, or
portions of it, in the stations market. Our affiliation agreements provide us with additional
distribution of our PAX TV programming without the expense of acquiring a station or paying
compensation to cable system operators in the markets reached. Under our affiliation agreements, we
are not required to pay cash compensation to the affiliate, and the affiliate is entitled to sell
and retain the revenue from all or a portion of the non-network advertising time during the PAX TV
programming hours. We have affiliation agreements with respect to 47 television stations which
reach approximately 6% of U.S. prime time television households. In March 2005, we notified all of our affiliates that we were exercising our right to
terminate the affiliation agreements, effective June 30, 2005. We will seek to replace the
distribution lost by the termination of our network affiliation agreements through the negotiation
of new, more flexible affiliation agreements and carriage agreements with cable systems in the
affected markets, as and if such agreements can be concluded on cost efficient terms. Programming We operate PAX TV, a network that provides programming seven days per week, 24 hours per day.
During our PAX TV entertainment programming hours, which are between 5:00 p.m. and 11:30 p.m.,
local time, Monday through Friday, and 6:00 p.m. and 11:00 p.m., Saturday and Sunday, we offer
entertainment programs that are free of excessive violence, explicit sexual themes and foul
language. Our PAX TV entertainment lineup consists of original 8




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shows, syndicated programs and a limited amount of entertainment and sports programming on a
market-by-market basis. During each programming season since our launch, we have developed original PAX TV
entertainment programming, as our operating experience with PAX TV has shown that quality original
programs can generate higher ratings and deliver a greater return to us, in terms of advertising
revenues, than syndicated programs of comparable cost. By employing cost efficient development
and production techniques, such as the development of program concepts without the use of pilots,
and by entering into production arrangements with foreign production companies through which we
are able to share production costs, gain access to lower cost production labor and participate in
tax incentives, we have developed original entertainment programming for PAX TV at costs which we
believe to be lower than those typically incurred by other broadcast networks for original
entertainment programming. In addition, we attempt to pre-sell the foreign and other distribution
rights to our original PAX TV programming and thereby recover a significant portion of the
programs production costs, while retaining all of the domestic rights. Our agreements for
syndicated programming generally entitle us to exclusive nationwide distribution rights over our
entire television distribution system for a fixed cost, without regard to the number of households
that receive our programming. In March 2004 we entered into an agreement with NBC under which NBC consulted with us on the
development, production and programming of scripted and unscripted television series, games shows
and specials for the 2004-2005 broadcast season. We committed significant resources to this
programming initiative, and the shows we developed were targeted largely to a younger audience
demographic that is more attractive to advertisers than the audience demographic that has
typically viewed our programming. We launched these shows on PAX TV at various times during the
second half of 2004. To date, this programming initiative has not served to materially improve our
audience ratings or advertising revenues. Our consulting agreement with NBC has expired and,
although we continue to fund our remaining commitments to this programming initiative, we are not
currently planning to invest significant additional resources in the development of new original
programming. We plan to maintain a flexible programming strategy and to evaluate other
programming opportunities that might be available to us which would improve our cash flow. During hours when we are not broadcasting entertainment programming, our stations broadcast
long form paid programming, consisting primarily of infomercials, which are shows produced at no
cost to us to market and sell products and services through viewer direct response, and paid
religious programming. Pursuant to an agreement with The Christian Network, Inc., or CNI, our
broadcast stations carry CNIs programming between the hours of 1:00 a.m. and 6:00 a.m., seven days
per week. Under many of our JSAs, the JSA partner provides our station with local evening news
broadcasts, which may be a rebroadcast of the JSA partners news in a different time slot or a news
broadcast produced for PAX TV. We do not expect these arrangements to continue after termination
of our JSAs, as discussed above. Ratings The advertising revenues from our PAX TV entertainment programming are largely dependent upon
the popularity of our programming, in terms of audience ratings, and the attractiveness of our PAX
TV viewing audience to advertisers. Nielsen, one of the leading providers of national audience
measuring services, has grouped all television stations in the country into approximately 210 DMAs
that are ranked in size according to the number of television households, and periodically
publishes data on estimated audiences for the television stations in the various DMAs. The
estimates are expressed in terms of the percentage of the total potential audience in the market
viewing a station (the stations Rating) and of the percentage of the audience actually watching
television (the stations Share). Nielsen provides this data on the basis of total television
households and selected demographic groupings in the DMA. Some viewer demographic groups are more attractive to advertisers than others, such as adults
of working age who typically have greater purchasing power than other viewer demographic groups.
Many products and services are targeted to consumers with specific demographic characteristics, and
a viewer demographic group containing a concentration of these types of consumers generally will be
more attractive to advertisers. Based on our experiences with PAX TV, advertisers often will pay
higher rates to advertise during programming that reaches demographic groups that are targeted by
that advertiser. A component of our entertainment programming strategy is to air programming that
will increase PAX TVs ratings among certain demographic groups that are most attractive to
advertisers. 9




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Advertising We offer advertisers the opportunity to reach PAX TVs nationwide viewing audience with a
single infomercial or commercial, and to target specific geographic markets in which our
programming is aired. We sell airtime to advertisers for long form paid programming, consisting primarily of
infomercials. This programming may appear on our nationwide PAX TV network or it may be aired only
in specific geographic markets. Our national long form sales team sells network and regional paid
programming time. Local paid programming may be sold by our national sales team or by the local
sales team at each station. We also sell commercial air time to advertisers who want to reach the entire nationwide PAX TV
viewing audience with a single advertisement, which we refer to as network advertising. NBC serves
as our exclusive sales representative to sell most of our network spot advertising. Network spot
advertising represented approximately 21.0% of our net revenue during the year ended December 31,
2003 and 20.7% of our net revenue during the year ended December 31, 2004. The central programming
signal through which we supply our programming to our stations and to cable and satellite viewers
includes advertising, generally of a direct response nature, which reaches our cable and satellite
viewers (during both PAX TV entertainment programming and other viewing hours) in markets not
served by our stations during time that is otherwise allocated to station spot advertising, and
which reaches viewers in local markets during unsold station spot advertising time. We include the
revenue from this advertising in our network advertising revenues. We also sell commercial air time to local and national advertisers who want to reach our
viewing audience in specific geographic markets in which we operate, which we refer to as station
advertising. These advertisers may be local businesses or regional or national advertisers who want
to target their advertising in these markets. NBC provides national advertising sales services for
a majority of our stations. In markets in which our stations are operating under JSAs, our JSA
partner serves as our exclusive sales representative to sell our local station advertising. For
stations for which NBC does not provide national account representation, our JSA partner performs
this function. Our local sales force sells this advertising in markets without JSAs. Our station
advertising represented approximately 38.3% of our net revenue during the year ended December 31,
2003 and 39.5% of our net revenue during the year ended December 31, 2004 (including 21.4% and
22.8%, respectively, of our net revenue during each such year which was derived from local and
national long form paid programming). In March 2005, we notified our JSA partners other than NBC that we were exercising our right
to terminate the JSAs, effective June 30, 2005. We also notified NBC that we were exercising our
right to remove, effective June 30, 2005, all of our stations from our national sales agency
agreement, pursuant to which NBC sells national spot advertisements for 49 of our 60 stations. We
also began discussions with NBC as to the termination of our network sales agency agreement with
NBC and each of our JSAs with NBC (covering 14 of our stations in 12 markets). We plan to
substantially reduce or eliminate our sales of spot advertisements that are based on audience
ratings, and to focus our sales efforts on long form paid programming and non-rated spot
advertisements. We intend to transfer our local advertising sales efforts to our own employees by
the beginning of July 2005 and to transfer our network advertising sales efforts to our own
employees following resolution of our discussions with NBC. Our advertising rates are typically negotiated and based upon:  
    economic and market conditions;
    the size of the market in which a station operates;
    a programs popularity among the viewers that an advertiser wishes to attract;
    the number of advertisers competing for a time slot;
    the availability of alternative advertising media in the market area;
    the demographic composition of the market served by the station;
    development of projects, features and programs that tie advertiser messages to programming; and
    quarterly sweeps performance ratings which measure household tuning and demographic audience
estimates in all 210 Nielsen TV markets. 10




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##### Table of Contents



NBC Relationship On September 15, 1999, we entered into an investment agreement with NBC under which
wholly-owned subsidiaries of NBC purchased shares of our Series B preferred stock and warrants to
purchase shares of our common stock for an aggregate purchase price of $415 million. At the same
time, a wholly-owned subsidiary of NBC entered into an agreement with Mr. Paxson and entities
controlled by Mr. Paxson, under which the NBC subsidiary was granted the right to purchase all, but
not less than all, of the 8,311,639 shares of our Class B common stock beneficially owned by Mr.
Paxson. Series B Preferred Stock. Under the investment agreement, a wholly-owned subsidiary of NBC
acquired $415 million aggregate liquidation preference of our Series B preferred stock. This
security accrues cumulative dividends and is convertible, subject to adjustment under the terms of
the Series B preferred stock, into 31,896,032 shares of our Class A common stock at an initial
conversion price of $13.01 per share ($18.83 per share as of December 31, 2004). On September 15,
2004, the rate at which dividends accrue on the Series B preferred stock was adjusted from the
initial annual rate of 8% to an annual rate of 16.2% as required by the terms of the Series B
preferred stock. The shares of Series B preferred stock are exchangeable, in whole or in part, at
the option of the holders, into convertible debentures ranking on a parity with our other
subordinated indebtedness subject, with respect to any exchange before January 1, 2007, to the
exchange being permitted under the terms of our debt and preferred stock instruments. The maturity
date of the convertible debentures into which the shares of Series B preferred stock are
exchangeable is December 31, 2009. We are involved in litigation with NBC in the Delaware Court of Chancery regarding the
adjustment of the rate at which dividends accrue on our Series B preferred stock, as described
below under Forward Looking Statements and Associated Risks and Uncertainties  The adjustment to
the dividend rate on our Series B preferred stock could have adverse consequences for our
business. Warrant A and Warrant B. A wholly-owned subsidiary of NBC also acquired a warrant (Warrant
A) to purchase up to 13,065,507 shares of Class A common stock at an exercise price of $12.60 per
share, and a warrant (Warrant B) to purchase from us up to 18,966,620 shares of Class A common
stock at an exercise price equal to the average of the closing sale prices of the Class A common
stock for the 45 consecutive trading days ending on the trading day immediately preceding the
warrant exercise date, provided that the average price shall not be more than 17.5% higher or 17.5%
lower than the six month trailing average closing sale price. The warrants are exercisable until
September 2009, subject to various conditions and limitations. In addition:  
    Warrant B may not be exercised before the exercise in full of Warrant A; and
    Warrant B may not be exercised to the extent that, after giving effect to the
exercise, Mr. Paxson would no longer constitute our single majority stockholder unless
Warrant B is exercised in full and at the same time NBC exercises its right to purchase
all the shares of our Class B common stock held by Mr. Paxson. Right to Purchase Class B Common Stock.Concurrently with entering into the Investment
Agreement and issuing the Series B preferred stock and Warrants A and B to subsidiaries of NBC, a
wholly-owned subsidiary of NBC entered into an agreement with Mr. Paxson and entities controlled by
Mr. Paxson, under which the NBC subsidiary was granted the right to purchase all, but not less than
all, of the 8,311,639 shares of our Class B common stock beneficially owned by Mr. Paxson. This
right is exercisable through September 15, 2009, and may not be exercised before the exercise in
full of Warrant A and Warrant B. These shares of Class B common stock are entitled to ten votes per share on all matters
submitted to a vote of our stockholders and are convertible into an equal number of shares of Class
A common stock. The purchase price per share of Class B common stock is equal to the higher of:  
    the average of the closing sale prices of the Class A common stock for the 45
consecutive trading days ending on the trading day immediately preceding the exercise of
NBCs call right, provided that the average price shall not be more than 17.5% higher or
17.5% lower than the six month trailing average closing sale prices; and
    $20.00 per share. The owners of the shares that are subject to the call right have agreed not to transfer those
shares before September 15, 2005, and not to convert those shares into any of our other securities,
including shares of Class A common stock. NBCs exercise of the call right is subject to compliance
with applicable provisions of the Communications Act and the rules and regulations of the FCC. Optional Redemption by NBC. On November 13, 2003, NBC notified us that it was exercising its
right under its investment agreement with us to demand that we redeem or arrange for a third party
to acquire (the Redemption), 11




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by payment in cash, all 41,500 outstanding shares of our Series B Convertible Exchangeable
Preferred Stock held by NBC. The aggregate redemption price payable in respect of the 41,500
preferred shares, including accrued dividends thereon, was approximately $600.7 million as of
December 31, 2004. Between November 13, 2003 and November 13, 2004 we were unable to consummate the Redemption as
the terms of our outstanding debt and preferred stock prohibited the Redemption and we did not have
sufficient funds on hand to consummate the Redemption. We are involved in litigation with NBC in
the Delaware Court of Chancery in which we are seeking a declaratory ruling that we are not
obligated to consummate the Redemption and are not in default under our agreement with NBC by
virtue of not having done so. As we did not effect the Redemption by November 13, 2004, NBC generally is permitted to
transfer, without restriction, any of our securities acquired by it, its right to acquire Mr.
Paxsons Class B common stock, the contractual rights with respect to the NBC investment agreement
and its other rights under the related transaction agreements, provided that Warrant A, Warrant B
and the right to acquire Mr. Paxsons Class B common stock will expire, to the extent unexercised,
30 days after any such transfer. If NBC transfers any of our securities or its right to acquire Mr.
Paxsons Class B common stock, the transferee will remain subject to the terms and conditions of
such securities, including those limitations on exercise described above. Default Redemption by NBC. NBC also has the right to require that we redeem any Series B
preferred stock and Class A common stock issued upon conversion of the Series B preferred stock
then held by NBC upon the occurrence of various events of default (a Default Redemption). If NBC
exercises this right, we will have up to 180 days to consummate the redemption. If at any time
during the 180 day redemption period, the terms of our outstanding debt and preferred stock do not
prohibit the redemption and we have sufficient funds on hand to consummate the redemption, we must
consummate the redemption at that time. NBC may not exercise Warrant A, Warrant B or its right to
purchase shares of Class B common stock beneficially owned by Mr. Paxson during the 180 day
redemption period. Should we fail to effect a Default Redemption within 180 days after NBC has exercised its
right to require us to redeem its securities, NBC will have 180 days within which to exercise
Warrant A and Warrant B and its right to acquire Mr. Paxsons Class B common stock, and generally
will be permitted to transfer, without restriction, any of our securities acquired by it, its right
to acquire Mr. Paxsons Class B common stock, the contractual rights described below, and its other
rights under the related transaction agreements, provided that Warrant A, Warrant B and the right
to acquire Mr. Paxsons Class B common stock shall expire, to the extent unexercised, 30 days after
any such transfer. If NBC does not effect any of these transactions within the 180 day period, we
will have the right, for 30 days, to redeem NBCs securities. If we do not effect a redemption
during this period, NBC will have the right to require us to effect, at our option, either a public
sale or a liquidation of our company and may participate as a bidder in any such transaction. If
the highest bid in any public sale of our company would be insufficient to pay NBC the redemption
price of its securities, NBC will have a right of first refusal to purchase our company for the
highest bid amount. If the highest bid in any public sale would be sufficient to pay NBC the
redemption price of its securities, the investment agreement requires us to accept the bid. NBC
will not be permitted to exercise Warrant A, Warrant B or its right to acquire Mr. Paxsons Class B
common stock during the public sale or liquidation process. Inability to Effect a Redemption. Our ability to effect any redemption is restricted by the
terms of our outstanding debt and preferred stock. In order to be able to effect a redemption
demanded by NBC, we would need not only to raise sufficient cash to fund payment of the redemption
price, but also to obtain the consents of the holders of our outstanding debt and preferred stock
or repay, redeem or refinance these securities in a manner that obviated the need to obtain the
consents of the holders. Alternatively, we would need to identify a third party willing to purchase
NBCs Series B preferred stock directly from NBC or to enter into a merger, acquisition or other
transaction with us as a result of which NBCs Series B preferred stock would be redeemed or
acquired. Optional Redemption by the Company.We have the right, at any time, to redeem any or all of
our outstanding Series B preferred stock at a redemption price per share equal to the higher of (i)
the liquidation preference of $10,000 per share plus accrued and unpaid dividends, and (ii) the
product of 80% of the average of the closing sale prices of the Class A common stock for the ten
consecutive trading days ending on the trading day immediately preceding our notice to NBC
exercising the optional redemption, and the number of shares of Class A common stock into which a
share of Series B preferred stock is convertible (approximately 768.58 shares of Class A common
stock as of December 31, 2004). If we elect to redeem a portion of our outstanding Series B preferred stock, we are required
to declare and pay, in full, all of the accumulated and unpaid dividends on the Series B preferred
stock. As of December 31, 2004, accumulated and unpaid dividends on the Series B preferred stock
aggregated approximately $185.7 million. 12




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Consent Rights. The investment agreement also provides that we must obtain the consent of NBC
for various actions, including:  
    approval of annual budgets;
    expenditures materially in excess of budgeted amounts;
    material acquisitions of programming;
    material amendments to our certificate of incorporation or bylaws;
    material asset sales or purchases, including, in some cases, sales of our television stations;
    business combinations where we would not be the surviving corporation or as a result
of which we would experience a change of control;
    issuances or sales of any capital stock, with some exceptions;
    certain affiliate transactions;
    stock splits or recombinations;
    any increase in the size of our board of directors other than any increase resulting
from provisions of our outstanding preferred stock of up to two additional directors; and
    joint sales, joint services, time brokerage, local marketing or similar agreements as
a result of which our stations with national household coverage of 20% or more would be
subject to those agreements. Miscellaneous Rights. In connection with its investment in us, we also granted NBC various
rights with respect to our broadcast television operations, including:  
    the right to require the conversion of our television stations to NBC network
affiliates, subject to various conditions;
    a right of first refusal on proposed sales of television stations; and
    the right to require our television stations to carry NBC network programming that is
preempted by NBC network affiliates. Stockholders Agreement. We also entered into a stockholders agreement with NBC, Mr. Paxson and
entities controlled by Mr. Paxson under which we are permitted (but not required) to nominate
persons named by NBC for election to our board of directors upon request by NBC if NBC determines
that its nominees are permitted under the Communications Act and FCC rules to serve on our board.
Mr. Paxson and his affiliates agreed to vote their shares of common stock in favor of the election
of those persons as our directors. As part of the outcome of the proceedings that we initiated in
2001, which are described below, the FCC determined in 2002 that any NBC nominated director must
not be an NBC employee and must be a person who would reasonably be expected to act independently
on all matters. The stockholders agreement further provides that we will not, without the prior
written consent of NBC, enter into certain agreements or adopt certain plans which would be
breached or violated upon the acquisition of our securities by NBC or its affiliates or would
otherwise restrict or impede the ability of NBC or its affiliates to acquire additional shares of
our capital stock. Registration Rights. We also granted NBC demand and piggyback registration rights with respect
to the shares of Class A common stock issuable upon:  
    conversion of the Series B preferred stock;
    conversion of the debentures for which the Series B preferred stock is exchangeable;
    exercise of the warrants; or
    conversion of the Class B common stock. Operational Arrangements. In connection with these transactions, we entered into a number of
business arrangements with NBC. As part of these arrangements and our relationship with NBC:  
    NBC provides network advertising sales, marketing and network research services for PAX TV;
    NBC provides national advertising sales services for a majority of our stations; and 13




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
    NBC has provided some of its programming, including movies and sporting events, for broadcast on PAX TV. We have entered into JSAs with NBC with respect to 14 of our stations serving 12 markets also
served by an NBC owned and operated station, and with 27 independently owned NBC affiliated
stations serving our markets. Under the JSAs, the NBC stations sell all non-network advertising of
our stations and receive commission compensation for those sales, and each of our stations may
carry one hour per day of NBC syndicated programming, subject to compliance with our entertainment
programming content standards. In March 2005, we notified NBC that we were removing, effective June 30, 2005, all of our
stations from the national sales agency agreement pursuant to which NBC sells national spot
advertisements for 49 of our 60 stations. In addition, we began discussions with NBC as to the

termination of our network sales agency agreement with NBC and each of the JSAs with NBC. Delaware Court of Chancery Proceedings. On August 19, 2004, NBC filed a complaint against us
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 (the Certificate of Designation) of our 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. We engaged CIBC World Markets Corp., 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, we filed our answer and a counterclaim to NBCs complaint. Our answer
largely denies the allegations of the NBC complaint and our counterclaim seeks a declaratory ruling
that we are not obligated to redeem, and will not be in default under the terms of the agreement
under which NBC made its initial $415 million investment in us if we do not redeem, the Series B
preferred stock on or before November 13, 2004. NBC delivered a notice of demand for redemption on
November 13, 2003, and has since alleged, both through statements to the press and in its complaint
filed in Delaware, that we are obligated to redeem, and will be in default if we do not redeem,
NBCs investment on or before November 13, 2004. We and NBC have filed briefs in the litigation and have each moved for judgment on the
pleadings. The court heard oral argument on the respective motions on February 14, 2005 and has not
yet issued its ruling. Arbitration and FCC Proceedings. In December 2001, we commenced a binding arbitration
proceeding against NBC in which we asserted that NBC breached its agreements with us and breached
its fiduciary duty to us and to our shareholders. We asserted that NBCs proposed acquisition of
Telemundo Communications Group, Inc. (Telemundo Group) (which was completed in April 2002)
violates the terms of the agreements governing the investment and partnership between us and NBC.
In September 2002, the arbitrator ruled against us on all of our claims, denying us any of the
relief we had sought with respect to what we believed to be NBCs wrongful actions. Accordingly,
the provisions of our agreements with NBC remain in effect without change. We also made two filings with the FCC, one of which requested a declaratory ruling as to
whether conduct by NBC, including NBCs influence and apparent control over certain members of our
board of directors selected by NBC (all of whom have since resigned from our board), caused NBC to
have an attributable interest in us in violation of FCC rules or infringed upon our rights as an
FCC license holder. The second FCC filing sought to deny FCC approval of NBCs acquisition of the
Telemundo Groups television stations. In an opinion and order adopted April 9, 2002, the FCC
granted approval of NBCs applications for consent to the transfer to NBC of control of the
Telemundo Group television stations, denied our petition to deny these applications, and granted in
part and denied in part our request for a declaratory ruling. The FCC found that the placement of
NBC employees on our board and the subsequent actions of these persons in their capacity as our
directors, including a finding that one such director was protecting NBCs interests and not acting
as an independent member of our board, resulted in NBC having an attributable interest in us in
violation of the FCCs multiple ownership rules. The FCC determined that admonishment was the
appropriate remedy and further inquiry was not necessary. The FCC further indicated that should NBC
choose to exercise its rights to nominate new members of our board of directors, the FCC would
require that such persons not be NBC employees or agents but persons who would reasonably be
expected to act independently in all future matters concerning our company. 14




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Competition We compete for audience and advertisers and our television stations are located in highly
competitive markets and face strong competition on all levels. Audience. Television stations compete for audience share principally on the basis of program
popularity, as measured and reported by Nielsen Media Research, the primary audience measurement
service used for buying and selling advertising time. Audience size, as reflected by Nielsen
ratings, has a direct effect on advertising rates. Our PAX TV programming competes for audience
share in all of our markets with the programming offered by other broadcast networks, local and
national cable networks and non-network affiliated television stations. We believe our stations
also compete for audience share in their respective markets on the basis of their channel positions
on the cable systems which carry our programming, and that the ability to view our programming on
the lower numbered channel positions (generally below channel 21) generally improves the likelihood
that viewers will watch our programming. Our stations also compete for audience share with other forms of entertainment programming,
including home entertainment systems and direct broadcasting satellite video distribution services
which transmit programming directly to homes equipped with special receiving antennas and tuners.
Further advances in technology may increase competition for household audiences. Advertising. PAX TV competes for advertising revenues principally with other broadcast and
cable television networks and to some degree with other nationally distributed advertising media,
such as print publications. Our television stations also compete for advertising revenues with
other television stations in their respective markets, as well as with other advertising media,
such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. Competition for advertising dollars at the
television station level occurs primarily within individual markets. Some national advertisers may
be more interested in buying groups or markets, either on a regional basis that align to products
distribution patterns, or among larger markets, such as the top 50, as those markets represent
approximately two-thirds of the nations television households. We believe owning and operating
stations located primarily in the top 50 markets is more attractive to national advertisers with
broad-based distribution of products and services. Generally, a television station in one market
does not compete with stations in other market areas. Federal Regulation of Broadcasting The FCC regulates television broadcast stations under the Communications Act. The following is
a brief summary of certain provisions of the Communications Act and the rules of the FCC. License Issuance and Renewal. The Communications Act provides that a broadcast station license
may be granted to an applicant if the public interest, convenience and necessity will be served
thereby, subject to certain limitations. Television broadcast licenses generally are granted and
renewed for a period of eight years. Interested parties including members of the public may file
petitions to deny a license renewal application but competing applications for the license will not
be accepted unless the current licensees renewal application is denied. The FCC is required to
grant a license renewal application if it finds that the licensee (1) has served the public
interest, convenience and necessity; (2) has committed no serious violations of the Communications
Act or the FCCs rules; and (3) has committed no other violations of the Communications Act or the
FCCs rules which would constitute a pattern of abuse. Our licenses are subject to renewal at
various times between 2004 and 2007. General Ownership Matters. The Communications Act requires the prior approval of the FCC for
the assignment of a broadcast license or the transfer of control of a corporation or other entity
holding a license. In determining whether to approve such an assignment or transfer of control, the
FCC considers, among other things, the financial and legal qualifications of the prospective
assignee or transferee, including compliance with rules limiting the common ownership of certain
attributable interests in broadcast, cable and newspaper properties. The FCCs multiple ownership rules may limit the acquisitions and investments that we may make
or the investments that others may make in us. The FCC generally applies its ownership limits to
attributable interests held by an individual, corporation, partnership or other association or
entity. In the case of corporations holding or controlling broadcast licenses, the interests of
officers, directors and those who, directly or indirectly, have the right to vote five percent or
more of the corporations stock are generally attributable. The FCC treats all partnership and
limited liability company interests as attributable, except for those interests that are insulated
under FCC rules and policies. For insurance companies, certain regulated investment companies and
bank trust departments that hold stock for investment purposes only, stock interests become
attributable with the ownership of 20% or more of the voting stock of the corporation holding or
controlling broadcast licenses. 15




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The FCC treats as attributable debt and equity interests that, when combined, exceed 33% of a
station licensees total assets, which is defined as the total amount of debt and equity capital,
if the party holding the equity and debt interests (1) supplies more than 15% of the stations
total weekly programming or (2) has an attributable interest in another media entity, whether
television, radio or newspaper, in the same market. Non-voting equity, loans, and insulated
interests count toward the 33% equity/debt threshold. Non-conforming interests acquired before
November 7, 1996, are permanently grandfathered for purposes of the equity/debt rules and thus do
not constitute attributable ownership interests. Television National Ownership Rule. On June 2, 2003, the FCC adopted new rules governing,
among other things, national and local ownership of television broadcast stations and
cross-ownership of television broadcast stations with radio broadcast stations and newspapers
serving the same market. The new rules would change the regulatory framework within which
television broadcasters hold, acquire and transfer broadcast stations. Numerous parties asked the
FCC to reconsider portions of its decision and other parties sought judicial review. In September
2003, the U. S. Court of Appeals for the Third Circuit issued an order staying the effectiveness of
the new media ownership rules, and in June 2004 the Third Circuit remanded the proceeding to the
FCC with instructions to the FCC to better justify or modify its approach to setting the numerical
limits. The stay remains in effect pending further review by the Third Circuit of the FCCs further
action. Several parties have filed petitions for review by the Supreme Court which are currently
pending. Among other things, the FCCs new ownership rules would have increased the percentage of the
nations television households that may be served by television broadcast stations in which the
same person or entity has an attributable interest from 35% to 45% of national television
households. The Consolidated Appropriations Act of 2004 directed the FCC to increase this
percentage to 39% of national television households and allows an entity that acquires licensees in
excess of 39% two years to come into compliance with the new cap. The enactment of the 39% cap
mooted the FCCs proposed 45% cap. This act also provides that the FCC shall conduct a quadrennial,
rather than biennial, review of its ownership rules. The new rules also relax FCC restrictions on
local television ownership and on cross-ownership of television stations with radio stations or
newspapers in the same market. In general, these new rules would reduce the regulatory barriers to
the acquisition of an interest in our television stations by various industry participants who
already own television stations, radio stations, or newspapers. In assessing compliance with the national ownership caps, the FCC counts each UHF station as
serving only half of the television households in its market. This UHF Discount is intended to
take into account that UHF stations historically have provided less effective coverage of their
markets than VHF stations. All of our television stations are UHF stations and, without the UHF
Discount, we would not meet the recently-enacted 39% ownership cap. In its June 2, 2003 decision,
the FCC concluded that the future transition to digital television may eliminate the need for a UHF
Discount. For that reason, the FCC provided that the UHF Discount will sunseti.e., expirefor
the top four broadcast networks (ABC, NBC, CBS, and Fox) on a market-by-market basis as the digital
transition is completed, unless otherwise extended by the FCC. The FCC also announced, however,
that it will examine in a future review whether to include in this sunset provision the UHF
television stations owned by other networks and group owners, which would include our television
stations. The Third Circuit opinion referred to above also held that the Consolidated
Appropriations Act of 2004 mooted any argument on whether the FCC could maintain the UHF
Discount. In the last Congress, in addition to enacting the 39% cap, separate legislation was introduced
to prohibit the application of the UHF Discount to UHF stations sold after June 2, 2003, to sunset
the UHF Discount in 2008 for all UHF stations, to prohibit the cross ownership of newspapers and
television stations in the same market and to nullify in their entirety the rule changes adopted by
the FCC. Television Duopoly Rule. The FCCs television duopoly rule permits a party to own two
television stations without regard to signal contour overlap if each station is located in a
separate designated market area, or DMA. A party may own two television stations in the same DMA so
long as (1) at least eight independently owned and operating full-power commercial and
non-commercial television stations remain in the market at the time of acquisition and (2) at least
one of the two stations is not among the four top-ranked stations in the market based on audience
share. Without regard to the number of independently owned television stations or media voices,
the FCC permits television duopolies within the same DMA so long as the stations Grade B service
contours do not overlap. Satellite stations that are authorized to rebroadcast the programming of a
parent station located in the same DMA are also exempt from the duopoly rule. In April 2002,
the U.S. Court of Appeals for the District of Columbia Circuit reversed the FCCs decision
establishing an eight media voice standard for same-market television duopolies. The court
remanded the proceeding to the FCC to consider whether it should include in its definition of
media voices other media (i.e., newspapers, radio, and cable). The court also suggested that,
on remand, the FCC may decide to adjust the numerical limit of eight. 16




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On June 2, 2003 the FCC adopted new rules governing, among other things, the number of
television stations a party may own in the same DMA. Under the new rules, a party would be
permitted to have an attributable interest in up to two television stations in the same DMA,
provided there were between five and 17 television stations in the DMA and provided that only one
of the duopoly stations was among the top four television stations in the market in terms of
audience share. Duopolies would not be permitted in markets with fewer than five television
stations. In markets with 18 or more television stations, a party would be permitted to own up to
three television stations in a DMA, only one of which may be among the top four in terms of
audience share. The new rules would also eliminate the contour overlap rule for television. The
media voice test would be eliminated and the number of television stations in a market would be
calculated by counting all full-power commercial and noncommercial television stations located
within a given DMA. Neither cable channels, Class A television stations, low power television
stations, television translator stations nor dark or non-operational stations would be included in
the count. Satellite television stations would also be excluded from the count, if the parent and
satellite station were located within the same DMA. The effectiveness of these new rules has been stayed by the order of the U.S. Court of Appeals
for the Third Circuit described above. Television/Newspaper Radio/Television Cross Ownership. On June 2, 2003, the FCC removed the
newspaper-broadcast and radio-television cross-ownership prohibitions and replaced them with a new
set of cross-media limits. The FCC continued, however, to prohibit common ownership of daily
newspapers and broadcast stations, and television/radio combinations in markets with three or fewer
television stations. In markets having between four and eight television stations, the new rules
would limit ownership to one of the following combinations: (1) a daily newspaper, one television
station and up to half of the radio station limit for the market; (2) a daily newspaper, no
television station and up to the radio station limit for the market; or (3) two television stations
(if allowable under the new rules), no daily newspaper, and up to the radio station limit for the
market. In markets having nine or more television stations the cross-media limits would be
eliminated completely and only the new local television and local radio ownership rules would
apply. Under the new rules, noncommercial television stations would be included in the station
count. The effectiveness of these new rules has been stayed by the order of the U.S. Court of Appeals
for the Third Circuit described above. Television Time Brokerage and Joint Sales Agreements. Over the past few years, a number of
television stations, including certain of our television stations, have entered into agreements
commonly referred to as time brokerage agreements and joint sales agreements. Under these
agreements, separately owned and licensed stations agree to function cooperatively subject to the
requirements of antitrust laws and compliance with the FCCs rules and policies, including the
requirement that each party maintain independent control over the programming and operations of its
own station. The FCCs attribution and television duopoly rules apply to time brokerage agreements
in which one station brokers more than 15% of the broadcast time per week of another station in the
same DMA with an overlapping Grade B contour. A joint sales agreement, or JSA, is an arrangement by which a brokering station provides
advertising sales services, but not programming, for another station in the market. On August 7,
2004, the FCC commenced a rulemaking proceeding to consider whether to treat a television
licensees JSA to sell the advertising time of another television station in the same market as the
equivalent of ownership of that station for purposes of the FCCs local television ownership rules.
The FCC may adopt rules affecting these arrangements that could adversely affect our current
station operations under existing JSAs. We cannot predict what rules the FCC will adopt or what
effect any new rules are likely to have. In March 2005, we notified all of our JSA partners other
than NBC that we were exercising our right to terminate the JSAs, effective June 2005. Alien Ownership.Under the Communications Act, no FCC broadcast license may be held by a
corporation of which more than one-fifth of its capital stock is owned or voted by aliens or their
representatives or by a foreign government or its representative, or by any corporation organized
under the laws of a foreign country (collectively Aliens). Furthermore, the Communications Act
provides that no FCC broadcast license may be granted to any corporation controlled by any other
corporation of which more than one-fourth of its capital stock is owned of record or voted by
Aliens if the FCC should find that the public interest would be served by the refusal of the
license. Dual Network Rule. FCC rules permit the combination of television broadcast networks, except
for a combination of any two of the four major networks (ABC, CBS, Fox or NBC). The FCC retained
the current rule in its June 2, 2003 report and order. Programming and Operation. The Communications Act requires broadcasters to present programming
that responds to community problems, needs and interests and to maintain records demonstrating its
responsiveness. Stations also must follow rules that regulate, among other things, obscene and indecent
broadcasts, sponsorship identification, the advertising of contests and lotteries and technical
operations, including limits on radio frequency radiation. 17




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The FCCs rules limit the amount of advertising in television programming designed for
children 12 years of age and under. The FCC effectively requires that television broadcast stations
air specified amounts of programming during specified time periods that serve the educational and
informational needs of children 16 years of age and under. The Communications Act and FCC rules also regulate the broadcasting of political
advertisements by television stations. Stations must provide reasonable access for the purchase
of time by legally qualified candidates for federal office and equal opportunities for the
purchase of equivalent amounts of comparable broadcast time by opposing candidates for the same
elective office. Before primary and general elections, legally qualified candidates for elective
office may be charged no more than the stations lowest unit charge for the same class of
advertisement, length of advertisement and daypart. The Bipartisan Campaign Reform Act of 2002 (BCRA) (also known as the McCain-Feingold
campaign finance bill) modified the regulation of certain aspects of political campaign fundraising
and expenditures, and imposed new restrictions on the broadcast of issue advertisements.
Congress previously has considered and may in the future consider amending the political
advertising laws by changing the statutory definition of lowest unit charge in a manner which
would require television stations to sell time to federal political candidates at lower rates. We
are unable to predict whether additional changes to the political broadcasting laws will be
enacted, or what effect, if any, these changes might have upon our business. Equal Employment Opportunity Requirements. Existing FCC rules require all broadcast station
employment units with five or more full-time employees to comply with certain general and specific
recruitment, outreach, and reporting requirements. All broadcast licensees must refrain from
engaging in employment discrimination based on race, color, religion, national origin or sex (with
a limited exception for religious broadcasters). The FCC is considering applying these rules to
part-time positions. Cable Must Carry/Retransmission Consent Regulations. Under the Communications Act, every
local commercial television broadcast station must elect once every three years to require a cable
system to carry the station subject to certain exceptions, or to negotiate for retransmission
consent to carry the station. A stations must carry rights are not absolute, and their
exercise depends on variables such as the number of activated channels on a cable system, the
location and size of a cable system, the amount of duplicative programming on the station, and the
quality of the stations signal at the cable systems headend. Alternatively, if a broadcaster
chooses to exercise retransmission consent rights, it can prohibit cable systems from carrying its
signal or grant the cable system consent to retransmit the broadcast signal for a fee or other
consideration. Our television stations have generally elected the must carry alternative. Our
elections of retransmission or must carry status will continue until the next election period,
which commences on January 1, 2006. In a recently concluded rulemaking proceeding, the FCC determined that cable television
systems are not required to carry both the analog and digital television signals of local
television stations. In an initial order in the proceeding, the FCC concluded that broadcasters
would not be entitled to mandatory carriage of both their analog and digital signals, and that a
cable television system is required to carry a digital signal only if the broadcaster first
surrenders the analog signal. Broadcasters with multiple digital video programming streams are
required to designate a single, primary video stream eligible for mandatory carriage.
Alternatively, television licensees may negotiate with cable television systems for carriage of
their digital signal in addition to their analog signal under retransmission consent. Under retransmission consent agreements, some of our television stations are also carried as
distant signals on cable systems that are located outside of those stations markets. Cable systems
generally must remit a compulsory license royalty fee to the United States Copyright Office to
carry television stations in distant markets. We have filed a request with the Copyright Office to
change our stations status under the compulsory license from independent to network
signals. If the Copyright Office grants our request, certain cable systems may transmit our
stations at reduced royalty rates. We cannot determine when the Copyright Office will act on this
request, or whether we will receive a favorable ruling. Satellite Carriage of Television Broadcast Signals. Under the Satellite Home Viewer
Improvement Act of 1999, which we refer to as SHVIA, a satellite carrier must obtain retransmission
consent before carrying a television station, and a satellite carrier delivering the signal of any
local television station is required to carry all television stations licensed to the carried
stations DMA. SHVIA was recently extended for five years until the end of 2009. The FCC rules
implementing SHVIA are similar to the must-carry and retransmission consent rules that apply to
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television systems. Our PAX TV signal currently is carried on satellite systems under
agreements we negotiated with the satellite television providers, which allow the satellite
provider to sell and retain the advertising revenues from a portion of the non-network advertising
time during PAX TV programming hours and which require the carriage of some of our television
stations in certain circumstances. Digital Television Service. The FCC has adopted rules for the implementation of digital
television, or DTV, service, a technology which is intended to improve the quality of television
broadcast signals. The FCC allotted a second channel for DTV operations to each broadcaster who
held a license or a construction permit for a full service television station on April 3, 1997.
Each such licensee and permittee must return one of its two channels at the end of the DTV
transition period currently scheduled to end on December 31, 2006 or when 85% of the service areas
of the stations in a DMA as determined by Nielsen can receive digital signals. The transition
period could be extended in certain areas depending generally on the level of DTV market
penetration or if the FCC or Congress changes the schedule. Except for certain stations operating
analog facilities in the 700 MHz spectrum band that have been allotted a digital channel in the 700
MHz spectrum band, the FCC has established a schedule by which broadcasters must begin DTV service
absent extenuating circumstances that may affect individual stations. Under the FCCs digital television transition rules a station will be in compliance with its
build-out requirement, without constructing the full authorized facilities, so long as, by May 1,
2002, it constructed digital facilities capable of serving its community of license with a signal
of requisite strength. The dates by which digital facilities replicating a stations analog service
area must be constructed have been set by the FCC as July 1, 2005 and July 1, 2006 depending on
market size and network affiliation. The FCC has authorized analog stations operating in the 700
MHz spectrum band that have entered into voluntary agreements with future users of the 700 MHz
spectrum resulting in the surrender of the analog 700 MHz channel to continue broadcasting their
analog signal on the channel assigned for digital service and to delay the institution of digital
service until December 31, 2005, or later than December 31, 2005 if it can be demonstrated that
less than 70% of the television households in the stations market are capable of receiving digital
broadcast signals. Broadcasters given a digital channel allocation within the 700 MHz band may
forego the use of that channel for digital service until December 31, 2005, or later than December
31, 2005, if it can be demonstrated that less than 70% of the television households in the
stations market are capable of receiving digital broadcast signals. Broadcasters left with a
single-channel allotment as a result of clearing the 700 MHz spectrum band will retain the
interference protection associated with their digital television channel allotment for a period of
31 months after beginning to transmit in digital. The FCC has adopted rules permitting DTV licensees to offer ancillary or supplementary
services on their DTV channels, so long as such services are consistent with the FCCs DTV
standards, do not derogate required DTV services, and are regulated in the same manner as similar
non-DTV services. The FCCs rules require that DTV licensees pay a fee (based on revenues) for any
subscription-based services that are provided. The FCC has commenced a proceeding to consider
additional public interest obligations for television stations as they transition to digital
broadcast television operation. The FCC is considering various proposals that would require DTV
stations to use digital technology to increase program diversity, political discourse, access for
disabled viewers and emergency warnings and relief. If these proposals are adopted, our stations
may be required to increase their current level of public interest programming, which generally
does not generate as much revenue from commercial advertisers. Proposed Changes. Congress and the FCC have under consideration, and may in the future adopt,
new laws, regulations and policies regarding a wide variety of matters that could, directly or
indirectly, affect the operation, ownership and profitability of our company and our television
broadcast stations. We cannot predict what other matters may be considered in the future, nor can
we judge in advance what effect, if any, the implementation of any of these proposals or changes
might have on our business. Employees As of December 31, 2004, we had 458 full-time employees and 43 part-time employees. None of
our employees are represented by labor unions. We consider our relations with our employees to be
good. Seasonality Seasonal revenue fluctuations are common within the television broadcasting industry and
result primarily from fluctuations in advertising expenditures. We believe that generally
television advertisers spend relatively more for long form paid programming in the first and fourth
calendar quarters of each year, spend relatively less for long form paid programming in the second
calendar quarter and spend the least for long form paid programming in the third calendar quarter.
We believe that generally television advertisers spend relatively more for spot advertising in the
second and fourth calendar quarters of each year, spend relatively less for spot advertising during
the first calendar quarter and spend the least for spot advertising in the third calendar quarter. 19




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Trademarks and Service Marks We have 36 registered trademarks and service marks (21 in the United States, nine in Mexico
and six in Europe) and pending applications for registration of another eight trademarks and
service marks (five in the United States, two in Mexico and one in Canada). We do not own any
patents or have any pending patent applications. Available Information Our internet website address is www.pax.tv. We make available free of charge through our
internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission. Forward-Looking Statements and Associated Risks and Uncertainties This Report contains forward-looking statements that reflect our current views with respect
to future events. All statements in this Report other than those that are simply statements of
historical facts are generally forward-looking statements. These statements are based on our
current assumptions and analysis, which we believe to be reasonable, but are subject to numerous
risks and uncertainties that could cause actual results to differ materially from our expectations.
All forward-looking statements in this Report are made only as of the date of this Report, and we
do not undertake to update these forward-looking statements, even though circumstances may change
in the future. Among the significant risks and uncertainties which could cause actual results to differ from
those anticipated in our forward-looking statements or could otherwise adversely affect our
business or financial condition are those described below. We have a high level of indebtedness and are subject to restrictions imposed by the terms of our
indebtedness and preferred stock. We are highly leveraged. As of December 31, 2004 we had total indebtedness of $1.0 billion,
approximately $365.4 million of which was senior secured indebtedness, and redeemable preferred
stock with an aggregate redemption value of approximately $1.2 billion (approximately $1.1 billion
of which was exchangeable, under certain circumstances, into senior subordinated indebtedness). We
may incur limited amounts of additional indebtedness to finance capital expenditures and for
certain other corporate purposes. Our ability to incur indebtedness is subject to restrictions in
the terms of the indentures governing our senior secured notes and our senior subordinated notes,
as well as the terms of our outstanding preferred stock. The level of our indebtedness and
redeemable preferred stock has important consequences to us, including that our cash flow from
operations must be dedicated to debt service and will not be available for other purposes. Many of
our competitors currently operate on a less leveraged basis and may have significantly greater
operating and financing flexibility than us. The indentures and the preferred stock contain
covenants that restrict, among other things, our ability to incur additional indebtedness, incur
liens, make investments, pay dividends or make other restricted payments, consummate asset sales,
consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of our assets. Currently, these covenants prevent us from incurring
additional indebtedness other than limited amounts of certain types of permitted indebtedness
(e.g., purchase money indebtedness), although certain refinancings of existing debt are permitted.
These restrictions could limit our ability to obtain future financing, make acquisitions or needed
capital expenditures, withstand a future downturn in our business or the economy in general,
conduct operations or otherwise take advantage of business opportunities that may arise. If we were
unable to service our indebtedness or satisfy our dividend or redemption obligations with respect
to our outstanding preferred stock, we would be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital. There is no assurance that any
of these strategies could be effected on satisfactory terms, if at all. We have a history of operating losses and negative cash flow and we may not become profitable in
the future. We have incurred losses from continuing operations in each fiscal year since our inception.
For the years ended December 31, 2004, 2003 and 2002, our earnings were insufficient to cover our
combined fixed charges and preferred stock dividend requirements by approximately $220.7 million,
$139.8 million and $255.5 million, respectively. We expect to continue to experience net losses in
the foreseeable future, principally due to interest charges on outstanding debt (and the debentures
into which our outstanding preferred stock can be exchanged, if issued), dividends on outstanding
preferred stock, and non-cash charges for depreciation and amortization expense related to fixed
assets. Future net losses could be greater than those we have experienced in the past. Our cash flow from operations has been insufficient to cover our operating expenses, debt
service requirements and other cash commitments in each of our last five fiscal years. We have
financed our operating cash requirements, as well as our capital needs, during these periods with
the proceeds of asset sales and financing activities, including 20




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the issuance of preferred stock and additional borrowings. Our senior secured floating rate
notes and our 10 3/4% senior subordinated discount notes require us to make cash interest payments on
a current basis, and we are required to commence making semi-annual cash interest payments of
approximately $30.4 million under our 121/4% senior subordinated discount notes on July 15, 2006, and
to make such payments on each January 15 and July 15 thereafter until these notes are repaid or
refinanced. We may not be able to generate sufficient operating cash flow in the future to pay our
debt service and preferred stock dividend requirements and may not be able to obtain sufficient
additional financing to meet such requirements on terms acceptable to us, or at all. We engaged Bear, Stearns & Co. Inc. in 2002 and Citigroup Global Markets Inc. in 2003 to act
as our financial advisors to assess our business plan, capital structure and future capital needs,
and to explore strategic alternatives for our company. We terminated these engagements in March
2005 as no viable strategic transactions had been developed on terms that we believed would be in
the best interests of all of our stockholders. While we continue to consider strategic
alternatives that may arise, which may include the sale of all or part of our assets, finding a
strategic partner for our company who would provide the financial resources to enable us to redeem,
restructure or refinance our debt and preferred stock, or finding a third party to acquire our
company through a merger or other business combination or through a purchase of our equity
securities, our principal efforts are focused on improving our core business operations and
increasing our cash flow. See Forward-Looking Statements and Associated Risks and
UncertaintiesOur ability to pursue strategic alternatives is subject to limitations and factors
beyond our control. PAX TV may not be successful as a broadcast television network. We launched our PAX TV entertainment programming on August 31, 1998, and are now in our
seventh network broadcasting season. Our own experiences, as well as the experiences of other new
broadcast television networks during the past decade, indicate that it requires a substantial
period of time and the commitment of significant financial, managerial and other resources to gain
market acceptance of a new television network by viewing audiences and advertisers to a sufficient
degree that the new network can attain profitability. Although we believe that our approach is
unique among broadcast television networks, in that we own and operate stations reaching most of
the television households that can receive PAX TV, our business model is unproven and to date has
not been successful. PAX TV may not gain sufficient market acceptance to be profitable or otherwise
be successful. If the rates at which we are able to sell long form paid programming were to decline or the
audience ratings of our entertainment programming were to continue to decline, our advertising
revenue could decrease. Advertising revenues constitute substantially all of our operating revenues. Our ability to
generate advertising revenues depends upon our ability to sell our inventory of air time for long
form paid programming at acceptable rates and, with respect to entertainment programming, to
provide programming which attracts sufficient numbers of viewers in desirable demographic groups to
generate audience ratings that advertisers will find attractive. Long form paid programming rates
are dependent upon a number of factors, including our available inventory of air time, the viewing
publics interest in the products and services being marketed through long form paid programming,
and economic conditions generally. Our revenues from the sale of air time for long form paid
programming may decline. Our entertainment programming has not attracted sufficient targeted
viewership or achieved sufficiently favorable ratings to enable us to generate enough advertising
revenues to be profitable. Our ratings declined following the increase in the amount of long form
paid programming on PAX TV in January 2003 and generally have not improved over the past year,
despite our new original programming initiative launched in consultation with NBC during the second
half of 2004. Our ratings may continue to decline, which would adversely affect that portion of our
advertising revenues derived from the sale of commercial spots during our entertainment
programming. We incur production, talent and other ancillary costs to produce original
entertainment programs. Our original entertainment programming may not generate advertising
revenues in excess of our programming and other costs. We may lose a portion of our television distribution platform. In March 2005, we notified all of our PAX TV network affiliates that we were exercising our
right to terminate our affiliation agreements with them, effective June 30, 2005. We will seek to
replace the distribution lost by the termination of these agreements
(consisting of approximately 6% of U.S. prime time television
households) through the negotiation of
new, more flexible affiliation agreements and carriage agreements with cable systems in the
affected markets, as and if such agreements can be concluded on cost efficient terms. Our revenues
may be reduced if we are unable to replace the lost distribution. A number of our carriage
agreements with cable systems in markets where we do not own a television station place
restrictions on the type of programming that we may broadcast on the local cable system. Should
our programming be inconsistent with these restrictions, the cable systems may have the
right to require us to distribute additional entertainment programming over these systems or the
right to terminate their carriage agreements with us. Our financial results could be adversely
affected if we were required to provide alternative programming to these cable systems or if we
were to lose a portion of our distribution through the termination of these agreements. 21




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The results of operations of our stations which operated under joint sales agreements could be
adversely affected by the termination of the JSAs. The performance of our stations operating under JSAs depends to a substantial degree on the
performance of our JSA partners, over which we have no control. We have entered into JSAs with
respect to 45 of our television stations. Each JSA typically provides for our JSA partner to serve
as our exclusive sales representative to sell our local station advertising and in 22 of our
stations we have integrated and co-located our station operations with those of our JSA partners.
In March 2005, we notified all of our JSA partners other than NBC that we were exercising our right
to terminate the JSAs, effective June 30, 2005, and we began discussions with NBC as to the
termination of each of the JSAs with NBC (covering 14 of our stations in 12 markets). Although we
took this action in order to improve our operating results, we may incur significant costs to
resume operating the stations ourselves, including the expense of re-establishing office and studio
facilities separate from those of the JSA partners, or transferring performance of these functions
to another broadcast television station operator. Our network and station revenues could also be
adversely affected by the disruption of our advertising sales efforts that could result from the
unwinding of the JSAs. The unwinding or termination of some or all of our JSAs could adversely
affect the results of operations of our stations and could have a materially adverse effect upon
us. In addition, we may incur significant costs in order to effectuate a termination of our JSAs
with NBC. Our network and national advertising sales could be adversely affected by the termination of our
network and national sales agency agreements with NBC. We have significant operating relationships with NBC which have been developed since NBCs
investment in us in September 1999. NBC serves as our exclusive sales representative to sell most
of our PAX TV network advertising and is the exclusive national sales representative for most of
our stations. In March 2005, we notified NBC that we were removing, effective June 30, 2005, all of
our stations from our national sales agency agreement with NBC, and we began discussions with NBC
as to the termination of our network sales agency agreement with NBC. Although we took these
actions in order to improve our operating results, we may incur significant costs to resume
performing the advertising sales and other operating functions currently performed by NBC. Our
network revenues could be adversely affected by the disruption of our advertising sales efforts
that could result from the termination of our network sales agency agreement with NBC. The
unwinding or termination of our network and national sales agency agreements with NBC could have a
materially adverse effect upon us. If advertisers have to pay higher residual payments to the members of the actors guilds that they
use in spot advertisements on our network, advertisers may reduce or discontinue their advertising
on our network. Approximately 21.0% of our 2003 net revenues and 20.7% of our 2004 revenues were derived from
network commercial spot advertisements aired on PAX TV. We believe substantially all of our network
spot advertisements were produced by advertisers or their advertising agencies using performers who
are members of the Screen Actors Guild and the American Federation of Television and Radio Artists.
When commercials are aired on broadcast and cable television networks, the performers are entitled
to residual payments from the advertisers, which are determined under collective bargaining
agreements between the guilds and the advertising community. Under the current guild agreements,
the residual payments required to be paid by advertisers in connection with advertisements aired on
cable networks are substantially lower than the residuals required to be paid in connection with
advertising aired on broadcast networks. To date, we believe that a substantial portion of the
network spot advertising time on PAX TV was purchased by advertisers under the assumption that the
residual payment obligations incurred in connection with airing these spots were to be calculated
under the rates applicable to cable networks, not those applicable to other broadcast networks. The
current guild agreements include provisions establishing residual rates that are applicable to
network advertisements aired on PAX TV and that are substantially lower than the rates applicable
to broadcast networks but still higher, in most circumstances, than the rates applicable to cable
networks. As a result of this development, some advertisers have informed us that our network
advertising spots are no longer as attractive as those of cable networks because of the relatively
higher residual payments applicable to PAX TV. Because of these higher residual payments, some
advertisers may be unwilling to purchase advertising time on PAX TV unless we lower our rates or
otherwise provide financial compensation to them. We are unable to predict the magnitude of the
effect of this development on our network spot advertising revenues. We may be required to
purchase our outstanding debt and preferred stock if we experience a
change of control. In the event of a change of control (as defined in the indentures governing our outstanding
senior secured notes and senior subordinated notes), we will be required to offer to purchase all
of the outstanding notes at a price equal to 101% (or 100% in the case of the senior secured notes,
with respect to any change of control occurring on or after January 15, 2006) of the principal
amount or accreted value, as the case may be, thereof. In the event of a change of control (as
defined with respect to our outstanding preferred stock), we will be required to offer to 22




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purchase all of the shares of these preferred stocks then outstanding at 101% (100% for the
Series A preferred stock) of the then effective liquidation preference thereof, plus accumulated
and unpaid dividends. Generally, under these instruments a change of control will be deemed to have
occurred if any person, other than Mr. Paxson and his affiliates or, with respect to the senior
secured notes and senior subordinated notes, NBC and its affiliates, acquires control of a majority
of the voting power of our outstanding capital stock or acquires more than one-third of the
outstanding voting power and possesses voting power in excess of that possessed by Mr. Paxson and
his affiliates (or, with respect to the senior secured notes and senior subordinated notes, NBC and
its affiliates), or there is a merger and we are not the surviving corporation and our stockholders
do not own at least a majority of the outstanding common stock of the surviving corporation. Our
repurchase of our outstanding senior subordinated notes or the redemption of any of our preferred
stock upon a change of control could also cause a default under the senior secured notes indenture.
We can provide no assurance that in the event of a change of control, we will have access to
sufficient funds or will be contractually permitted under the terms of our outstanding debt to
repay our outstanding senior secured notes and senior subordinated notes or pay the required
purchase price for any shares of preferred stock tendered by holders. Were this to occur, we could
be required to seek third party financing to the extent we did not have sufficient available funds
to meet our purchase obligations, and we can provide no assurance that we would be able to obtain
this financing on favorable terms or at all. NBCs exercise of its rights to exert significant influence upon our operations could adversely
affect our business. As a result of our agreements with NBC, NBC is in a position to exert significant influence
over our management and policies and to prevent us from taking actions which our management may
otherwise desire to take. NBC may have interests that differ from those of our other stockholders
and debtholders. We must obtain NBCs consent for:  
    approval of annual budgets;
    expenditures materially in excess of budgeted amounts;
    material acquisitions of programming;
    material amendments to our certificate of incorporation or bylaws;
    material asset sales or purchases, including sales of our television stations which
are located in the top 20 DMAs;
    business combinations where we would not be the surviving corporation or as a result
of which we would experience a change of control;
    issuances or sales of any capital stock, with some exceptions;
    stock splits or recombinations;
    any increase in the size of our board of directors other than an increase resulting
from provisions of our outstanding preferred stock of up to two additional directors; and
    joint sales, joint services, time brokerage, local marketing or similar agreements as
a result of which our stations with national household coverage of 20% or more would be
subject to those agreements. We have not redeemed our securities held by NBC that NBC has demanded that we redeem and this could
have adverse consequences for us. On November 13, 2003, NBC exercised its right to demand that we redeem, or arrange for a third
party to acquire, all of the shares of our Series B preferred stock held by NBC, at a price equal
to the aggregate liquidation preference thereof plus accrued and unpaid dividends, which as of
December 31, 2004, totaled $600.7 million. Because we did not effect a redemption within one year
after November 13, 2003, NBC is now permitted to transfer, without restriction, any of our
securities acquired by it, its right to acquire Mr. Paxsons Class B common stock, its contractual
rights with respect to our business, and its other rights under the related transaction agreements.
As a result, we are unable to prevent NBC from transferring its interest in our company to a third
party selected by NBC in its discretion, which could have a material adverse effect upon us. We are involved in litigation with NBC regarding NBCs demand for redemption. NBC has
asserted that we continue to be required to redeem all of the shares of our Series B preferred
stock held by NBC. If a court were to grant a judgment against us requiring us to pay the
redemption amount, it would have a material adverse effect upon us. Our ability to effect any
redemption is restricted by the terms of our outstanding debt and preferred stock. Further, we do
not currently have sufficient funds to pay the redemption price for these securities. If we were
unable to satisfy any such judgment, we would be in default under the indentures governing our
senior secured notes and senior subordinated notes. In order to comply with NBCs redemption
demand, we would need to repay, refinance or 23




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otherwise restructure the majority of our outstanding indebtedness and preferred stock and
raise sufficient liquidity to enable us to pay the required redemption price. Alternatively, we
would need to find a third party willing to purchase those securities at the required redemption
price. We believe it is unlikely that we would be able to accomplish any of these actions. The adjustment to the dividend rate on our Series B preferred stock could have adverse consequences
for our business. On September 15, 2004, the rate at which dividends accrue on our Series B preferred stock, all
of which is held by NBC, was adjusted to an annual rate of 16.2% from the initial annual rate of
8%. The rate was adjusted pursuant to the terms governing the Series B preferred stock. We
retained CIBC World Markets Corp., a nationally recognized independent investment banking firm, in
connection with the rate adjustment process. We are involved in litigation with NBC regarding the
rate adjustment. NBC has asserted that CIBC does not constitute an independent investment banking
firm, and that the dividend rate adjustment was not performed in the manner required by the terms
of the Series B preferred stock. As described in greater detail above under Forward-Looking
Statements and Associated Risks and UncertaintiesWe have a high level of indebtedness and are
subject to restrictions imposed by the terms of our indebtedness and preferred stock, the increase
in the dividend rate on our Series B preferred stock to 16.2% and any further increase resulting
from the NBC litigation could have material adverse consequences for us. We are unable
to predict whether we will be successful in the litigation with NBC and whether or to what degree
the dividend rate on our Series B preferred stock may be increased further. Our ability to pursue strategic alternatives is subject to limitations and factors beyond our
control. Our ability to pursue strategic alternatives to address the challenges facing our company,
such as the sale of all or part of our assets, finding a strategic partner for our company who
would provide the financial resources to enable us to redeem, restructure or refinance our debt and
preferred stock, or finding a third party to acquire our company through a merger or other business
combination or acquisition of our equity securities, is subject to various limitations and issues
which we may be unable to control. A strategic transaction will, in most circumstances, require
that we seek the consent of, or refinance, redeem or repay, NBC and the other holders of our
preferred stock, as well as the holders of our senior and subordinated debt. FCC regulations may
limit the type of strategic alternatives we may pursue and the parties with whom we may pursue
strategic alternatives. In addition, our ability to pursue a strategic alternative will be
dependent upon the attractiveness of our assets and business plan to potential transaction parties.
Among other things, potential transaction parties may find unattractive our capital structure and
high level of indebtedness, our carriage of the PAX TV programming and the overnight programming
provided by The Christian Network, Inc., and certain of our television stations serving major
television markets. Our relatively low tax basis in our television station assets (resulting in
part from the Section 1031 like kind exchange discussed below) is a significant factor to be
considered in structuring any potential transactions involving sales of a material portion of our
television station assets, and may make certain types of transactions less attractive or not
viable. Potential transaction parties may believe our stations and other assets to be less valuable
than as shown in prior appraisals we have obtained. We may be prevented from consummating a
strategic transaction due to any of these and other factors, or we may incur significant costs to
terminate obligations and commitments with respect to, or receive less consideration in a strategic
transaction as a result of, these and other factors. We have not been successful to date in our
efforts to find or effectuate strategic alternatives for our company, and we may not be successful
in doing so in the future. We could be subject to a material tax liability if the IRS successfully challenges our position
regarding the 1997 disposition of our radio division. We structured the disposition of our radio division in 1997 and our acquisition of television
stations during the period following this disposition in a manner that we believed would qualify
these transactions as a like kind exchange under Section 1031 of the Internal Revenue Code and
would permit us to defer recognizing for income tax purposes up to approximately $333 million of
gain. The IRS has examined our 1997 tax return and has issued us a 30-day letter proposing to
disallow all of our gain deferral. We have filed our protest to this determination with the IRS
appeals division, but we cannot predict the outcome of this matter at this time, and we may not
prevail. 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 million of the $333
million gain deferral will be disallowed. We have filed a protest to this alternative determination
as well. We may not prevail with respect to this alternative determination. Should the IRS
successfully challenge our position and disallow all or part of our gain deferral, because we had
net operating losses in the years subsequent to 1997 in excess of the amount of the deferred gain,
we would not be liable for any tax deficiency, but could be liable for state income taxes. We have
estimated the amount of state income tax for which we could be liable as of December 31, 2004 to be
approximately $8.0 million should the IRS succeed in disallowing the entire deferred gain. In
addition, we could be liable for interest on the tax liability for the period prior to the
carryback of our net operating losses and for interest on any state income taxes that may be due.
We have 24




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estimated the amount of federal interest and state interest, as of December 31, 2004, to be
approximately $18.0 million and $4.0 million, respectively, should the IRS succeed in disallowing
the entire deferred gain. The use of our net operating losses to offset any disallowed deferred
gain would result in a benefit from income taxes. This matter is currently with the Appeals Office
of the Internal Revenue Service. We could be adversely affected by actions of the FCC, the Congress and the courts that could alter
broadcast television ownership rules in a way that would materially affect our present operations
or future business alternatives. On June 2, 2003, the FCC adopted new rules governing, among other things, national and local
ownership of television broadcast stations and cross-ownership of television broadcast stations
with radio broadcast stations and newspapers serving the same market. The new rules would change
the regulatory framework within which television broadcasters hold, acquire and transfer broadcast
stations. Numerous parties asked the FCC to reconsider portions of its decision and other parties
sought judicial review. In September 2003, the U.S. Court of Appeals for the Third Circuit issued
an order staying the effectiveness of the new media ownership rules pending its review of the FCCs
action. In June 2004, the Third Circuit remanded the proceeding to the FCC with instructions to the
FCC to better justify or modify its approach to setting numerical limits. The stay remains in
effect pending further review by the Third Circuit of the FCCs further actions on remand. Several
parties have filed petitions for review by the Supreme Court which are currently pending. Among other things, the FCCs new rules would have increased the percentage of the nations
television households that may be served by television broadcast stations in which the same person
or entity has an attributable interest from 35% to 45% of national television households. The
Consolidated Appropriations Act of 2004 directed the FCC to increase this percentage to 39% of
national television households and allows an entity that acquires licensees serving in excess of
39% two years to come into compliance with the new cap. This act also provides that the FCC shall
conduct a quadrennial, rather than biennial, review of its ownership rules. The new rules also
relax FCC restrictions on local television ownership and on cross-ownership of television stations
with radio stations or newspapers in the same market. In general, these new rules would reduce the
regulatory barriers to the acquisition of an interest in our television stations by various
industry participants who already own television stations, radio stations, or newspapers. In assessing compliance with the national ownership caps, the FCC counts each UHF station as
serving only half of the television households in its market. This UHF Discount is intended to
take into account that UHF stations historically have provided less effective coverage of their
markets than VHF stations. All of our television stations are UHF stations and, without the UHF
Discount, we would not meet the recently enacted 39% ownership cap. In its June 2, 2003 decision,
the FCC concluded that the future transition to digital television may eliminate the need for a UHF
Discount. For that reason, the FCC provided that the UHF Discount will sunset, or expire, for the
top four broadcast networks (ABC, NBC, CBS and Fox) on a market-by-market basis as the digital
transition is completed, unless otherwise extended by the FCC. The FCC also announced, however,
that it will examine in a future review whether to include in this sunset provision the UHF
television stations owned by other networks and group owners, which would include our television
stations. The Third Circuit stated that, barring legislative action, the FCC may decide the scope
of its authority to modify or eliminate the UHF Discount outside of the Consolidated Appropriations
Act of 2004 limitation. The Third Circuit opinion referred to above also held that the Consolidated
Appropriations Act of 2004 mooted any argument on whether the FCC could maintain the UHF
Discount. Since the FCCs adoption of the new rules, in addition to the legislation enacting the 39%
cap, separate legislation was introduced in the last Congress to prohibit the application of the
UHF Discount to UHF stations sold after June 2, 2003, to sunset the UHF Discount in 2008 for all
UHF stations, to prohibit the cross ownership of newspapers and television stations in the same
market and to nullify in their entirety the rule changes adopted by the FCC. We cannot predict
whether any pending legislation ultimately will be adopted or whether any petitions for
reconsideration or further judicial review of the FCCs decision of June 2, 2003 will result in
significant changes to the ownership rules. A further rollback of the nationwide television
ownership cap, the prohibition of newspaper and television cross ownership by Congress, any further
limitation on the ability of a party to own two television stations without regard to signal
contour overlap if each station is located in a separate designated market area, or action by the
FCC or Congress affecting the availability of the UHF Discount, may adversely affect the
opportunities we might have for sale of our television broadcast stations to those television group
owners and major television broadcast networks that otherwise would be the most likely purchasers. In August 2004, the FCC commenced a rulemaking proceeding to consider whether to treat a
television licensees joint sales agreement, or JSA, to sell the advertising time of another
television station in the same market as the equivalent of ownership of that station for purposes
of the FCCs local television ownership rules. We have entered into JSAs for 45 of our television
stations, 41 of which are with NBC owned or affiliated stations in our markets. The 25




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FCC may adopt rules affecting these arrangements that could adversely affect our current
station operations under existing JSAs. We cannot predict what rules the FCC will adopt or what
effect any new rules are likely to have. In March 2005, we notified all of our JSA partners other
than NBC that we were exercising our right to terminate the JSAs, effective June 30, 2005. We are required by the FCC to abandon the analog broadcast service of 23 of our full power stations
occupying the 700 MHz spectrum and may suffer adverse consequences if we are unable to secure
alternative distribution on reasonable terms. We hold 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 our 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. We cannot predict when we will abandon, by private
agreement, or as required by law, the broadcast service of our stations occupying the 700 MHz
spectrum. We could suffer adverse consequences if we are unable to secure alternative simultaneous
distribution of both the analog and digital signals of those stations on reasonable terms and
conditions. We cannot now predict the impact, if any, on our business of the abandonment of our
broadcast television service in the 700 MHz spectrum. Failure to achieve and maintain effective internal control over financial reporting in accordance
with rules of the Securities and Exchange Commission promulgated under Section 404 of the
Sarbanes-Oxley Act could result in a loss of investor confidence in our financial reports, which
could in turn have a material adverse effect on our business and stock price. Under rules of the Securities and Exchange Commission, or SEC, promulgated under Section 404
of the Sarbanes-Oxley Act of 2002, beginning with this Annual Report on Form 10-K for the fiscal
year ending December 31, 2004, we are required to furnish a report by our management on our
internal control over financial reporting. Our report must contain, among other matters, an
assessment of the effectiveness of our internal control over financial reporting as of December 31,
2004, including a statement as to whether or not our internal control over financial reporting is
effective. In the course of our assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004, we identified a material weakness in our internal
control over financial reporting. This material weakness is described in Item 9A, Controls and
Procedures, of this report. Although we believe that we have remediated this material weakness, we
cannot assure you that this remediation has been successful or that additional deficiencies or
weaknesses in our controls and procedures will not be identified. The material weakness already
identified, as well as any other weaknesses or deficiencies, could harm our business and operating
results, and could result in adverse publicity and a loss in investor confidence in the accuracy
and completeness of our financial reports, which in turn could have a material adverse effect on
our stock price, and, if such weaknesses are not properly remediated, could adversely affect our
ability to report our financial results on a timely and accurate basis. Further, our internal control report must contain a statement that our auditors have issued an
attestation report on managements assessment of our internal control. If our independent auditors
are unable to attest that our managements report is fairly stated or are unable to express an
opinion on our managements evaluation of the effectiveness of our internal control, investor
confidence in the accuracy and completeness of our financial reports could be adversely affected,
which in turn could have a material adverse effect on our stock price. We cannot assure you that we will successfully exploit our broadcast station groups digital
television platform. We have completed construction of digital broadcasting facilities at 49 of our 60 owned and
operated stations and are exploring the most effective use of digital broadcast technology for each
of such stations. We cannot assure you, however, that we will derive commercial benefits from the
exploitation of our digital broadcasting capacity. Although we believe that proposed alternative
and supplemental uses of our analog and digital spectrum will continue 26




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to grow in number, the viability and success of each proposed alternative or supplemental use
of spectrum involves a number of contingencies and uncertainties. We cannot predict what future
actions the FCC or Congress may take with respect to regulatory control of these activities or what
effect these actions would have on us. We are dependent upon our senior management team and key personnel and the loss of any of them
could materially and adversely affect us. Our business depends upon the efforts, abilities and expertise of our executive officers and
other key employees, including Mr. Paxson, our Chairman and Chief Executive Officer. We cannot
assure you that we will be able to retain the services of any of our key executives. If any of
these executive officers were to leave our employment, our operating results could be adversely
affected. We operate in a very competitive business environment. We compete for audience share and advertising revenues with other providers of television
programming. Our PAX TV entertainment programming competes for audience share and advertising
revenues with the programming offered by other broadcast and cable networks, and also competes for
audience share and advertising revenues in our stations respective market areas with the
programming offered by non-network affiliated television stations. Our ability to compete
successfully for audience share and advertising revenues depends upon the popularity of our
entertainment programming with viewing audiences in demographic groups that advertisers desire to
reach. Our ability to provide popular programming depends upon many factors, including our ability
to correctly gauge audience tastes and accurately predict which programs will appeal to viewing
audiences, to produce original programs and purchase the right to air syndicated programs at costs
which are not excessive in relation to the advertising revenue generated by the programming, and to
fund marketing and promotion of our programming to generate sufficient viewer interest. Many of our
competitors have greater financial and operational resources than we do which may enable them to
compete more effectively for audience share and advertising revenues. All of the existing
television broadcast networks and many of the cable networks have been operating for a longer
period than we have been operating PAX TV, and therefore have more experience in network television
operations than we have which may enable them to compete more effectively. Our television stations also compete for audience share with other forms of entertainment
programming, including home entertainment systems and direct broadcast satellite video distribution
services which transmit programming directly to homes equipped with special receiving antennas and
tuners. Further advances in technology may increase competition for household audiences. Our
stations also compete for advertising revenues with other television stations in their respective
markets, as well as with other advertising media, such as newspapers, radio stations, magazines,
outdoor advertising, transit advertising, yellow page directories, direct mail and local cable
systems. We cannot assure you that our stations will be able to compete successfully for audience
share or that we will be able to obtain or maintain significant advertising revenue. The television broadcasting industry faces continual technological change and innovation, the
possible rise in popularity of competing entertainment and communications media, and governmental
restrictions or actions of federal regulatory bodies, including the FCC and the Federal Trade
Commission, any of which could have a material effect on our operations. We may be adversely affected by changes in the television broadcasting industry or a general
deterioration in economic conditions. The financial performance of our television stations is subject to various factors that
influence the television broadcasting industry as a whole, including:  
    the condition of the U.S. economy;
    changes in audience tastes;
    changes in priorities of advertisers;
    new laws and governmental regulations and policies;
    changes in broadcast technical requirements;
    technological changes;
    proposals to eliminate the tax deductibility of expenses incurred by advertisers; 27




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
    changes in the law governing advertising by candidates for political office; and
    changes in the willingness of financial institutions and other lenders to finance
television station acquisitions and operations. We cannot predict which, if any, of these or other factors might have a significant effect on
the television broadcasting industry in the future, nor can we predict what effect, if any, the
occurrence of these or other events might have on our operations. Generally, advertising
expenditures tend to decline during economic recession or downturn. Consequently, our revenues are
likely to be adversely affected by a recession or downturn in the U.S. economy or other events or
circumstances that adversely affect advertising activity. Our operating results in individual
geographic markets also could be adversely affected by local regional economic downturns. Seasonal
revenue fluctuations are common in the television broadcasting industry and result primarily from
fluctuations in advertising expenditures by local retailers. Our business is subject to extensive and changing regulation that could increase our costs, expose
us to greater competition, or otherwise adversely affect the ownership and operation of our
stations or our business strategies. Our television operations are subject to significant regulation by the FCC under the
Communications Act of 1934. A television station may not operate without the authorization of the
FCC. Approval of the FCC is required for the issuance, renewal and transfer of station operating
licenses. In particular, our business depends upon our ability to continue to hold television
broadcasting licenses from the FCC, which generally have a term of eight years. Our station
licenses are subject to renewal at various times between 2004 and 2007. Third parties may challenge
our license renewal applications. Although we have no reason to believe that our licenses will not
be renewed in the ordinary course, we cannot assure you that our licenses or the licenses owned by
the owner-operators of the stations with which we have JSAs will be renewed. The non-renewal or
revocation of one or more of our primary FCC licenses could have a material adverse effect on our
operations. The Communications Act of 1934 empowers the FCC to regulate other aspects of our business, in
addition to imposing licensing requirements. For example, the FCC has the authority to:  
    determine the frequencies, location and power of our broadcast stations,
    regulate the equipment used by our stations,
    adopt and implement regulations and policies concerning the ownership and operation of our television stations, and
    impose penalties on us for violations of the Communications Act of 1934 or FCC regulations. Our failure to observe FCC or other rules and policies can result in the imposition of various
sanctions, including monetary forfeitures or the revocation of a license. Congress and the FCC currently have under consideration, and may in the future adopt, new
laws, regulations, and policies regarding a wide variety of matters that could, directly or
indirectly, affect the operation and ownership of our broadcast properties. Relaxation and proposed
relaxation of existing cable ownership rules and broadcast multiple ownership and cross-ownership
rules and policies by the FCC and other changes in the FCCs rules following passage of the
Telecommunications Act of 1996 have affected and may continue to affect the competitive landscape
in ways that could increase the competition we face, including competition from larger media,
entertainment and telecommunications companies, which may have greater access to capital and
resources. We are unable to predict the effect that any such laws, regulations or policies may have
on our operations. We believe that the success of our television operations depends to a significant extent upon
access to households served by cable television systems. If the law requiring cable system
operators to carry our signal were to change, we might lose access to cable television households,
which could adversely affect our operations. Under the 1992 Cable Act, each broadcast station is required to elect, every three years, to
either require cable television system operators in their local market to carry their signals,
which we refer to as must carry rights, or to prohibit cable carriage or condition it upon
payment of a fee or other consideration. By electing the must carry rights, a broadcaster can
demand carriage on a specified channel on cable systems within its market. These must carry
rights are not absolute, and under some circumstances, a cable system may decline to carry a given
station. Our television stations elected must carry on local cable systems for the three year
election period which commenced January 1, 2003. The required election date for the next three year
election period commencing January 1, 2006, will be October 1, 2005. If the law were changed to
eliminate or materially alter must carry rights, our business could be adversely affected. 28




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The FCC has adopted rules to govern the obligations of cable television systems to carry local
television stations during and following the transition from analog to digital television
broadcasting. The FCC concluded that a television broadcast station would not be entitled to
mandatory carriage of both the stations analog signal and its digital signal, and would not be
entitled to mandatory carriage of its digital signal unless it first gives up its analog signal.
Furthermore, the FCC concluded that a broadcaster with multiple digital programming streams will be
required to designate the primary video stream eligible for mandatory carriage. Broadcasters
operating with both analog and digital signals nevertheless could negotiate with cable television
systems for carriage of their digital signal. We cannot predict what effect those rules will have
on our business. We cannot assure you that we would actually be able to realize, in any sale, liquidation, merger or
other transaction involving our assets, the estimated values of such assets set forth in any
appraisal. We have had appraisals of certain of our assets, including our broadcast television stations,
prepared by independent valuation firms from time to time. Each appraisal was prepared in
accordance with certain procedures and methodologies set forth therein. In general, appraisals
represent the analysis and opinion of each of the appraisers as of their respective dates, subject
to the assumptions and limitations set forth in the appraisal. An appraisal may not be indicative
of the present or future values of our assets upon liquidation or resale. Although appraisals are
based upon a number of estimates and assumptions that are considered reasonable by the appraiser
issuing such appraisal, these estimates and assumptions are subject to significant business,
economic, competitive and regulatory uncertainties and contingencies, many of which are beyond our
control or the ability of the appraisers to accurately assess and estimate, and are based upon
assumptions with respect to future business decisions and conditions which are subject to change.
The opinions of value set forth in any appraisal and the actual values of the assets appraised
therein will vary, and those variations may be material. We cannot assure you that we would
actually be able to realize, in any sale, liquidation, merger or other transaction involving our
assets, the estimated values of such assets set forth in any appraisal. The occurrence of extraordinary events may substantially decrease the use of and demand for
advertising and may decrease our revenues. Because our programming consists principally of entertainment programming and long form paid
programming which markets and sells products and services, the occurrences of extraordinary events
which generally divert attention from entertainment programming in favor of news based programming
or which negatively affect the United States economy generally and reduce the demand for the
products and services marketed through long form paid programming, may adversely affect the market
for television advertising and our revenues. Our Class A common stock may be delisted from the American Stock Exchange. Our Class A common stock is listed on the American Stock Exchange, which we refer to as AMEX.
If we were unable to satisfy AMEXs maintenance criteria for the continued listing of our Class A
common stock, our Class A common stock may be delisted from trading on AMEX. If our Class A common
stock were delisted from trading on AMEX, then trading, if any, would thereafter be conducted in
the over-the-counter market in the so-called pink sheets or on the Electronic Bulletin Board of
the National Association of Securities Dealers, Inc. and consequently an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the price of, our Class A
common stock. 
 Item 2. Properties Our corporate headquarters is located in West Palm Beach, Florida. We have a satellite up-link
facility through which we supply our central programming feed, including PAX TV, to satellite
transmitters which relay the signal to our stations. Our satellite up-link facility is located in
Clearwater, Florida. Each of our stations has a facility in the market in which it operates at which the central
programming feed is received and retransmitted in its market. Each of our stations broadcasts its
signal from a transmission tower or antenna situated on a transmitter site. Each station also has
an office and studio and related broadcasting equipment. For about half of our stations with
respect to which we have entered into JSAs, we have vacated the leased studio and office facilities
of our stations and co-located our operations with those of our JSA partner. In connection with
the termination of our JSAs, we will have to either relocate up to 22 of our station master
controls which are currently located in our JSA partners facility or lease space from our JSA
partner in order to keep our station master control located in our JSA partners facility. We
generally lease our broadcast transmission towers and own substantially all of the equipment used
in our broadcasting operations. Our tower leases have expiration dates that range generally from
two to twenty years. We do not anticipate any difficulties in renewing those leases that expire
within the next several years or in leasing other space, if required. 29




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Our antenna, transmitter and other broadcast equipment for our New York television station
(WPXN) were destroyed upon the collapse of the World Trade Center on September 11, 2001. We are
currently broadcasting from a tower located on the Empire State Building in Manhattan. We are
continuing to evaluate several alternatives to improve our signal through transmission from other
locations. We expect, however, that it could take several years to replace the signal we enjoyed at
the World Trade Center location with a comparable signal. We have property and business
interruption insurance coverage to mitigate the losses sustained, although the extent of coverage
of such insurance is currently being litigated. We believe our existing facilities are adequate for our current and anticipated future needs.
No single property is material to our overall operations. 
 Item 3. Legal Proceedings On August 19, 2004, NBC filed a complaint against us 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 (the Certificate
of Designation) of our 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. We engaged
CIBC World Markets Corp., 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, we filed our answer and a counterclaim to NBCs complaint. Our answer
largely denies the allegations of the NBC complaint and our counterclaim seeks a declaratory ruling
that we are not obligated to redeem, and will not be in default under the terms of the agreement
under which NBC made its initial $415 million investment in us if we do not redeem, the Series B
preferred stock on or before November 13, 2004. NBC delivered a notice of demand for redemption on
November 13, 2003, and has since alleged, both through statements to the press and in its complaint
filed in Delaware, that we are obligated to redeem, and will be in default if we do not redeem,
NBCs investment on or before November 13, 2004. The aggregate redemption price payable in respect
of the 41,500 shares of Series B preferred stock held by NBC, including accrued dividends thereon,
was approximately $600.7 million as of December 31, 2004. We and NBC have filed briefs in the litigation and have each moved for judgment on the
pleadings. The court heard oral argument on the respective motions on February 14, 2005 and has
not yet issued its ruling. An adverse outcome in this litigation would have a material adverse
effect on us. See Forward Looking Statements and Associated Risks and UncertaintiesWe have not
redeemed our securities held by NBC that NBC has demanded that we redeem and this could have
adverse consequences for us and The adjustment to the dividend rate on our Series B preferred
stock could have adverse consequences for our business. Our antenna, transmitter and other broadcast equipment for our New York television station
(WPXN) were destroyed upon the collapse of the World Trade Center on September 11, 2001. We filed
property damage, business interruption and extra expense insurance claims with our insurer, Zurich
American Insurance Company, or Zurich. To date, Zurich has paid us
$7.7 million in respect of our claims for property damage, business interruption and extra expense, which are
substantially in excess of this amount. In March 2003, Zurich filed an action against us 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 we purchased from it. This action remains pending.
Were we to prevail on our insurance claims against Zurich, the recovery could have a material
effect on our cash position. We are involved in other litigation from time to time in the ordinary course of our business.
We believe the ultimate resolution of these matters will not have a material effect on our
financial position or results of operations or cash flows. 
 Item 4. Submission of Matters to Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the
period covered by this report. 30




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PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our Class A common stock is listed on the American Stock Exchange under the symbol PAX. The
following table sets forth, for the periods indicated, the high and low sales price per share for
our Class A common stock. 2004
    
    
    2003High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    4.60
    
    
    $
    3.51
    
    
    $
    2.65
    
    
    $
    1.91Second Quarter
    
    
    4.00
    
    
    
    2.15
    
    
    
    6.99
    
    
    
    2.18Third Quarter
    
    
    3.30
    
    
    
    1.30
    
    
    
    6.48
    
    
    
    3.70Fourth Quarter
    
    
    1.74
    
    
    
    0.90
    
    
    
    6.07
    
    
    
    3.62
 On March 4, 2005, the closing sale price of our Class A common stock on the American Stock
Exchange was $1.29 per share. As of that date, there were approximately 471 holders of record of
the Class A common stock. Dividends We have not paid cash dividends and do not intend for the foreseeable future to declare or pay
any cash dividends on any classes of common stock and intend to retain earnings, if any, for the
future operation and expansion of our business. Any determination to declare or pay dividends will
be at the discretion of our board of directors and will depend upon our future earnings, results of
operations, financial condition, capital requirements, contractual restrictions under our debt
instruments, considerations imposed by applicable law and other factors deemed relevant by our
board of directors. In addition, the terms of the indentures governing our outstanding senior
secured notes and senior subordinated notes and our outstanding preferred stock contain
restrictions on the declaration of dividends with respect to our common stock. Issuer Purchases of Equity Securities In October 2004, we completed an exchange offer pursuant to which 3,197,250 restricted shares
of Class A common stock were exchanged for options to purchase an equal number of shares of Class A
common stock, at an exercise price of $0.01 per share and with identical vesting provisions as the
original awards. The restricted shares were originally issued to certain employees and directors in
connection with an October 2003 grant. This exchange did not result in any additional stock-based
compensation expense. The number of shares of Class A common stock issued and outstanding at the
time of exchange was reduced by the number of restricted shares exchanged. Equity Compensation Plan Information As of December 31, 2004, the following shares of Class A common stock were authorized for
issuance under equity compensation plans: Number of Securities
    
    
    Weighted-Average
    
    
    Number of Securitiesto be Issued Upon
    
    
    Exercise Price of
    
    
    Remaining Available forExercise of
    
    
    Outstanding
    
    
    Future Issuance UnderOutstanding
    
    
    Options,
    
    
    Equity Compensation PlansOptions, Warrants
    
    
    Warrants
    
    
    [excluding SecuritiesPlan Category
    
    and Rights
    
    
    and Rights
    
    
    Reflected in Column(a)]Equity compensation plans approved
by security holders (1)
    
    
    5,336,713
    
    
    $
    0.49
    
    
    
    3,444,603Equity compensation plans not
approved by security holders (1)
    
    
    522,500
    
    
    $
    3.04
    
    
    
    Total
    
    
    5,859,213
    
    
    $
    0.71
    

    
    
    3,444,603
   (1)
    
    In October 2004, we completed an exchange offer pursuant to which 3,197,250 restricted shares
of Class A common stock were exchanged for options to purchase an equal number of shares of
Class A common stock, at an exercise price of $0.01 per share and with identical vesting
provisions as the original awards. The restricted 31




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shares were originally issued to certain
employees and directors in connection with the
October 2003 grant. This exchange did not result
in any additional stock-based compensation
expense. The number of shares of Class A common
stock issued and outstanding at the time of
exchange was reduced by the number of restricted
shares exchanged. A narrative description of the
material terms of these plans is set forth in
Note 11STOCK INCENTIVE PLANS, to our
consolidated financial statements which are set
forth elsewhere in this report. 
 Item 6. Selected Financial Data The following table sets forth our consolidated financial data as of and for each of the years
in the five year period ended December 31, 2004. This information is qualified in its entirety by,
and should be read in conjunction with, the consolidated financial statements and the notes thereto
which are included elsewhere in this report. The following data, insofar as it relates to each of
the years presented, has been derived from annual financial statements, including the consolidated
balance sheets at December 31, 2004 and 2003, and the related consolidated statements of operations
and of cash flows for each of the three years in the period ended December 31, 2004, and notes
thereto appearing elsewhere herein. (in thousands, except per share data) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Operations Data:Net revenues
    
    $
    276,630
    
    
    $
    270,939
    
    
    $
    276,921
    
    
    $
    265,326
    
    
    $
    271,892Operating (loss) income
    
    
    (12,419
    )
    
    
    44,195
    
    
    
    (69,906
    )
    
    
    (150,129
    )
    
    
    (155,946
    )Net loss
    
    
    (187,972
    )
    
    
    (76,213
    )
    
    
    (336,186
    )
    
    
    (205,545
    )
    
    
    (169,176
    )Net loss attributable to common
stockholders (a)
    
    

    (245,735
    )
    
    
    (146,317
    )
    
    
    (446,285
    )
    
    
    (352,201
    )
    
    
    (381,980
    )Basic and Diluted Loss Per Common
Share: (b)Net loss
    
    $
    (3.61
    )
    
    $
    (2.14
    )
    
    $
    (6.88
    )
    
    $
    (5.46
    )
    
    $
    (6.01
    )Weighted average shares outstanding
basic and diluted
    
    
    68,139
    
    
    
    68,390
    
    
    
    64,849
    
    
    
    64,509
    
    
    
    63,515Balance Sheet Data:Cash and cash equivalents
    
    $
    82,047
    
    
    $
    97,123
    
    
    $
    25,765
    
    
    $
    83,858
    
    
    $
    51,363Working capital
    
    
    77,422
    
    
    
    67,132
    
    
    
    19,188
    
    
    
    57,871
    
    
    
    74,298Total assets
    
    
    1,224,305
    
    
    
    1,283,677
    
    
    
    1,276,619
    
    
    
    1,409,840
    
    
    
    1,552,603Total debt
    
    
    1,004,093
    
    
    
    925,608
    
    
    
    900,101
    
    
    
    529,180
    
    
    
    405,476Total mandatorily redeemable preferred
stock
    
    
    471,355
    
    
    
    410,739
    
    
    
    354,498
    
    
    
    589,958
    
    
    
    574,587Total mandatorily redeemable convertible
preferred stock
    
    
    740,745
    
    
    
    684,067
    
    
    
    638,603
    
    
    
    574,202
    
    
    
    505,802Total common stockholders deficit
    
    
    (1,327,341
    )
    
    
    (1,089,845
    )
    
    
    (958,267
    )
    
    
    (515,520
    )
    
    
    (175,503
    )Other Data:Cash flows (used in) provided by operating
activities
    
    $
    (9,717
    )
    
    $
    32,916
    
    
    $
    (75,428
    )
    
    $
    (60,772
    )
    
    $
    (76,036
    )Cash flows (used in) provided by investing
activities
    
    
    (23,647
    )
    
    
    60,929
    
    
    
    (7,689
    )
    
    
    48,477
    
    
    
    (12,784
    )Cash flows provided by (used in)
financing activities
    
    
    18,288
    
    
    
    (22,487
    )
    
    
    25,024
    
    
    
    44,790
    
    
    
    14,994Program rights payments and deposits
    
    
    67,682
    
    
    
    34,239
    
    
    
    116,243
    
    
    
    130,566
    
    
    
    128,288Payments for cable distribution rights
    
    
    123
    
    
    
    4,347
    
    
    
    9,286
    
    
    
    14,418
    
    
    
    10,727Purchases of property and equipment
    
    
    15,845
    
    
    
    26,732
    
    
    
    31,177
    
    
    
    35,213
    
    
    
    25,110
   a)
    
    Includes dividends and accretion on redeemable preferred stock.b)
    
    Because of losses from continuing operations, the effect of stock options and warrants is
antidilutive. Accordingly, our presentation of diluted earnings per share is the same as that
of basic earnings per share. 32




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Introduction Overview: We are a network television broadcasting company which owns and operates the largest broadcast
television station group in the U.S., as measured by the number of television households in the
markets our stations serve. We currently own and operate 60 broadcast television stations
(including three stations we operate under time brokerage agreements), which reach all of the top
20 U.S. markets and 40 of the top 50 U.S. markets. We operate PAX TV, a network that provides
programming seven days per week, 24 hours per day, and reaches approximately 95 million homes, or
87% of prime time television households in the U.S., through our broadcast television station
group, and pursuant to distribution arrangements with cable and satellite distribution systems and
our broadcast station affiliates. PAX TVs entertainment programming principally consists of shows
originally developed by us and shows that have appeared previously on other broadcast networks
which we have purchased the right to air. The balance of PAX TVs programming consists of long form
paid programming (principally infomercials) and public interest programming. Our primary operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses, programming expenses, employee compensation and costs
associated with cable and satellite distribution, ratings services and promotional advertising.
Programming amortization is a significant expense and is affected by several factors, including the
mix of syndicated versus lower cost original programming as well as the frequency with which
programs are aired. Our business operations presently do not provide sufficient cash flow to support our debt
service and preferred stock dividend requirements. In September 2002, we engaged Bear, Stearns &
Co. Inc. and in August 2003 we engaged Citigroup Global Markets Inc. to act as our financial
advisors to assess our business plan, capital structure and future capital needs, and to explore
strategic alternatives for our company. We terminated these engagements in March 2005 as no viable
strategic transactions had been developed on terms that we believed would be in the best interests
of all of our stockholders. While we continue to consider strategic alternatives that may arise,
which may include the sale of all or part of our assets, finding a strategic partner for our
company who would provide the financial resources to enable us to redeem, restructure or refinance
our debt and preferred stock, or finding a third party to acquire our company through a merger or
other business combination or through a purchase of our equity securities, our principal efforts
are focused on improving our core business operations and increasing our cash flow. See
Forward-Looking Statements and Associated Risks and UncertaintiesOur ability to pursue strategic
alternatives is subject to limitations and factors beyond our control. Financial Performance:  
    Net revenues in 2004 increased 2.1% to $276.6 million compared to $270.9 million in 2003.
    Operating loss was $12.4 million in 2004 compared to operating income of $44.2
million in 2003. Included in the 2004 results is a charge of $4.6 million to adjust
certain programming to net realizable value resulting from a change in estimated future
advertising revenues expected to be generated by certain programming as a result of a
change in expected usage of such programming, a $4.0 million adjustment to recognize
additional lease expense for lease arrangements that provide for escalating lease payments
(of which approximately $3.1 million pertained to periods prior to 2004), a $1.7 million
amortization expense charge for certain leasehold improvements to adjust their
amortization period to the shorter of their useful lives or the lease terms, a $3.0
million reduction in music license fees resulting from the conclusion of a dispute and the
commencement of a new agreement with a music license organization and $3.3 million of
insurance recoveries related to our World Trade Center litigation. Operating income for
2003 included gains of $51.9 million primarily from sales of television station assets.
    Net loss attributable to common stockholders was $245.7 million in 2004 compared to a
net loss attributable to common stockholders of $146.3 million in 2003. The net loss
attributable to common stockholders for 2004 includes all of the items described above,
$1.1 million in costs incurred in connection with a required adjustment of the dividend
rate on our Series B preferred stock held by NBC, increased dividends of $20.7 million
including the increase resulting from the aforementioned rate adjustment, a loss on
extinguishment of debt of $6.3 million resulting from the refinancing of our senior credit
facility in January 2004 and a $4.9 million adjustment to recognize additional provision
for income taxes resulting from a change in the estimated state income tax rate that we
expect to incur at the time of reversal of our deferred taxes (of which approximately $4.5
million pertained to periods prior to 2004). The net loss attributable to common 33




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stockholders for 2003 included a benefit from income taxes of $4.7 million resulting from
the sale of television stations.
    Cash flow from operating activities decreased $42.6 million to a negative $9.7
million in 2004 compared to $32.9 million of cash provided by operating activities in
2003. Balance Sheet: Our cash, cash equivalents and short-term investments decreased during the year by $22.0
million to $88.0 million as of December 31, 2004. Our total debt, which primarily comprises three
series of notes, increased $78.5 million during the year to $1.0 billion as of December 31, 2004.
Additionally, we have three series of mandatorily redeemable preferred stock currently outstanding
with a carrying value of $1.2 billion as of December 31, 2004. Two series of the notes require us
to make periodic cash interest payments on a current basis. Interest on the third series of notes
accretes until July 2006, at which time we will be obligated to make cash interest payments on a
current basis. All series of preferred stock accrue dividends but do not require current cash
dividend payments. None of these instruments matures or requires mandatory principal repayments
until the fourth quarter of 2006. During 2003 and 2004, we issued letters of credit to support our obligation to pay for certain
original programming. The settlement of such letters of credit generally occurs during the first
quarter of the year. As a result of this strategy, our programming payments may be higher in the
first quarter of the year compared to the other three quarters of the year. Sources of Cash: Our principal sources of cash in 2004 were:  
    revenues from the sale of network long form paid programming, network spot advertising,
station long form paid programming and station spot advertising; and  
    $10.0 million in proceeds from the sale of broadcast assets, consisting of one
television station. We expect our principal sources of cash in 2005 to consist of revenues from the sale of
network long form paid programming, network spot advertising, station long form paid programming
and station spot advertising. We are also exploring the sale of certain broadcast station assets,
which if completed during 2005 would generate additional cash. Key Company Performance Indicators: We use a number of key performance indicators to evaluate and manage our business. One of the
key indicators related to the performance of our long form paid programming is long form
advertising rates. These rates can be affected by the number of television outlets through which
long form advertisers can air their programs, weather patterns which can affect viewing levels, and
new product introductions. We monitor early indicators such as how new products are performing and
our ability to increase or decrease rates for given time slots. Program ratings are one of the key indicators related to our network spot business. As more
viewers watch our programming, our ratings increase which can increase our revenues. The
commitments we obtain from advertisers in the up front market are a leading indicator of the
potential performance of our network spot revenues. As the year progresses, we monitor pricing in
the scatter market to determine where network spot advertising rates are trending.
Cost-per-thousand (CPMs) refers to the price of reaching 1,000 television viewing households with
an advertisement. CPM trends and comparisons to competitors CPMs can be used to determine pricing
power and the appeal of the audience demographic that we are delivering to advertisers. In order to evaluate our local market performance, we examine ratings as well as our cost per
point, which is the price we charge an advertiser to reach one percent of the total television
viewing households in a stations DMA, as measured by Nielsen. We also examine the percentage of
the market advertising revenue that our local stations are receiving compared to the share of the
market ratings that we are delivering. The economic health of a particular region or certain
industries that are concentrated in a particular region can affect the amount being spent on local
television advertising. Factors Expected to Affect our Performance in 2005: We do not anticipate that we will generate sufficient cash flows from operating activities to
cover our anticipated capital expenditures for the year ending December 31, 2005. Accordingly, our
total cash, cash equivalents and short-term investments as of December 31, 2004 is expected to
decrease during the course of 2005. 34




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We have begun discussions with NBC as to the termination of our network sales agency agreement
with NBC and each of our JSAs with NBC (covering 14 of our stations in 12 markets), and we expect
that the performance of our business during 2005 will be affected by the costs of terminating these
arrangements, including the possible disruption of our network advertising sales efforts resulting
from the transfer of this function from NBC to our own employees. In connection with the termination of our JSAs, we will have to either relocate up to 22 of
our station master controls which are currently located in our JSA partners facility or lease
space from our JSA partner in order to keep our station master control located in our JSA partners
facility. We expect that the performance of our business during 2005 will be affected by the
terms on which we are able to effect such relocation or leasing. The U.S. economic environment also affects the performance of our business, since our business
is dependent in part on cyclical advertising rates. An improving economy, led by increases in
consumer confidence, could benefit us by leading advertisers to increase their spending. Outlook for 2005: We expect 2005 to be a challenging year for us. Our principal business objective is to improve
our cash flow and increase our financial flexibility, so that we may pursue refinancing
alternatives with a view to reducing our cost of capital. We believe that if we are able to improve
our cash flow and reduce our cost of capital, we will be able to improve the degree to which our
operating business supports our capital structure and improve our ability to avail ourselves of
future opportunities to strengthen our business that may arise due to changes in the regulatory or
business environment for broadcasters or other future developments in our industry. In 2005 we will seek to maintain an efficient operating structure and a flexible programming
strategy as we implement changes to our business operations. We do not expect to invest substantial
additional amounts in new entertainment programming, and are evaluating other programming
strategies and opportunities that might be available to us which would improve our cash flow. In
March 2005, we notified all of our JSA partners other than NBC that we were exercising our right to
terminate the JSAs, effective June 30, 2005, we notified all of our affiliates that we were
exercising our right to terminate the affiliation agreements, effective June 30, 2005, and we
notified NBC that we were removing, effective June 30, 2005, all of our stations from the national
sales agency agreement pursuant to which NBC sells national spot advertisements for 49 of our 60
stations. In addition, we began discussions with NBC as to the termination of our network sales
agency agreement with NBC and each of our JSAs with NBC (covering 14 stations in 12 markets). We
are also reviewing all of the elements of our business operations. In order for us to improve revenues in 2005, we would need to market and air programming that
attracts additional viewers, increase our CPMs through delivery of more attractive viewing
demographics or realize increases in long form paid programming rates. As long form programming is
not currently in a high growth cycle, we expect that our revenues in this segment for 2005 will be
relatively unchanged when compared to 2004. As we do not expect to invest substantial additional
amounts in new entertainment programming during 2005, we expect that our revenues from network spot
and station spot advertising for 2005 will be relatively unchanged or may decrease when compared to
2004. We expect that we will experience a decrease in certain operating expenses during 2005 as a
result of our strategy of reducing our programming and other operating expenses, offset by costs to
exit certain arrangements and increased utility costs to broadcast our digital television signal
and other contractual increases in certain operating expenses. During 2005, we also do not
anticipate that we will have the benefit of a reduction in expenses related to certain beneficial
legal settlements, similar to those that we received during the years ended December 31, 2004 and
2003. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of financial statements requires us 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
reporting period. We believe the most significant estimates involved in preparing our financial
statements include estimates related to the net realizable value of our programming rights, barter
revenue recognition, estimates used in accounting for leases and estimates related to the
impairment of long-lived assets and FCC licenses. We base our estimates on historical experience
and various other assumptions we believe are reasonable. Actual results could differ from those
estimates. We consider the accounting policies described below to be critical since they have the
greatest effect on our 35




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reported financial condition and results of operations and they require significant estimates
and judgments. We carry programming rights assets on our balance sheet at the lower of unamortized cost or
net realizable value. We record our program rights and related liabilities at the contractual amounts when the
programming is available to air. Our original programming generally is amortized on a straight line
or accelerated method over three to four years based on expected usage. Our syndicated programming
rights are amortized over the licensing agreement term using the greater of the straight line per
run or straight line over the license term method.
 We periodically evaluate the net realizable value of our program rights based
on anticipated future usage of programming and the anticipated future ratings and related
advertising revenues. We evaluate the net realizable value of our programming rights by aggregating
the program costs and related estimated future revenues for each programming daypart. If estimated
future revenues are insufficient to recover the unamortized cost of the programming assets in each
daypart, we record an adjustment to write down the value of our assets to net realizable value. We
also evaluate whether future revenues will be sufficient to recover the cost of programs we are
committed to purchase in the future, and if estimated future revenues are insufficient, we accrue a
loss related to our programming commitments. Our estimates of future advertising revenues are based
upon our actual revenues generated currently, adjusted for estimated revenue growth assumptions. If
market conditions were to deteriorate, we may not achieve our estimated future revenues, which
could result in future write downs to net realizable value and accrued losses on programming
commitments. We have made judgments and estimates in connection with some of our leasing transactions
regarding the estimated useful lives of the assets subject to lease, as well as the discount rates
used to estimate the present value of future lease payments. These judgments and estimates have led
us to conclude that these leases should be accounted for as operating leases. Had we used different
judgments and estimates, these leases may have been classified as capital leases. The terms of our
senior notes indenture, senior subordinated notes indentures and outstanding preferred stock
restrict our ability to incur indebtedness, including our ability to enter into capital leases. We review our long-lived assets for possible 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 our analysis indicates that a possible impairment
exists, we are required to then estimate the fair value of the asset determined either by third
party appraisal or estimated discounted future cash flows. In addition, our FCC licenses are tested
for impairment at least annually by comparing the estimated fair values with the recorded amount on
an aggregate basis as a single unit of accounting since we operate PAX TV as a single asset, a
consolidated distribution platform. We believe that we have made reasonable estimates and judgments
in determining whether our long-lived assets and FCC licenses have been impaired. If, however,
there were a material change in our determination of fair values or if there were a material change
in the conditions or circumstances influencing fair value, we could be required to recognize an
impairment charge. In addition, it is possible that the estimated life of certain long-lived assets
will be reduced significantly in the near term because of the anticipated industry migration from
analog to digital broadcasting. If and when we become aware of such a reduction of useful lives,
depreciation expense will be adjusted prospectively to ensure assets are fully depreciated upon
migration. We recognize revenues as commercial spots and long form paid programming are aired and ratings
guarantees to advertisers are achieved. We recognize a liability for shortfalls in ratings
guarantees based on information obtained from third party sources and by using our judgment and
best estimates. We carry accounts receivable at the amount we believe to be collectible. We use our judgment
and best estimates in determining the amount of accounts receivable we believe to be uncollectible.
The amounts of accounts receivable that ultimately become uncollectible could vary materially from
our estimates. We have entered into agreements with cable system operators to improve channel positioning on
certain cable systems. For agreements with specified termination dates, we amortize amounts paid
over the term of the agreement using the straight line method. For agreements with no specified
termination date, we amortize amounts paid on a straight line basis over their estimated useful
lives. We depreciate property and equipment over their estimated useful lives using the straight line
method. We periodically evaluate the potential time frame in which certain equipment may become
obsolete as a result of the FCC mandated conversion from analog to digital to determine whether
accelerated depreciation is necessary. We have not determined whether accelerated depreciation
should be used to depreciate any of our property and equipment and we continue to depreciate our
property and equipment over their estimated useful lives. We account for employee stock-based compensation using the intrinsic value method. 36




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We have investments in certain broadcast properties, including purchase options in entities
owning television stations. We review our investments in broadcast properties for possible
impairment whenever events or changes in circumstances indicate that the carrying value of these
assets may not be recoverable. If our analysis indicates that a possible impairment exists, we are
required to estimate the fair value of the asset based either on a third party appraisal or
estimated discounted future cash flows. We believe we have made reasonable estimates and judgments
in determining whether our investments in broadcast properties are impaired. We structured the disposition of our radio division in 1997 and our acquisition of television
stations during the period following this disposition in a manner that we believed would qualify
these transactions as a like kind exchange under Section 1031 of the Internal Revenue Code and
would permit us to defer recognizing for income tax purposes up to approximately $333 million of
gain. The IRS has examined our 1997 tax return and has issued us a 30-day letter proposing to
disallow all of our gain deferral. We have filed our protest to this determination with the IRS
appeals division, but we cannot predict the outcome of this matter at this time, and we may not
prevail. 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 million of the $333
million gain deferral will be disallowed. We have filed a protest to this alternative determination
as well. We may not prevail with respect to this alternative determination. Should the IRS
successfully challenge our position and disallow all or part of our gain deferral, because we had
net operating losses in the years subsequent to 1997 in excess of the amount of the deferred gain,
we would not be liable for any tax deficiency, but could be liable for state income taxes. We have
estimated the amount of state income tax for which we could be liable as of December 31, 2004, to
be approximately $8.0 million should the IRS succeed in disallowing the entire deferred gain. In
addition, we could be liable for interest on the tax liability for the period prior to the
carryback of our net operating losses and for interest on any state income taxes that may be due.
As of December 31, 2004, we have estimated the amount of federal interest and state interest to be
approximately $18.0 million and $4.0 million, respectively, should the IRS succeed in disallowing
the entire deferred gain. The use of our net operating losses to offset any disallowed deferred
gain would result in a benefit from income taxes. This matter is currently with the Appeals Office
of the Internal Revenue Service. Results of Continuing Operations The following table sets forth net revenues, the components of operating expenses with
percentages of net revenues, and other operating data for the periods presented (in thousands): Years Ended December 312004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %Net revenues
    
    $
    276,630
    
    
    
    100.0
    
    
    $
    270,939
    
    
    
    100.0
    
    
    $
    276,921
    
    
    
    100.0Expenses:Programming and broadcast operations
    
    
    56,472
    
    
    
    20.4
    
    
    
    51,954
    
    
    
    19.2
    
    
    
    51,204
    
    
    
    18.5Program rights amortization
    
    
    53,616
    
    
    
    19.4
    
    
    
    51,082
    
    
    
    18.9
    
    
    
    77,980
    
    
    
    28.2Selling, general and administrative
    
    
    121,835
    
    
    
    44.0
    
    
    
    110,976
    
    
    
    41.0
    
    
    
    132,305
    
    
    
    47.8Business interruption insurance proceeds
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    (1,617
    )
    
    
    (0.6
    )Time brokerage and affiliation fees
    
    
    4,466
    
    
    
    1.6
    
    
    
    4,403
    
    
    
    1.6
    
    
    
    4,079
    
    
    
    1.5Stock-based compensation
    
    
    8,501
    
    
    
    3.1
    
    
    
    12,766
    
    
    
    4.7
    
    
    
    3,810
    
    
    
    1.4Adjustment of programming to net
realizable value
    
    
    4,645
    
    
    
    1.7
    
    
    
    1,066
    
    
    
    0.4
    
    
    
    41,270
    
    
    
    14.9Restructuring (credits) charges
    
    
    (5
    )
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    2,173
    
    
    
    0.8Reserve for state taxes
    
    
    691
    
    
    
    0.2
    
    
    
    3,055
    
    
    
    1.1
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    43,664
    
    
    
    15.8
    
    
    
    42,983
    
    
    
    15.9
    
    
    
    58,529
    
    
    
    21.1Total operating expenses
    
    
    293,885
    
    
    
    106.2
    
    
    
    278,333
    
    
    
    102.7
    
    
    
    369,733
    
    
    
    133.5Gain on sale or disposal of broadcast and other
assets, net
    
    
    4,836
    
    
    
    1.7
    
    
    
    51,589
    
    
    
    19.0
    
    
    
    22,906
    
    
    
    8.3Operating (loss) income
    
    $
    (12,419
    )
    
    
    (4.5
    )
    
    $
    44,195
    
    
    
    16.3
    
    
    $
    (69,906
    )
    
    
    (25.2
    )Other Data:Cash flows (used in) provided by
operating activities
    
    $
    (9,717
    )
    
    
    
    
    
    $
    32,916
    
    
    
    
    
    
    $
    (75,428
    )Cash flows (used in) provided by investing
activities
    
    
    (23,647
    )
    
    
    
    
    
    
    60,929
    
    
    
    
    
    
    
    (7,689
    )Cash flows provided by (used in) financing
activities
    
    
    18,288
    
    
    
    
    
    
    
    (22,487
    )
    
    
    
    
    
    
    25,024Program rights payments and deposits
    
    
    67,682
    
    
    
    
    
    
    
    34,239
    
    
    
    
    
    
    
    116,243Payments for cable distribution rights
    
    
    123
    
    
    
    
    
    
    
    4,347
    
    
    
    
    
    
    
    9,286Purchases of property and equipment
    
    
    15,845
    
    
    
    
    
    
    
    26,732
    
    
    
    
    
    
    
    31,177
 37




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Years Ended December 31, 2004 and 2003 Net revenues increased 2.1% to $276.6 million for the year ended December 31, 2004 versus
$270.9 million for the year ended December 31, 2003. This increase is primarily attributable to
increased revenues from long form paid programming. Programming and broadcast operations expenses were $56.5 million during the year ended
December 31, 2004, compared with $52.0 million in 2003. Programming and broadcast operations
expenses reflects a $3.0 million reduction in music license fees during the third quarter of 2004
resulting from the conclusion of a dispute and the commencement of a new agreement with a music
license organization offset by higher tower rent and utilities costs in connection with our digital
television build-out and higher personnel costs. In the fourth
quarter of 2004, we
recorded an adjustment in the amount of $3.7 million in order to recognize additional lease expense
for lease arrangements that provide for escalating lease payments of which approximately $2.9
million pertained to periods prior to 2004. Program rights amortization expense was $53.6 million during the year ended December 31, 2004
compared with $51.1 million in 2003. The increase is primarily attributable to increased
amortization associated with new original and syndicated programming in 2004 when compared to 2003. Selling, general and administrative expenses were $121.8 million during the year ended
December 31, 2004 compared with $111.0 in 2003. The increase was primarily attributable to higher
personnel costs and increased advertising spending. During 2004 we received $3.3 million of
insurance proceeds pursuant to a property and business interruption insurance claim in connection
with the destruction of our antenna, transmitter and other broadcast equipment upon the collapse of
the World Trade Center on September 11, 2001. We are in litigation with our former insurance
carrier concerning the extent of our property and business interruption coverage. We offset the
insurance proceeds we received in 2004 against expenses we incurred in 2004 in connection with this
litigation. During 2004, we determined that we had not recorded certain state taxes for purchases
in jurisdictions in which we have operations, resulting in a charge of $0.8 million which is
reflected in selling, general and administrative expenses in 2004. A significant portion of the
state taxes recorded pertain to periods prior to 2004. During the first quarter of 2003, we
received approximately $2.2 million from NBC to settle a pending dispute regarding digital
television signal interference at our television station WPXM, serving the Miami-Fort Lauderdale,
Florida market. This settlement was recorded as a reduction of our selling, general and
administrative expenses. Additionally, in the second quarter of 2003, we reduced our bad debt
reserve by approximately $1.5 million as a result of our shift in 2003 to more prepaid long form
advertising. During the third quarter of 2004, we recognized a charge of $4.6 million to reduce certain
programming rights to their net realizable value. This charge resulted from a change in the
estimated future advertising revenues expected to be generated by certain programming as a result
of a change in expected usage of such programming. During the year ended December 31, 2003, we
recognized an adjustment of programming to net realizable value totaling $1.1 million resulting
from our decision to no longer air an original game show production. In 2004 and 2003, we recorded a reserve for state taxes in the amount of $0.7 million and $3.1
million, respectively, in connection with a tax liability related to certain states in which we
have operations. The amount reserved for 2003 included prior periods. Depreciation and amortization expense was $43.7 million during the year ended December 31,
2004 compared with $43.0 million in 2003. During the fourth quarter of 2004, we recorded additional
amortization expense of $1.7 million for certain leasehold improvements to adjust their
amortization period to the shorter of their useful lives or the lease terms. Approximately $1.6
million pertained to periods prior to 2004. During 2004, we determined that we had not recorded
certain state taxes for purchases in jurisdictions in which we have operations, resulting in a
charge of $1.4 million and a corresponding increase in property and equipment and accrued
liabilities. We recorded a $0.4 million depreciation charge related to the aforementioned increase
in property and equipment. A significant portion of the state taxes recorded pertain to periods
prior to 2004. In addition, in 2004 we recorded a $0.5 million impairment charge in connection with
a purchase option for a television station. During 2003, we determined that we had over-amortized
certain cable and satellite distribution rights assets, which resulted in a $6.9 million reduction
in amortization expense. The aforementioned 2003 reduction in amortization expense was partially
offset by an impairment charge of $5.4 million recorded as depreciation and amortization related to
a purchase option for a television station. This impairment existed in periods prior to 2003. In
1998, we began entering into cable distribution agreements for periods generally up to ten years in
markets where we do not own a television station. Certain of these cable distribution agreements
also provided us with some level of promotional advertising to be run 38




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at the discretion of the
cable operator, primarily during the first few years to support the launch of the PAX TV
network on the cable systems. We had been amortizing these assets on an accelerated basis,
which gave effect to the advertising component included in these agreements. The remaining
unamortized cost, which was being amortized over seven years, will be amortized over the remaining
contractual life of the agreements. In May 2004, we completed the sale of our television station KPXJ, serving the Shreveport,
Louisiana market, for $10.0 million resulting in a pre-tax gain of approximately $6.1 million. In October 2003, we granted 3,598,750 options under our 1998 Stock Incentive Plan, as amended
(the Plan), to purchase one share of our Class A common stock at an exercise price of $0.01 per
share to certain employees and directors. The options provided for a one business day exercise
period. All holders of the options exercised their options and received shares of Class A common
stock that were subject to vesting, restrictions on transfer and a risk of forfeiture. The shares
of restricted stock issued upon the exercise of the options included 2,278,000 shares which were to
vest in their entirety at the end of a five year period. Of the remaining restricted stock,
1,000,750 shares were to vest ratably over a three year period and 320,000 shares were to vest
ratably over a five year period. The option grants resulted in non-cash stock based compensation
expense, which will be recognized on a straight-line basis over the vesting period. For the years
ended December 31, 2004 and 2003, we recognized approximately $7.1 million and $1.5 million,
respectively, in stock based compensation expense in connection with these grants. Approximately
$3.2 million will be recognized in 2005, and $6.1 million will be recognized between 2006 and 2008. In October 2004, we completed an exchange offer pursuant to which 3,197,250 restricted shares
of Class A common stock were exchanged for options to purchase an equal number of shares of Class A
common stock, at an exercise price of $0.01 per share and with identical vesting provisions as the
original awards. The restricted shares were originally issued to certain employees and directors in
connection with the October 2003 grants. This exchange did not result in any additional stock-based
compensation expense. The number of shares of Class A common stock issued and outstanding at the
time of exchange was reduced by the number of restricted shares exchanged. In January 2003, we consummated a stock option exchange offer under which we granted to
holders who tendered their eligible options in the exchange offer new options under the Plan to
purchase one share of our Class A common stock for each two shares of our Class A common stock
issuable upon the exercise of tendered options, at an exercise price of $0.01 per share. The terms
of the new options provided for a one business day exercise period. All holders who tendered their
eligible options in the exchange offer exercised their new options promptly after the issuance of
those new options. Approximately 5.5 million options issued under our stock option plans and 1.8
million additional nonqualified options were tendered in the exchange offer and approximately 2.6
million new shares of Class A common stock were issued upon exercise of the new options, net of
approximately 1.0 million shares of Class A common stock withheld, in accordance with the Plans
provisions, at the holders elections to cover withholding taxes and the option exercise price
totaling approximately $2.4 million. The stock option exchange resulted in a non-cash stock-based
compensation expense of approximately $8.7 million, of which approximately $8.6 million related to
vested and unvested shares issued upon exercise of the new options was recognized in the year ended
December 31, 2003 and the remaining amount was recognized in 2004. In addition, the remaining
deferred stock compensation expense associated with the original stock option awards totaling
approximately $2.5 million at December 31, 2002 associated with tendered options was recognized
using the straight-line method over the vesting period of the modified awards ($2.3 million
recognized in the year ended December 31, 2003 and $0.2 million was recognized in 2004). As of
December 31, 2004, there were 40,000 shares of restricted stock issued upon the exercise of options
in the January 2003 exchange that had not vested as a result of elections to defer vesting made by
the holders. Interest expense for the year ended December 31, 2004 increased to $94.2 million from $92.2
million in 2003. The increase is primarily due to higher accretion on our 12 1/4 % senior
subordinated discount notes. Dividends on mandatorily redeemable preferred stock were $60.6 million
compared to $27.5 million in 2003. This increase resulted from the classification of our 14 1/4%
Junior Exchangeable Preferred Stock as interest expense beginning July 1, 2003 in accordance with
SFAS 150. Interest income for the year ended December 31, 2004 decreased to $2.8 million from $3.4
million in 2003. The decrease is primarily due to lower interest income on amounts due from Crown
Media. On January 12, 2004, we completed a private offering of $365.0 million of senior secured
floating rate notes. The proceeds from the offering were used to repay in full the outstanding
indebtedness under our senior credit facility. The refinancing resulted in a charge in the first
quarter of 2004 in the amount of $6.3 million related to the unamortized debt issuance costs
associated with the senior credit facility. 39




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Years Ended December 31, 2003 and 2002 Net revenues decreased 2.2% to $270.9 million for the year ended December 31, 2003 versus
$276.9 million for the year ended December 31, 2002. This decrease is primarily attributable to the
sale of certain television stations. Programming and broadcast operations expenses were $51.9 million during the year ended
December 31, 2003, compared with $51.2 million in 2002. This increase is primarily due to higher
tower rent and utilities expense in connection with our digital television build-out. Program rights amortization expense was $51.1 million during the year ended December 31, 2003
compared with $78.0 million in 2002. The decrease is primarily due to the modification of our
programming schedule in January 2003 whereby we replaced daytime entertainment programming with
long form paid programming for which we have no programming cost and due to the sub-licensing of
Touched By An Angelto Crown Media described below. Selling, general and administrative expenses were $111.0 million during the year ended
December 31, 2003 compared with $132.3 in 2002. The decrease is primarily a result of cost cutting
measures including headcount reductions in connection with the fourth quarter 2002 restructuring
activities described below, lower legal expenses primarily resulting from completion, in 2002, of
the NBC arbitration matter and a charge recorded in 2002 in connection with the postponement of the
700 MHz spectrum auction. In addition, during the first quarter of 2003, we received approximately
$2.2 million from NBC to settle a pending dispute regarding digital television signal interference
at our television station WPXM, serving the Miami-Fort Lauderdale, Florida market. This settlement
was recorded as a reduction of our selling, general and administrative expenses. Additionally, we
reduced our bad debt reserve by approximately $1.5 million because of the decrease in our
receivables that resulted from our shift in 2003 to more prepaid long form advertising. During the year ended December 31, 2003, we recognized an adjustment of programming to net
realizable value totaling $1.1 million resulting from our decision to no longer air an original
game show production. In 2003, we recorded a reserve for state taxes related to current and prior periods in the
amount of $3.1 million in connection with a tax liability related to certain states in which we
have operations. Depreciation and amortization expense was $43.0 million during the year ended December 31,
2003 compared with $58.5 million in 2002. This decrease is due to the sale of broadcast assets and
our determination to amortize our remaining cable distribution rights over the remaining term of
the underlying agreements. In 1998, we began entering into cable distribution agreements for
periods generally up to ten years in markets where we do not own a television station. Certain of
these cable distribution agreements also provided us 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 PAX TV network on the cable systems. We had been amortizing these assets on an
accelerated basis, which gave effect to the advertising component included in these agreements. The
remaining unamortized cost, which was being amortized over seven years, will be amortized over the
remaining contractual life of the agreements. In 2003, we determined that we had previously
over-amortized certain of these assets and recorded a $6.9 million reduction of amortization
expense. The decrease in depreciation and amortization expense was offset, in part, by an
impairment charge in the amount of $5.4 million recorded in 2003 in connection with a purchase
option on a television station. This impairment existed in periods prior to 2003. In May 2003, we completed the sale of our television station KAPX, serving the Albuquerque,
New Mexico market, for $20.0 million resulting in a pre-tax gain of approximately $12.3 million. In
April 2003, we completed the sale of our television stations WMPX, serving the Portland-Auburn,
Maine market, and WPXO, serving the St. Croix, U.S. Virgin Islands market, for an aggregate of
$10.0 million resulting in a pre-tax gain of approximately $3.1 million. In April 2003, we
completed the sale of our 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 $9.9 million. In February 2003, we completed the sale of our television station KPXF,
serving the Fresno, California market, for $35.0 million resulting in a pre-tax gain of
approximately $26.6 million. In October 2003, we granted 3,598,750 options under our 1998 Stock Incentive Plan, as amended
(the Plan), to purchase one share of our Class A common stock at an exercise price of $0.01 per
share to certain employees and directors. The options provided for a one business day exercise
period. All holders of the options exercised their options and received Class A common stock
subject to vesting restrictions. The awards included retention grants totaling 2,278,000 shares
which will vest in their entirety at the end of a five year period. Of the remaining awards,
1,000,750 will vest ratably over a three year period and 320,000 will vest ratably over a five year
period. The option grants resulted in non-cash stock based compensation expense, which will be
recognized on a straight-line basis over the vesting period of the awards. For the year ended
December 31, 2003, we recognized approximately $1.5 million in stock based compensation expense in
connection with these grants. 40




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In January 2003, we consummated a stock option exchange offer under which we granted to
holders who
tendered their eligible options in the exchange offer new options under the Plan to purchase
one share of our Class A common stock for each two shares of our Class A common stock issuable upon
the exercise of tendered options, at an exercise price of $0.01 per share. The terms of the new
options provided for a one business day exercise period. All holders who tendered their eligible
options in the exchange offer exercised their new options promptly after the issuance of those new
options. Approximately 5.5 million options issued under our stock option plans and 1.8 million non
qualified options issued in addition to the options granted under our stock option plans were
tendered in the exchange offer and approximately 2.6 million new shares of Class A common stock
were issued upon exercise of the new options, net of approximately 1.0 million shares of Class A
common stock withheld, in accordance with the Plans provisions, at the holders elections to cover
withholding taxes and the option exercise price totaling approximately $2.4 million. The stock
option exchange resulted in a non-cash stock-based compensation
expense of approximately $8.7
million, of which approximately $8.6 million related to vested and unvested shares issued upon
exercise of the new options was recognized in the year ended December 31, 2003 and the remaining
amount was recognized in 2004. In addition, the remaining deferred stock compensation expense
associated with the original stock option awards totaling approximately $2.5 million at December
31, 2002 associated with tendered options was recognized using the straight-line method over the
vesting period of the modified awards ($2.3 million recognized in the year ended December 31,
2003). Interest expense for the year ended December 31, 2003 increased to $92.2 million from $85.2
million in 2002. The increase is primarily due to higher accretion on our 12 1/4 % senior
subordinated discount notes. Dividends on mandatorily redeemable preferred stock resulted from the
classification of our 14 1/4% Junior Exchangeable Preferred Stock as a liability in
accordance with SFAS 150. Interest income for the year ended December 31, 2003 increased to $3.4 million from $2.4
million in 2002. The increase is primarily due to higher average cash and short-term investment
balances in 2003 resulting from the proceeds of asset sales. Restructuring Activities During the fourth quarter of 2002, we adopted a plan to consolidate certain of our operations,
reduce personnel and modify our programming schedule in order to significantly reduce our cash
operating expenditures. In connection with this plan, we 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 December 31, 2004, we have paid $2.1 million in
termination benefits to 94 employees and paid $0.5 million of lease termination and other costs. We
have accounted for these costs pursuant to SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities which we early adopted in the fourth quarter of 2002. 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, we will recognize
additional restructuring costs as they are incurred. Income Taxes Upon adoption of SFAS No. 142 on January 1, 2002, we no longer amortize our FCC license
intangible assets. Under previous accounting standards, these assets were being amortized over 25
years. Although the provisions of SFAS 142 stipulate that indefinite-lived intangible assets and
goodwill are not amortized, we are required under FASB Statement No. 109, Accounting for Income
Taxes (SFAS 109), to recognize deferred tax liabilities and assets for temporary differences
related to the FCC license intangible assets and the tax-deductible portion of these assets. Prior
to the adoption of SFAS 142, we considered our deferred tax liabilities related to the FCC license
intangible assets as a source of future taxable income in assessing the realization of our deferred
tax assets. Because indefinite-lived intangible assets and goodwill are no longer amortized for
financial reporting purposes under SFAS 142, the related deferred tax liabilities will not reverse
until some indeterminate future period should the FCC license intangible assets become impaired or
be disposed of. Therefore, the reversal of deferred tax liabilities related to FCC license
intangible assets is no longer considered a source of future taxable income in assessing the
realization of deferred tax assets. As a result of this accounting change, we were required to
record an increase in our deferred tax asset valuation allowance resulting in a deferred tax
liability of $168.6 million during the year ended December 31, 2002. In addition, we continue to
record increases in our valuation allowance based on increases in the deferred tax liabilities and
assets for temporary differences related to the FCC license intangible assets. We structured the disposition of our radio division in 1997 and our acquisition of television
stations during the 41




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period following this disposition in a manner that we believe would qualify
these transactions as a like kind
exchange under Section 1031 of the Internal Revenue Code and would permit us to defer
recognizing for income tax purposes up to approximately $333 million of gain. The IRS has examined
our 1997 tax return and has issued to us a 30-day letter proposing to disallow all of our gain
deferral. We have filed our protest to this determination with the IRS appeals division, but cannot
predict the outcome of this matter at this time, and may not prevail. In addition, the 30-day
letter offered us an alternative position that, in the event the IRS is unsuccessful in
disallowing all of the gain deferral, approximately $62 million of the $333 million gain deferral
will be disallowed. We filed a protest to this alternative determination as well. We may not
prevail with respect to this alternative determination. Should the IRS successfully challenge our
position and disallow all or part of our gain deferral, because we had net operating losses in the
years subsequent to 1997 in excess of the amount of the deferred gain, we would not be liable for
any tax deficiency, but could be liable for state income taxes. We have estimated the amount of
state income tax for which we could be liable as of December 31, 2004 to be approximately $8.0
million should the IRS succeed in disallowing the entire deferred gain. In addition, we could be
liable for interest on the tax liability for the period prior to the carryback of our net operating
losses and for interest on any state income taxes that may be due. We have estimated the amount of
federal interest and state interest, as of December 31, 2004, to be approximately $18.0 million and
$4.0 million, respectively, should the IRS succeed in disallowing the entire deferred gain. The use
of our net operating losses to offset any disallowed deferred gain would result in a benefit from
income taxes. This matter is currently with the Appeals Office of the Internal Revenue Service. Liquidity and Capital Resources Our primary capital requirements are to fund capital expenditures for our television
properties, programming rights payments and debt service payments. Our primary sources of liquidity
are our cash on hand and our net working capital. As of December 31, 2004, we had $88.0 million in
cash and cash equivalents and short-term investments and we had working capital of approximately
$77.4 million. During the year ended December 31, 2004, our cash and cash equivalents and
short-term investments decreased by approximately $22.0 million primarily due to net cash used in
operating activities, deposits on programming letters of credit and purchases of property and
equipment. We believe that our cash on hand and net working capital will provide the liquidity
necessary to meet our obligations and financial commitments through the next twelve months. Our
121/4% senior subordinated discount notes require us to commence making semi-annual cash interest
payments of approximately $30.4 million on July 15, 2006 and on each January 15 and July 15
thereafter. We believe that we will need to improve our operating cash flow over the next twelve
months in order to be able to meet this obligation. Should we be unable to do so, or if our
financial results are not as anticipated, we may be required to seek to sell broadcast assets or
raise additional funds through the offering of equity securities in order to generate sufficient
cash to meet our liquidity needs. During the first quarter of 2005 we have identified certain
broadcast assets that we will seek to sell in order to improve our liquidity position. We can
provide no assurance that we will be successful in selling these or any other assets or raising
additional funds that we may require. We are involved in litigation with NBC regarding NBCs demand for redemption of our Series B
preferred stock. NBC has asserted that we continue to be required to redeem all of the shares of
our Series B preferred stock held by NBC. If a court were to grant a judgment against us requiring
us to pay the redemption amount of the Series B preferred stock, it would have a material adverse
effect upon us. Our ability to effect any redemption is restricted by the terms of our outstanding
debt and preferred stock. Further, we do not currently have sufficient funds to pay the redemption
price of these securities. If any such judgment were entered, and we were unable to satisfy it, we
would be in default under the indentures governing our senior secured notes and senior subordinated
notes. In order to redeem NBCs preferred stock, we would need to repay, refinance or otherwise
restructure our outstanding indebtedness and preferred stock and raise sufficient liquidity to
enable us to pay the required redemption price. It is unlikely that we would be able to accomplish
these actions and redeem NBCs preferred stock were this to occur. Cash (used in) provided by operating activities was approximately $(9.7) million, $32.9
million and $(75.4) million for the years ended December 31, 2004, 2003 and 2002, respectively.
These amounts reflect cash generated or used in connection with the operation of PAX TV, including
the related programming rights and cable distribution rights payments and interest payments on our
debt. The decrease for the year ended December 31, 2004 is due to increased programming payments in
the period. Cash (used in) provided by investing activities was approximately $(23.6) million, $60.9
million and $(7.7) million for the years ended December 31, 2004, 2003 and 2002, respectively.
These amounts include proceeds from the sale of broadcast assets, capital expenditures and
short-term investments. During the third quarter of 2004, we purchased the television production
and distribution facility that we had been leasing from The Christian Network, Inc. for an
aggregate purchase price of approximately $1.7 million. We use this facility as our network
operations center and to originate our PAX TV network signal. In May 2004, we received $10.0
million in proceeds from the sale of our television station KPXJ, serving the Shreveport, Louisiana
market. 42




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During the year ended December 31, 2003, we raised $83.3 million in proceeds from the sale of
broadcast assets.
These asset sales included the sale of our television station KPXF, serving the Fresno,
California market, to Univision Communications, Inc. for $35.0 million, which we completed in
February 2003; the sale of our television stations WMPX, serving the Portland-Auburn, Maine market,
and WPXO, serving the St. Croix, U.S. Virgin Islands market for an aggregate purchase price of
$10.0 million, which we completed in April 2003; the sale of our limited partnership interest in
television station WWDP, serving the Boston, Massachusetts market, for approximately $13.8 million,
which we completed in April 2003; and the sale of our television station KAPX, serving the
Albuquerque, New Mexico market, for approximately $20.0 million, which we completed in May 2003. We
realized aggregate pre-tax gains of approximately $51.9 million on these 2003 sales. As of December
31, 2004, there were $24.6 million of outstanding letters of credit all of which we have pre-funded
and which are reflected as deposits for programming letters of credit in the accompanying
consolidated balance sheets. As of December 31, 2003, there were $16.6 million of outstanding
letters of credit supported by the revolving credit portion of our previously existing senior
credit facility. We have options to purchase the assets of two television stations serving the
Memphis and New Orleans markets for an aggregate purchase price of $36.0 million. We have paid $4.0
million for the options to purchase these stations. The owners of these stations also have the
right to require us to purchase these stations at any time after January 1, 2007 through December
31, 2008. These stations are currently operating under TBAs with us. Cash provided by (used in) financing activities was $18.3 million, $(22.5) million and $25.0
million for the years ended December 31, 2004, 2003 and 2002, respectively. These amounts include
the proceeds from borrowings and proceeds from stock option exercises, net of principal repayments.
Also included are payments of employee withholding taxes on option exercises in connection with the
January 2003 stock option exchange offer. Capital expenditures, which consist primarily of digital conversion costs and purchases of
broadcast equipment for our television stations, were approximately $15.8 million in 2004, $26.7
million in 2003 and $31.2 million in 2002. The FCC mandated that each licensee of a full power
broadcast television station that was allotted a second digital television channel in addition to
the current analog channel, complete the construction of digital facilities capable of serving its
community of license with a signal of requisite strength by May 2002. Those digital stations that
were not operating by the May 2002 date requested extensions of time from the FCC which have been
granted with limited exceptions. Despite the current uncertainty that exists in the broadcasting
industry with respect to standards for digital broadcast services, planned formats and usage, we
have complied and intend to continue to comply with the FCCs timing requirements for the
construction of digital television facilities and the broadcast of digital television services. We
have commenced our migration to digital broadcasting in certain of our markets and will continue to
do so throughout the required time period. We currently own or operate 49 stations broadcasting in
digital (in addition to broadcasting in analog). With respect to our remaining stations, we have
received construction permits from the FCC and will be completing the build-out on three stations
during 2005, we are awaiting construction permits from the FCC with respect to seven of our
television stations and one of our television stations has not received a digital channel
allocation and therefore will not be converted until the end of the digital transition. Because of
the uncertainty as to standards, formats and usage, we cannot currently predict with reasonable
certainty the amount or timing of the expenditures we will likely have to make to complete the
digital conversion of our stations. We currently anticipate, however, that we will spend at least
an additional $8 million in 2005 to complete the conversion of each of our stations that has
received a construction permit and a digital channel allocation. We expect to fund these
expenditures from cash on hand. During 2002, we sold our television station WPXB, serving the Merrimack, New Hampshire market,
to NBC for $26.0 million and realized a pre-tax gain of approximately $24.5 million. On January 12, 2004, we completed a private offering of $365.0 million of senior secured
floating rate notes. The senior notes bear interest at the rate of LIBOR plus 2.75% per year and
will mature on January 10, 2010. We may redeem the senior notes at any time at specified redemption
prices. The senior notes are secured by a first priority lien on substantially all of our 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 our subsidiaries. The proceeds from the offering
were used to repay in full the outstanding indebtedness under our previously existing senior credit
facility described below, pre-fund letters of credit supported by the revolving credit portion of
our previously existing senior credit facility and pay fees and expenses incurred in connection
with the transaction. In January 2002, we completed an offering of senior subordinated discount notes due in 2009.
Gross proceeds of the offering totaled approximately $308.3 million and were used to refinance our
12 1/2% exchange debentures due 2006, which were issued in exchange for the outstanding shares of
our 12 1/2% exchangeable preferred stock on January 14, 2002, and to pay costs related to the
offering. The notes were sold at a discounted price of 62.132% of the principal amount at maturity,
which represents a yield to maturity of 121/4%. We will be required to commence making semi-annual
cash interest payments of approximately $30.4 million under our 121/4% senior subordinated discount
notes on July 15, 2006, and to make interest payments on each January 15 and July 15 thereafter
until these 43




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notes are repaid or refinanced. The senior subordinated discount notes are guaranteed
by our subsidiaries. We recognized a loss due to early extinguishment of debt totaling approximately $17.6 million in
the first quarter of 2002 resulting primarily from the redemption premium and the write-off of
unamortized debt costs associated with the repayment of the 121/2% exchange debentures. The terms of the indentures governing our senior secured and senior subordinated notes contain
covenants which, among other things, limit our ability to incur additional indebtedness, other than
refinancing indebtedness, restrict our ability to pay dividends or redeem our outstanding capital
stock, restrict our ability to make certain investments or to enter into transactions with
affiliates, restrict our ability to incur liens or merge or consolidate with any other person,
require us to pay all material taxes prior to delinquency, require any asset sales we may conduct
to comply with certain requirements, including as to the use of asset sale proceeds, restrict our
ability to sell interests in our subsidiaries, and require us, in the event we experience 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 monetary judgment against us 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 we receive notice of default from
the indenture trustee or holders of at least 25% of the outstanding notes, and the occurrence of
certain bankruptcy events. For a complete statement of our obligations under these indentures, you
should refer to the indentures themselves which are filed as exhibits to this report. The
certificates of designation of two of our outstanding series of preferred stock contain
restrictions on our ability to incur additional indebtedness, other than refinancing indebtedness,
pay dividends or redeem our outstanding capital stock, make certain investments or enter into
transactions with affiliates, and sell preferred stock in our subsidiaries, and require us, in the
event we experience a change of control, to make an offer to purchase the outstanding shares of
preferred stock on specified terms. Our third outstanding series of preferred stock contains
restrictions on our ability to pay dividends or redeem our outstanding capital stock, make certain
investments or enter into transactions with affiliates, and requires us, in the event we experience
a change of control, to make an offer to purchase the outstanding shares of preferred stock on
specified terms. For a complete statement of our obligations under our three outstanding series of
preferred stock, you should refer to the certificates of designation of each series which are filed
as exhibits to this report. We structured the disposition of our radio division in 1997 and our acquisition of television
stations during the period following this disposition in a manner that we believe would qualify
these transactions as a like kind exchange under Section 1031 of the Internal Revenue Code and
would permit us to defer recognizing for income tax purposes up to approximately $333 million of
gain. The IRS has examined our 1997 tax return and has issued to us a 30-day letter proposing to
disallow all of our gain deferral. We have filed our protest to this determination with the IRS
appeals division, but cannot predict the outcome of this matter at this time, and may not prevail.
In addition, the 30-day letter offered us an alternative position that, in the event the IRS is
unsuccessful in disallowing all of the gain deferral, approximately $62 million of the $333 million
gain deferral will be disallowed. We filed a protest to this alternative determination as well. We
may not prevail with respect to this alternative determination. Should the IRS successfully
challenge our position and disallow all or part of our gain deferral, because we had net operating
losses in the years subsequent to 1997 in excess of the amount of the deferred gain, we would not
be liable for any tax deficiency, but could be liable for state income taxes. We have estimated the
amount of state income tax for which we could be liable as of December 31, 2004 to be approximately
$8.0 million should the IRS succeed in disallowing the entire deferred gain. In addition, we could
be liable for interest on the tax liability for the period prior to the carryback of our net
operating losses and for interest on any state income taxes that may be due. We have estimated the
amount of federal interest and state interest, as of December 31, 2004, to be approximately $18.0
million and $4.0 million, respectively, should the IRS succeed in disallowing the entire deferred
gain. The use of our net operating losses to offset any disallowed deferred gain would result in a
benefit from income taxes. This matter is currently with the Appeals Office of the Internal
Revenue Service. Contractual Obligations and Commitments As of December 31, 2004, we were obligated under the terms of our indentures, programming
contracts, cable distribution agreements, operating lease agreements and employment agreements to
make future payments as follows (in thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalSenior secured and senior subordinated
Notes
    
    $
    64
    
    
    $
    71
    
    
    $
    79
    
    
    $
    200,086
    
    
    $
    496,358
    
    
    $
    365,048
    
    
    $
    1,061,706Obligations for program rights and program
rights commitments
    
    
    43,776
    
    
    
    1,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,479Obligations to CBS
    
    
    17,726
    
    
    
    9,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,917Obligations for cable distribution rights
    
    
    2,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,896Operating leases and employment agreements
    
    
    19,701
    
    
    
    17,516
    
    
    
    15,892
    
    
    
    14,679
    
    
    
    12,450
    
    
    
    107,160
    
    
    
    187,398$
    84,163
    
    
    $
    28,481
    
    
    $
    15,971
    
    
    $
    214,765
    
    
    $
    508,808
    
    
    $
    472,208
    
    
    $
    1,324,396
 44




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The following table presents the redemption value of the three classes of our preferred
stock outstanding at December 31, 2004 should we elect to redeem the preferred stock in the
indicated year, assuming no dividends are paid in cash prior to redemption (in thousands): Junior Exchangeable
    
    
    Convertible Preferred
    
    
    Series B ConvertiblePreferred Stock
    
    
    Stock
    
    
    Preferred Stock14 1/4%(1)
    
    

9 3/4%(2)
    
    
    16.2%(3)2005
    
    $
    540,916
    
    
    $
    155,323
    
    
    $
    667,9332006
    
    
    609,879
    
    
    
    171,029
    
    
    
    735,1632007
    
    
    
    
    
    
    
    
    
    
    802,3932008
    
    
    
    
    
    
    
    
    
    
    869,6232009
    
    
    
    
    
    
    
    
    
    
    936,853
   (1)
    
    Mandatorily redeemable on November 15, 2006; redeemable by us.(2)
    
    Mandatorily redeemable on December 31, 2006; redeemable by us.(3)
    
    As further discussed above, on November 13, 2003, we received notice from NBC that NBC was
exercising its right under its investment agreement with us to demand that we redeem or
arrange for a third party to acquire, by payment in cash, all 41,500 outstanding shares of our
Series B Convertible Preferred Stock held by NBC. As of December 31, 2004, obligations for programming rights and program rights
commitments require collective payments by us of approximately $45.5 million as follows (in
thousands): Obligations forProgram
    
    
    Program RightsRights
    
    
    Commitments
    
    
    Total2005
    
    $
    18,436
    
    
    $
    25,340
    
    
    $
    43,7762006
    
    
    1,703
    
    
    
    
    
    
    
    1,703$
    20,139
    
    
    $
    25,340
    
    
    $
    45,479
 On August 1, 2002, we entered into agreements with a subsidiary of CBS Broadcasting, Inc.
(CBS) and Crown Media United States, LLC (Crown Media) to sublicense our rights to broadcast
the television series Touched By An Angel (Touched)to Crown Media for exclusive exhibition on
the Hallmark Channel. Under the terms of the agreement with Crown Media, we are to receive
approximately $47.4 million from Crown Media, $38.6 million of which will be paid over a three-year
period that commenced in August 2002 and the remaining $8.8 million, for the 2002/2003 season, is
to be paid over a three-year period that commenced in August 2003. Under the terms of our agreement with CBS, we remain obligated to CBS for amounts due under
our pre-existing license agreement, less estimated programming cost savings of approximately $15.0
million. As of December 31, 2004, amounts due or committed to CBS totaled approximately $26.9
million. The transaction resulted in a gain of approximately $4.0 million, which is being deferred
over the term of the Crown Media agreement. We have a significant concentration of credit risk with respect to the amounts due from Crown
Media under the sublicense agreement. As of December 31, 2004, the maximum amount of loss due to
credit risk that we would sustain if Crown Media failed to perform under the agreement totaled
approximately $11.5 million, representing the present value of amounts due from Crown Media. Under
the terms of the sublicense agreement, we have the right to terminate Crown Medias rights to
broadcast Touchedif Crown Media fails to make timely payments under the agreement. Therefore,
should Crown Media fail to perform under the agreement, we could regain our exclusive rights to
broadcast Touchedon PAX TV pursuant to our existing licensing agreement with CBS. Under our agreement with CBS, we were required to license future seasons of Touchedfrom CBS
upon the series being renewed by CBS. Under our sublicense agreement with Crown Media, Crown Media
was obligated to sublicense such future seasons from us. Our financial obligation to CBS for future
seasons exceeded the sublicense fees to be received from Crown Media, resulting in accrued
programming losses to the extent the series was renewed in future seasons. During the second
quarter of 2002, upon the decision by CBS to renew Touchedfor the 2002/2003 season, we became
obligated to license the 2002/2003 season, resulting in an accrued programming loss of
approximately $10.7 million. This amount was offset in part by a decrease in our estimated loss on
the 2001/2002 45




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season of approximately $7.8 million, resulting in a net accrued programming loss of
$2.9 million. The change in
estimate for the 2001/2002 season was due to the sublicensing agreement with Crown Media and a
lower number of episodes produced than previously estimated. In 2003, CBS determined that it would
not renew Touchedfor the 2003/2004 season. Our obligations to CBS for Touchedwill be partially funded through the sub-license fees from
Crown Media. As of December 31, 2004, our obligation to CBS and our receivable from Crown Media
related to Touchedare as follows (in thousands): Obligations to
    
    
    Amounts Due fromCBS
    
    
    Crown Media
    
    
    Net Amount2005
    
    $
    17,726
    
    
    $
    (10,439
    )
    
    $
    7,2872006
    
    
    9,191
    
    
    
    (1,711
    )
    
    
    7,48026,917
    
    
    
    (12,150
    )
    
    
    14,767Amount representing interest
    
    
    
    
    
    
    610
    
    
    
    610$
    26,917
    
    
    $
    (11,540
    )
    
    $
    15,377
 As of December 31, 2004, obligations for cable distribution rights require collective payments
by us of approximately $2.9 million in 2005. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R supersedes
Accounting Principles Board Opinion (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). SFAS No.
123R is effective for public entities at the beginning of the first interim or annual period
beginning after June 15, 2005. The adoption of SFAS No. 123R is not expected to have a significant
impact on our financial position, results of operations or cash flows. 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 our
common stock that makes the debt currently not convertible. The new rules are effective for
reporting periods ending on or after December 15, 2004. We do not have any convertible debt and,
therefore, EITF 04-8 will not have any effect on our 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 be measured based on the
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. We do not expect SFAS No. 153 to have a
material effect on our financial position, results of operations or cash flows. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003)
Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51 (FIN 46). FIN 46 clarifies the application of ARB No. 51 to certain entities in
which the equity investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Application of FIN 46 is required in financial
statements of public entities that have interests in variable interest entities or potential
variable interest entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities for all other types of entities is required
in financial statements for periods ending after March 15, 2004. The adoption of FIN 46 did not
have any impact on our financial position, results of operations or cash flows. 46




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk The tables below provide information about our market sensitive financial instruments and
constitute forward-looking statements. All items described are non-trading. Our primary market risk exposure is changing interest rates. We manage interest rate risks
through the use of a combination of fixed and floating rate debt. We use interest rate swaps to
adjust interest rate exposures when appropriate, based upon market conditions. Expected maturity
dates for variable rate debt are based upon contractual maturity dates. Average interest rates on
variable rate debt are based on implied forward rates in the yield curve at the reporting date. Fair value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment. The fair value of variable rate debt
approximates the carrying value since interest rates are variable and thus approximate current
market rates. At December 31, 2004 we had $365.0 million of floating rate indebtedness outstanding under our
senior secured floating rate notes. As discussed in further detail in Item 7- Managements
Discussion and Analysis of Results of Operations  Liquidity and Capital Resources, we refinanced
our previously existing senior credit facility with the proceeds of our January 2004 offering of
$365.0 million senior secured floating rate notes. The table below reflects the balance of the
previously existing senior credit facility at December 31, 2003, after giving effect to the
interest rate and maturity date applicable to the new senior secured floating rate notes. The
senior secured floating rate notes bear interest at a rate of LIBOR plus 2.75% per year, with the
LIBOR rate being reset quarterly. The senior secured floating rate notes mature in January 2010.
Additionally, at December 31, 2004, we had $0.5 million of floating rate indebtedness outstanding
under a mortgage for our headquarters building. The mortgage bears interest at a rate of the U.S.
Treasury Index for Five Year Notes plus 2.85% per year, reset once every five years. The final
maturity date for the mortgage is June 2010. Expected Maturity DateFair ValueDecember 31,December 31, 2004
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    2004(in thousands)Variable rate debt
    
    $
    64
    
    
    $
    71
    
    
    $
    79
    
    
    $
    86
    
    
    $
    95
    
    
    $
    365,048
    
    
    $
    365,443
    
    
    $
    365,443Average interest rates
    
    
    8.22
    %
    
    
    6.85
    %
    
    
    6.85
    %
    
    
    6.85
    %
    
    
    6.85
    %
    
    
    7.33
    %
 Expected Maturity DateFair ValueDecember 31,December 31, 2003
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    Total
    
    
    2003(in thousands)Variable rate debt
    
    $
    61
    
    
    $
    65
    
    
    $
    71
    
    
    $
    79
    
    
    $
    86
    
    
    $
    335,768
    
    
    $
    336,130
    
    
    $
    336,130Average interest rates
    
    
    9.59
    %
    
    
    8.63
    %
    
    
    7.66
    %
    
    
    7.66
    %
    
    
    7.66
    %
    
    
    6.76
    %
 
 Item 8. Financial Statements and Supplementary Financial Data The response to this item is submitted in a separate section of this report. 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2004
we carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. This evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that because the material weakness in internal control over our accounting for leases
described below existed as of December 31, 2004, our disclosure controls and procedures were not
effective as of December 31, 2004. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events and there can be no
assurance that any design will succeed in 47




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##### Table of Contents



achieving its stated goals under all potential future
conditions, regardless of how remote. Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to
allow timely decisions regarding required disclosure. In addition to our evaluation of our
disclosure controls and procedures, we reviewed our internal control over financial reporting and
have determined that we had a material weakness relating to our internal controls over our
historical accounting practices for leases. From approximately 1999 through 2002, we entered into various long-term operating leases that
provided for escalating lease payments. Historically, we had recognized the expense associated
with certain of these operating leases based on the annual cash outflows required. Under Generally
Accepted Accounting Principles (GAAP), we are required to recognize the annual amount of lease
expense using the straight-line method over the term of the lease. During our annual external
audit, it was determined that we were improperly accounting for lease escalations. In the fourth
quarter of 2004, we recorded an adjustment of $4.0 million of which approximately $3.1 million
pertained to periods prior to 2004. In the second quarter of 2004, we established policies and
procedures to assure that new contractual arrangements, including lease arrangements, were
appropriately accounted for in accordance with GAAP. These policies and procedures, however, were
not designed to extend to leases that had been entered into prior to the second quarter of 2004.
As a result, we corrected our procedures as of December 31, 2004 to incorporate a review of lease
arrangements executed prior to the second quarter of 2004. Changes in Internal Control Over Financial Reporting As described above, we reviewed our internal control over financial reporting and other than
correcting the material weakness identified above there were no changes in our internal control
over financial reporting identified in connection with the evaluation required by paragraph (d) of
Rule 13a-15 under the Exchange Act that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. Report on Internal Control Over Financial Reporting The Sarbanes-Oxley Act of 2002 requires us to include in this Annual Report on Form 10-K for
the fiscal year ending December 31, 2004 a report which sets forth managements assessment of our
internal control over financial reporting and an attestation report by our independent registered
certified public accountants, Ernst & Young LLP, regarding managements assessment of our internal
control over financial reporting. On November 30, 2004, the Securities and Exchange Commission
issued Exemptive Order #34-50754, under which certain companies are permitted to delay, for up to
45 days after the due date of their Annual Report on Form 10-K, the filing of the report containing
managements assessment of internal control over financial reporting and the related attestation of
the independent registered public accountants. We qualify under the provisions of this exemptive
order for such 45-day delay because the market value of our outstanding common equity held by
non-affiliates was under $700 million as of June 30, 2004. We are availing ourselves of the
extension to permit our management to complete its assessment of our internal control over
financial reporting and to permit our independent registered public accountants sufficient time to
audit managements assessment of our internal control over financial reporting and produce their
attestation. We expect that the assessment and attestation process will be complete before the
date of the expiration of the 45-day extension, and we intend to file the report which sets forth
managements assessment of our internal control over financial reporting and the related
attestation by our independent registered public accountants prior to that date. We note, however, that because the material weakness in internal control described above
existed as of December 31, 2004, the report setting forth managements assessment of our internal
control over financial reporting, when filed, will contain a conclusion by our management that our
internal control over financial reporting was not effective as of December 31, 2004. In addition, in accordance with the answer to Question Number 1 of the Frequently Asked
Questions regarding the exemptive order that were issued by the Division of Corporation Finance of
the Securities and Exchange Commission on January 21, 2005, we have not included in the
certifications under Section 302 of the Sarbanes Oxley Act of 2002 that are filed as Exhibits 31.1
and 31.2 to this Annual Report on Form 10-K certain introductory language to paragraph 4 of those
certifications or a new paragraph 4(b) of those certifications (which introductory language and new
paragraph address internal control over financial reporting). 48




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Item 9B. Other Information Not applicable. 49




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##### Table of Contents



PART III 
 Item 10. Directors and Executive Officers of the Registrant Information required by this item regarding directors and officers is incorporated by
reference from the definitive Proxy Statement being filed by the Company for the Annual Meeting of
Stockholders to be held on June 10, 2005. 
 Item 11. Executive Compensation Information required by this item is incorporated by reference from the definitive Proxy
Statement being filed by the Company for the Annual Meeting of Stockholders to be held on June 10,
2005. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the definitive Proxy
Statement being filed by the Company for the Annual Meeting of Stockholders to be held on June 10,
2005. 
 Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference from the definitive Proxy
Statement being filed by the Company for the Annual Meeting of Stockholders to be held on June 10,
2005. 
 Item 14. Principal Accountant Fees and Services Information required by this item is incorporated by reference from the definitive Proxy
Statement being filed by the Company for the Annual Meeting of Stockholders to be held on June 10,
2005. PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of the report: 1. The financial statements filed as part of this report are listed separately in the Index to
Consolidated Financial Statements and Financial Statement Schedule on page F-1 of this report. 2. The Financial Statement Schedule filed as part of this report is listed separately in the
Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1 of this
report. 3. For Exhibits see Item 15(b), below. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit hereto is listed in Exhibits Nos. 10.27, 10.28,
10.157, 10.208, 10.208.1, 10.208.2, 10.208.3, 10.224, 10.225, 10.225.1, 10.227, 10.227.1, 10.228,
10.231, 10.231.1, 10.231.2, 10.232, 10.232.1 and 10.233 of Item 15(b) below. (b) List of Exhibits: ExhibitNumber
    
    
    
    Description of Exhibits3.1.1
    
    
    
    Certificate of Incorporation of the Company (2)3.1.6
    
    
    
    Certificate of Designation of the Companys 93/4% Series A Convertible Preferred Stock (7)3.1.7
    
    
    
    Certificate of Designation of the Companys 141/4% Cumulative Junior
Exchangeable Preferred Stock (7)3.1.8
    
    
    
    Certificate of Designation of the Companys 16.2% Series B Convertible Exchangeable
Preferred Stock (8)3.1.9
    
    
    
    Certificate of Amendment to the Certificate of Incorporation of the Company (16)3.2
    
    
    
    Bylaws of the Company (11)4.4
    
    
    
    Investment Agreement, dated as of September 15, 1999, by and between the Company and
National Broadcasting Company, Inc. (8)
 50




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of Exhibits4.4.1
    
    
    
    Stockholder Agreement, dated as of September 15, 1999, among the
Company, National Broadcasting Company, Inc., Lowell W. Paxson, Second
Crystal Diamond Limited Partnership and Paxson Enterprises, Inc. (8)4.4.2
    
    
    
    Class A Common Stock Purchase Warrant, dated September 15, 1999, with
respect to up to 13,065,507 shares of Class A Common Stock (8)4.4.3
    
    
    
    Class A Common Stock Purchase Warrant, dated September 15, 1999, with
respect to up to 18,966,620 shares of Class A Common Stock (8)4.4.5
    
    
    
    Form of Indenture with respect to the Companys 8% Exchange Debentures due
2009 (8)4.46
    
    
    
    Registration Rights Agreement, dated September 15, 1999, between the
Company and National Broadcasting Company, Inc. (8)4.5
    
    
    
    Indenture, dated as of June 10, 1998, by and between the Company, the
Guarantors named therein and the Bank of New York, as Trustee, with respect to
the New Exchange Debentures (7)4.6
    
    
    
    Indenture, dated as of July 12, 2001, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect
to the Companys 103/4% Senior Subordinated Notes due 2008 (12)4.8
    
    
    
    Indenture, dated as of January 14, 2002, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect to
the Companys 121/4% Senior Subordinated Discount Notes due 2009 (14)4.9
    
    
    
    Indenture, dated as of January 12, 2004, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect
to the Companys Senior Secured Floating Rate Notes due 2010 (19)10.27
    
    
    
    Paxson Communications Corp. Profit Sharing Plan (1)10.28
    
    
    
    Paxson Communications Corp. Stock Incentive Plan (1)10.83.1
    
    
    
    Facility Lease Agreement, dated as of July 1, 2003, by and between the
Company and The Christian Network, Inc. (18)10.157
    
    
    
    Paxson Communications Corporation 1996 Stock Incentive Plan (4)10.183
    
    
    
    Stock Purchase Agreement, dated September 9, 1997, by and among
Channel 46 of Tucson, Inc., Paxson Communications of Tucson-46, Inc. and
Sungilt Corporation, Inc. (5)10.186
    
    
    
    Option Agreement, dated November 14, 1997, by and between the
Company and Flinn Broadcasting Corporation for Television station WCCL-TV, New
Orleans, Louisiana (6)10.187
    
    
    
    Option Agreement, dated November 14, 1997, by and between the
Company and Flinn Broadcasting Corporation for Television station WFBI-TV,
Memphis, Tennessee (6)10.193
    
    
    
    Programming Agreement, dated August 11, 1998, by and between Paxson
Communications of Chicago-38, Inc. and Christian Communications of Chicagoland Inc. (6)10.208
    
    
    
    Employment Agreement, dated October 16, 1999, by and between the
Company and Lowell W. Paxson (9)10.208.1
    
    
    
    Amendment to Employment Agreement, dated as of December 16, 2002, by and between
the Company and Lowell W. Paxson (15)10.208.2
    
    
    
    Amendment No. 2 to Employment Agreement, dated as of January 15, 2004 between
the Company and Lowell W. Paxson (19)10.208.3
    
    
    
    Amendment to Employment Agreement, dated as of February 9, 2005,
between the Company and Lowell W. Paxson10.209
    
    
    
    Asset Purchase Agreement, dated November 21, 1999, by and between the
Company and DP Media, Inc. (9)10.209.1
    
    
    
    Restated and Amended Asset Purchase Agreement, dated November 21,
1999, by and between Paxson Communications Corporation and DP Media (10)10.210
    
    
    
    Asset Purchase Agreement dated April 30, 1999, by and between DP Media of Boston,
Inc. and Boston University Communications, Inc. for television stations WABU (TV),
Boston, MA WZBU (TV), Vineyard Haven, MA
WNBU (TV), Concord, NH and Low Power television station W67BA (TV) Dennis, MA (9)10.217
    
    
    
    Indenture, dated as of July 12, 2001, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect to
the
 51




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##### Table of Contents



ExhibitNumber
    
    
    
    Description of ExhibitsCompanys 103/4% Senior Subordinated Notes due 2008 (incorporated by reference to
Exhibit 4.6) (12)10.219
    
    
    
    First Supplemental Indenture, dated as of August 2, 2001, by and among the
Company, S&E Network, Inc., the Subsidiary Guarantors party thereto, and The
Bank of New York, as Trustee (13)10.221
    
    
    
    Indenture, dated as of January 14, 2002, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect to
the Companys 121/4% Senior Subordinated Discount Notes due 2009 (incorporated by
reference to Exhibit 4.8) (14)10.224
    
    
    
    Amended and Restated Employment Agreement, by and between the
Company and Anthony L. Morrison, effective January 1, 200410.225
    
    
    
    Amended and Restated Employment Agreement, by and between the
Company and Dean M. Goodman, effective January 1, 200410.225.1
    
    
    
    Amendment to Employment Agreement, dated February 9, 2005, between the Company
and Dean M. Goodman10.227
    
    
    
    Amended and Restated Employment Agreement, by and between the
Company and Seth A. Grossman, effective January 1, 200410.227.1
    
    
    
    Amendment to Employment Agreement, dated February 9, 2005, between the Company
and Seth A. Grossman10.228
    
    
    
    Paxson Communications Corporation 1998 Stock Incentive Plan, as amended (16)10.229
    
    
    
    Indenture, dated as of January 12, 2004, among the Company, the Subsidiary
Guarantors party thereto, and The Bank of New York, as Trustee, with respect to
the Companys Senior Secured Floating Rate Notes due 2010 (incorporated by
reference to Exhibit 4.9)10.230
    
    
    
    Purchase Agreement, dated January 5, 2004, among the Company, the
Subsidiary Guarantors party thereto, and Citigroup Global Markets Inc., Bear,
Stearns & Co. Inc., and CIBC World Markets Corp., as representatives of the
Initial Purchasers (19)10.231
    
    
    
    Amended and Restated Employment Agreement, by and between the Company and Richard
Garcia, effective as of January 1, 2004 (20)10.231.1
    
    
    
    Amendment to Employment Agreement, dated February 9, 2005, between the Company
and Richard Garcia10.231.2
    
    
    
    Amendment to Employment Agreement, dated March 15, 2005, between the Company and
Richard Garcia (23)10.232
    
    
    
    Employment Agreement, dated as of January 1, 2004, as amended effective January 1,
2005, by and between the Company and Adam K. Weinstein (21)10.232.1
    
    
    
    Amendment to Employment Agreement, dated February 9, 2005, between the Company
and Adam K. Weinstein10.233
    
    
    
    Form of Indemnification Agreement by and between the Company and members of the Board of Directors of the Company (22)14.1
    
    
    
    Code of Ethics and Business Conduct (19)21
    
    
    
    Subsidiaries of the Company23.1
    
    
    
    Consent of Ernst & Young LLP23.2
    
    
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    
    
    Certification by the Chief Executive Officer of Paxson Communications
Corporation pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended31.2
    
    
    
    Certification by the Chief Financial Officer of Paxson Communications
Corporation pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended32.1
    
    
    
    Certification by the Chief Executive Officer of Paxson Communications
Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification by the Chief Financial Officer of Paxson Communications
Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 200299.1
    
    
    
    Tax Exemption Savings Agreement, dated May 15, 1994, between the
Company and The Christian Network, Inc. (3)
   (1)
    
    Filed with the Companys Registration Statement on Form S-4, filed September 26, 1994,
Registration No. 33-84416, and incorporated herein by reference. 52




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##### Table of Contents



(2)
    
    Filed with the Companys Annual Report on Form 10-K, dated March 31, 1995 (Commission File
No. 1-13452), and incorporated herein by reference.(3)
    
    Filed with the Companys Registration Statement on Form S-1, as amended, filed January 26,
1996, Registration No. 333-473, and incorporated herein by reference.(4)
    
    Filed with the Companys Registration Statement on Form S-8, filed January 22, 1997,
Registration No. 333-20163, and incorporated herein by reference.(5)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated September 30, 1997
(Commission File No. 1-13452), and incorporated herein by reference.(6)
    
    Filed with the Companys Annual Report on Form 10-K, dated December 31, 1997 (Commission
File No. 1-13452), and incorporated herein by reference.(7)
    
    Filed with the Companys Registration Statement on Form S-4, as amended, filed July 23,
1998, Registration No. 333-59641, and incorporated herein by reference.(8)
    
    Filed with the Companys Form 8-K, filed with the Securities and Exchange Commission on
September 24, 1999 (Commission File No. 1-13452), and incorporated herein by reference.(9)
    
    Filed with the Companys Annual Report on Form 10-K, dated December 31, 1999 (Commission
File No. 1-13452), and incorporated herein by reference.(10)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated March 31, 2000, and
incorporated herein by reference.(11)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated March 31, 2001, and
incorporated herein by reference.(12)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated June 30, 2001, and
incorporated herein by reference.(13)
    
    Filed with the Companys Registration Statement on Form S-4, as amended, filed September
10, 2001, Registration No. 333-69192, and incorporated herein by reference.(14)
    
    Filed with the Companys Annual Report on Form 10-K, dated December 31, 2001, and
incorporated herein by reference.(15)
    
    Filed with the Companys Annual Report on Form 10-K, dated December 31, 2002, and
incorporated herein by reference.(16)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated March 31, 2003, and
incorporated herein by reference.(17)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated June 30, 2003, and
incorporated herein by reference.(18)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated September 30, 2003, and
incorporated herein by reference.(19)
    
    Filed with the Companys Annual Report on Form 10-K, dated December 31, 2003, and
incorporated herein by reference.(20)
    
    Filed with the Companys Quarterly Report on Form 10-Q, dated June 30, 2004, and
incorporated herein by reference.(21)
    
    Filed with the Companys Form 8-K, filed with the Securities and Exchange Commission on
January 7, 2005, and incorporated herein by reference.(22)
    
    Filed with the Companys Form 8-K, filed with the Securities and Exchange Commission on
February 28, 2005, and incorporated herein by reference.(23)
    
    Filed with the Companys Form 8-K, filed with the Securities and Exchange Commission on
March 18, 2005, and incorporated herein by reference. (c) The financial statement schedule filed as part of this report is listed separately in
the Index to Financial Statements beginning on page F-1 of this report. 53




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of West Palm Beach, State of Florida, on March 31, 2005. PAXSON COMMUNICATIONS CORPORATIONBy:
    /s/ LOWELL W. PAXSONLowell W. PaxsonChairman of the Board and Chief
Executive Officer (Principal Executive
Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signatures
    
    Title
    
    Date/s/ LOWELL W. PAXSON
    
    Chairman of the Board, Director and
    
    March 31, 2005Lowell W. Paxson
    
    Chief Executive Officer (PrincipalExecutive Officer)/s/ RICHARD GARCIA
    
    Senior Vice President and Chief Financial
    
    March 31, 2005Richard Garcia
    
    Officer (Principal Financial Officer)/s/ TAMMY G. HEDGE
    
    Vice President, Controller and Chief
    
    March 31, 2005Tammy G. Hedge
    
    Accounting Officer (PrincipalAccounting Officer)/s/ BRUCE L. BURNHAM
    
    Director
    
    March 31, 2005Bruce L. Burnham/s/ JOHN E. OXENDINE
    
    Director
    
    March 31, 2005John E. Oxendine/s/ HENRY J. BRANDON III
    
    Director
    
    March 31, 2005Henry J. Brandon/s/ ELIZABETH J. HUDSON
    
    Director
    
    March 31, 2005Elizabeth J. Hudson/s/ W. LAWRENCE PATRICK
    
    Director
    
    March 31, 2005W. Lawrence Patrick
 54




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
 PageReport of Independent Registered Certified Public Accountants
    
    
    F-2Report
of Independent Registered Certified Public Accounting Firm
    
    
    F-3Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Operations
    
    
    F-5Consolidated Statements of Stockholders Deficit
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8Financial Statement Schedule  Valuation and Qualifying Accounts
    
    
    F-48
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and
Stockholders of Paxson
Communications Corporation: We have audited the accompanying consolidated balance sheets of Paxson Communications
Corporation as of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders deficit and cash flows for each of the two years in the period ended
December 31, 2004. Our audit also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Paxson Communications Corporation at December 31,
2004 and 2003 and the consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein. /s/ Ernst & Young LLP West Palm Beach, Florida
March 29, 2005 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
of Paxson Communications Corporation: In our opinion, the accompanying consolidated statements of operations, of changes in
stockholders deficit and of cash flows of Paxson Communications Corporation and its subsidiaries
present fairly, in all material respects, the results of their operations and their cash flows for
the year ended December 31, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the Schedule of Valuation and Qualifying
Accounts attached as Schedule II, presents fairly, in all material respects, the information set
forth therein for the year ended December 31, 2002 when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedule are
the responsibility of the Companys management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. As described in Note 1, during 2002 the Company ceased amortizing its indefinite lived
intangible assets. /s/ PricewaterhouseCoopers LLP Miami, Florida
March 27, 2003, except for Note 2 and the first paragraph of Note 11, which appear in the financial
statements included in the Companys Form 10-K for the year ended December 31, 2003 and are not
presented herein, as to which the date is March 29, 2004 F-3




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION 
 CONSOLIDATED BALANCE SHEETS
 December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    82,047
    
    
    $
    97,123Short-term investments
    
    
    5,993
    
    
    
    12,948Accounts receivable, net of allowance for doubtful accounts of $648 and $1,090, respectively
    
    
    24,961
    
    
    
    24,357Program rights
    
    
    38,853
    
    
    
    41,659Amounts due from Crown Media
    
    
    9,885
    
    
    
    13,883Deposits for programming letters of credit
    
    
    24,603
    
    
    
    Prepaid expenses and other current assets
    
    
    3,119
    
    
    
    4,406Total current assets
    
    
    189,461
    
    
    
    194,376Property and equipment, net
    
    
    103,526
    
    
    
    120,841Intangible assets:FCC license intangible assets
    
    
    843,462
    
    
    
    843,140Other intangible assets, net
    
    
    40,448
    
    
    
    50,814Program rights, net of current portion
    
    
    19,581
    
    
    
    28,640Amounts due from Crown Media, net of current portion
    
    
    1,655
    
    
    
    11,540Investments in broadcast properties
    
    
    2,205
    
    
    
    2,736Assets held for sale
    
    
    2,556
    
    
    
    7,301Other assets, net
    
    
    21,411
    
    
    
    24,289Total assets
    
    $
    1,224,305
    
    
    $
    1,283,677LIABILITIES, MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    40,500
    
    
    $
    39,303Accrued interest
    
    
    16,073
    
    
    
    14,875Current portion of obligations for program rights
    
    
    18,436
    
    
    
    35,382Current portion of obligations to CBS
    
    
    17,726
    
    
    
    19,556Current portion of obligations for cable distribution rights
    
    
    2,896
    
    
    
    2,494Deferred revenue
    
    
    16,344
    
    
    
    15,573Current portion of senior secured and senior subordinated notes
    
    
    64
    
    
    
    61Total current liabilities
    
    
    112,039
    
    
    
    127,244Obligations for program rights, net of current portion
    
    
    1,703
    
    
    
    7,902Obligations to CBS, net of current portion
    
    
    9,191
    
    
    
    27,704Obligations for cable distribution rights, net of current portion
    
    
    
    
    
    
    283Deferred revenue, net of current portion
    
    
    6,898
    
    
    
    6,898Deferred income taxes
    
    
    194,706
    
    
    
    175,281Senior secured and senior subordinated notes, net of current portion
    
    
    1,004,029
    
    
    
    925,547Mandatorily redeemable preferred stock
    
    
    471,355
    
    
    
    410,739Other long-term liabilities
    
    
    10,980
    
    
    
    7,857Total liabilities
    
    
    1,810,901
    
    
    
    1,689,455Mandatorily redeemable and convertible preferred stock
    
    
    740,745
    
    
    
    684,067Commitments and contingencies (See Notes to Consolidated Financial Statements)Stockholders deficit:Class A common stock, $0.001 par value; one vote per share; 215,000,000 shares
authorized and 60,545,269 and 63,131,125 shares issued and outstanding
    
    
    61
    
    
    
    63Class 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
    
    
    
    8Class 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
    
    
    
    66,663Additional paid-in capital
    
    
    542,138
    
    
    
    540,377Deferred stock option compensation
    
    
    (10,687
    )
    
    
    (17,167
    )Accumulated deficit
    
    
    (1,925,524
    )
    
    
    (1,679,789
    )Total stockholders deficit
    
    
    (1,327,341
    )
    
    
    (1,089,845
    )Total liabilities, mandatorily redeemable and convertible preferred stock and stockholders deficit
    
    $
    1,224,305
    
    
    $
    1,283,677
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
 For the Years Ended December 31,2004
    
    
    2003
    
    
    2002NET REVENUES (net of agency commissions of $46,565, $46,067, and
$44,975, respectively)
    
    $
    276,630
    
    
    $
    270,939
    
    
    $
    276,921EXPENSES:Programming and broadcast operations (excluding stock-based
compensation of $1,012, $1,872 and $575)
    
    
    56,472
    
    
    
    51,954
    
    
    
    51,204Program rights amortization
    
    
    53,616
    
    
    
    51,082
    
    
    
    77,980Selling, general and administrative (excluding stock-based
compensation of $7,489, $10,894 and $3,235)
    
    
    121,835
    
    
    
    110,976
    
    
    
    132,305Business interruption insurance
    
    
    
    
    
    
    
    
    
    
    (1,617
    )Time brokerage and affiliation fees
    
    
    4,466
    
    
    
    4,403
    
    
    
    4,079Stock-based compensation
    
    
    8,501
    
    
    
    12,766
    
    
    
    3,810Adjustment of programming to net realizable value
    
    
    4,645
    
    
    
    1,066
    
    
    
    41,270Restructuring (credits) charges
    
    
    (5
    )
    
    
    48
    
    
    
    2,173Reserve for state taxes
    
    
    691
    
    
    
    3,055
    
    
    
    Depreciation and amortization
    
    
    43,664
    
    
    
    42,983
    
    
    
    58,529Total operating expenses
    
    
    293,885
    
    
    
    278,333
    
    
    
    369,733Gain on sale or disposal of broadcast and other assets, net
    
    
    4,836
    
    
    
    51,589
    
    
    
    22,906Operating (loss) income
    
    
    (12,419
    )
    
    
    44,195
    
    
    
    (69,906
    )OTHER INCOME (EXPENSE):Interest expense
    
    
    (94,192
    )
    
    
    (92,202
    )
    
    
    (85,214
    )Dividends on mandatorily redeemable preferred stock
    
    
    (60,616
    )
    
    
    (27,539
    )
    
    
    Interest income
    
    
    2,811
    
    
    
    3,440
    
    
    
    2,363Other income, net
    
    
    
    
    
    
    341
    
    
    
    1,876Loss on extinguishment of debt
    
    
    (6,286
    )
    
    
    
    
    
    
    (17,552
    )Gain on modification of program rights obligations
    
    
    1,481
    
    
    
    2,103
    
    
    
    1,520Loss before income taxes
    
    
    (169,221
    )
    
    
    (69,662
    )
    
    
    (166,913
    )Income tax provision
    
    
    (18,751
    )
    
    
    (6,551
    )
    
    
    (169,273
    )Net loss
    
    
    (187,972
    )
    
    
    (76,213
    )
    
    
    (336,186
    )Dividends and accretion on redeemable and convertible preferred
stock
    
    
    (57,763
    )
    
    
    (70,104
    )
    
    
    (110,099
    )Net loss attributable to common stockholders
    
    $
    (245,735
    )
    
    $
    (146,317
    )
    
    $
    (446,285
    )Basic and diluted loss per common share
    
    
    (3.61
    )
    
    
    (2.14
    )
    
    
    (6.88
    )Weighted average shares outstanding
    
    
    68,139,205
    
    
    
    68,389,640
    
    
    
    64,849,068
 The accompanying notes are an integral part of the consolidated financial statements. F-5




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(in thousands)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherWarrants
    
    
    Subscription
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    Compre-
    
    
    Total
    
    
    Compre-Common Stock
    
    
    and Call
    
    
    Notes
    
    
    Paid-in
    
    
    Stock Option
    
    
    Accumulated
    
    
    hensive
    
    
    Stockholders
    
    
    hensiveClass A
    
    
    Class B
    
    
    Option
    
    
    Receivable
    
    
    Capital
    
    
    Compensation
    
    
    Deficit
    
    
    Loss
    
    
    Deficit
    
    
    LossBalance at January 1, 2002
    
    $
    56
    
    
    $
    8
    
    
    $
    68,384
    
    
    $
    (1,088
    )
    
    $
    512,194
    
    
    $
    (6,537
    )
    
    $
    (1,087,187
    )
    
    $
    (1,350
    )
    
    $
    (515,520
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336,186
    )
    
    
    
    
    
    
    (336,186
    )
    
    $
    (336,186
    )Unrealized loss on interest rate
swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,796
    )
    
    
    (1,796
    )
    
    
    (1,796
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (337,982
    )Deferred stock option
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (267
    )
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,810
    
    
    
    
    
    
    
    
    
    
    
    3,810Stock options exercised
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,183Interest on stock subscription
notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (489
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (489
    )Reserve on stock subscription
notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830Dividends on redeemable and
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88,373
    )
    
    
    
    
    
    
    (88,373
    )Accretion on redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,726
    )
    
    
    
    
    
    
    (21,726
    )Balance at December 31, 2002
    
    
    57
    
    
    
    8
    
    
    
    68,384
    
    
    
    (747
    )
    
    
    513,109
    
    
    
    (2,460
    )
    
    
    (1,533,472
    )
    
    
    (3,146
    )
    
    
    (958,267
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,213
    )
    
    
    
    
    
    
    (76,213
    )
    
    $
    (76,213
    )Unrealized gain on interest rate
swap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,146
    
    
    
    3,146
    
    
    
    3,146Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (73,067
    )Deferred stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,314
    
    
    
    (27,314
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,607
    
    
    
    
    
    
    
    
    
    
    
    12,607Stock options exercised
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    574Expiration of common stock
warrants
    
    
    
    
    
    
    
    
    
    
    (1,721
    )
    
    
    
    
    
    
    1,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment of employee withholding
taxes on exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,335
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,335
    )Reduction of stock subscription
notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747Dividends on redeemable and convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,009
    )
    
    
    
    
    
    
    (69,009
    )Accretion on redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,095
    )
    
    
    
    
    
    
    (1,095
    )Balance at December 31, 2003
    
    
    63
    
    
    
    8
    
    
    
    66,663
    
    
    
    
    
    
    
    540,377
    
    
    
    (17,167
    )
    
    
    (1,679,789
    )
    
    
    
    
    
    
    (1,089,845
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (187,972
    )
    
    
    
    
    
    
    (187,972
    )
    
    $
    (187,972
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (187,972
    )Deferred stock option
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,756
    
    
    
    (1,756
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,236
    
    
    
    
    
    
    
    
    
    
    
    8,236Restricted stock exchanged for options
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Dividends on redeemable and convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,175
    )
    
    
    
    
    
    
    (56,175
    )Accretion on redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,588
    )
    
    
    
    
    
    
    (1,588
    )Balance at December 31, 2004
    
    $
    61
    
    
    $
    8
    
    
    $
    66,663
    
    
    $
    
    
    
    $
    542,138
    
    
    $
    (10,687
    )
    
    $
    (1,925,524
    )
    
    $
    
    
    
    $
    (1,327,341
    )
 The accompanying notes are an integral part of the consolidated financial statements. F-6




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (187,972
    )
    
    $
    (76,213
    )
    
    $
    (336,186
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    43,664
    
    
    
    42,983
    
    
    
    58,529Stock-based compensation
    
    
    8,501
    
    
    
    12,766
    
    
    
    3,810Loss on extinguishment of debt
    
    
    6,286
    
    
    
    
    
    
    
    17,552Restructuring (credits) charges
    
    
    (5
    )
    
    
    48
    
    
    
    486Program rights amortization
    
    
    53,616
    
    
    
    51,082
    
    
    
    77,980Adjustment of programming to net realizable value
    
    
    4,645
    
    
    
    1,066
    
    
    
    41,270Payments for cable distribution rights
    
    
    (123
    )
    
    
    (4,347
    )
    
    
    (9,286
    )Non-cash barter revenue
    
    
    (129
    )
    
    
    (66
    )
    
    
    (659
    )Program rights payments and deposits
    
    
    (67,682
    )
    
    
    (34,239
    )
    
    
    (116,243
    )Provision for doubtful accounts
    
    
    155
    
    
    
    (418
    )
    
    
    (126
    )Deferred income tax provision
    
    
    19,425
    
    
    
    6,670
    
    
    
    168,611Reserve on stock subscription notes receivable
    
    
    (407
    )
    
    
    (240
    )
    
    
    830Gain on sale or disposal of broadcast and other assets, net
    
    
    (4,836
    )
    
    
    (51,589
    )
    
    
    (22,906
    )Equity in income of unconsolidated investment
    
    
    
    
    
    
    (80
    )
    
    
    (460
    )Dividends and accretion on 141/4% mandatorily redeemable preferred stock
    
    
    60,616
    
    
    
    27,539
    
    
    
    Accretion on senior subordinated discount notes
    
    
    49,172
    
    
    
    43,660
    
    
    
    37,480Gain on modification of program rights obligations
    
    
    (1,481
    )
    
    
    (2,103
    )
    
    
    (1,520
    )Business interruption insurance
    
    
    
    
    
    
    
    
    
    
    (1,697
    )Changes in assets and liabilities:(Increase) decrease in accounts receivable
    
    
    (1,834
    )
    
    
    9,697
    
    
    
    1,418Decrease in amounts due from Crown Media
    
    
    13,883
    
    
    
    4,404
    
    
    
    3,221Decrease (increase) in prepaid expenses and other current assets
    
    
    975
    
    
    
    (1,450
    )
    
    
    354Decrease in other assets
    
    
    6,514
    
    
    
    5,931
    
    
    
    7,842Increase in accounts payable and accrued liabilities
    
    
    4,963
    
    
    
    5,210
    
    
    
    4,809Increase (decrease) in accrued interest
    
    
    1,198
    
    
    
    254
    
    
    
    (599
    )Decrease in obligations to CBS
    
    
    (18,861
    )
    
    
    (7,649
    )
    
    
    (9,938
    )Net cash (used in) provided by operating activities
    
    
    (9,717
    )
    
    
    32,916
    
    
    
    (75,428
    )Cash flows from investing activities:Decrease (increase) in short-term investments
    
    
    6,955
    
    
    
    4,125
    
    
    
    (4,923
    )Deposits for programming letters of credit
    
    
    (24,603
    )
    
    
    
    
    
    
    Acquisitions of broadcasting properties
    
    
    
    
    
    
    
    
    
    
    (265
    )Increase in investments in broadcast properties
    
    
    
    
    
    
    (24
    )
    
    
    Purchases of property and equipment
    
    
    (15,845
    )
    
    
    (26,732
    )
    
    
    (31,177
    )Proceeds from sales of broadcast assets
    
    
    9,988
    
    
    
    83,332
    
    
    
    26,647Proceeds from sale of broadcast towers and property and equipment
    
    
    28
    
    
    
    360
    
    
    
    143Proceeds from insurance recoveries
    
    
    
    
    
    
    
    
    
    
    2,722Other
    
    
    (170
    )
    
    
    (132
    )
    
    
    (836
    )Net cash (used in) provided by investing activities
    
    
    (23,647
    )
    
    
    60,929
    
    
    
    (7,689
    )Cash flows from financing activities:Borrowings of long-term debt
    
    
    365,000
    
    
    
    2,000
    
    
    
    336,338Repayments of long-term debt
    
    
    (335,687
    )
    
    
    (20,152
    )
    
    
    (2,898
    )Redemption of 121/2% exchange debentures
    
    
    
    
    
    
    
    
    
    
    (284,410
    )Payment of loan origination costs
    
    
    (11,441
    )
    
    
    (2,259
    )
    
    
    (10,886
    )Debt extinguishment premium and costs
    
    
    
    
    
    
    
    
    
    
    (14,302
    )Payments of employee withholding taxes on exercise of common stock options
    
    
    
    
    
    
    (2,335
    )
    
    
    Proceeds from exercise of common stock options, net
    
    
    3
    
    
    
    115
    
    
    
    1,182Repayment of stock subscription notes receivable
    
    
    413
    
    
    
    144
    
    
    
    Net cash provided by (used in) financing activities
    
    
    18,288
    
    
    
    (22,487
    )
    
    
    25,024(Decrease) increase in cash and cash equivalents
    
    
    (15,076
    )
    
    
    71,358
    
    
    
    (58,093
    )Cash and cash equivalents, beginning of year
    
    
    97,123
    
    
    
    25,765
    
    
    
    83,858Cash and cash equivalents, end of year
    
    $
    82,047
    
    
    $
    97,123
    
    
    $
    25,765
 The accompanying notes are an integral part of the consolidated financial statements. F-7




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PAXSON COMMUNICATIONS CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Paxson Communications Corporation (the Company), a Delaware corporation, was organized in
1993. The Company owns and operates television stations nationwide, and on August 31, 1998,
launched PAX TV. PAX TV is the brand name for the programming that the Company broadcasts through
its owned, operated and affiliated television stations, and through certain cable television system
owners and satellite television providers. The Companys business operations presently do not provide sufficient cash flow to support its
debt service and preferred stock dividend requirements. 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 interest of the Companys stockholders.
While the Company continues 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 (see
Note 15). The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company balances and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three
months or less and are stated at cost. Short-Term Investments Short-term investments consist of marketable government securities with original maturities of
one year or less. All short-term investments are classified as trading and are recorded at fair
value based upon quoted market prices. 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 managements best estimates. The amounts of accounts receivable that
ultimately become uncollectible could vary significantly from the Companys estimates. Property and Equipment Purchases of property and equipment, including additions and improvements and expenditures for
repairs and maintenance that significantly add to productivity or extend the economic lives of
assets, are capitalized at cost and depreciated using the straight line method over their estimated
useful lives as follows (see Note 5): Broadcasting towers and equipment
    
    4-30 yearsOffice furniture and equipment
    
    5-10 yearsBuildings and leasehold improvements
    
    7-40 yearsAircraft, vehicles and other
    
    5 years
 Leasehold improvements are depreciated using the straight-line method over the shorter of the
lease term or the estimated useful life of the related asset. Maintenance, repairs, and minor
replacements are charged to expense as incurred. F-8




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Intangible Assets The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets (SFAS 142) effective January 1, 2002. SFAS No. 142 addresses
financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS
No. 142, goodwill and intangible assets that have indefinite lives are not amortized but rather are
tested at least annually for impairment. Intangible assets that have finite useful lives continue
to be amortized over their estimated useful lives. Under SFAS No. 142, the Company no longer
amortizes its FCC license intangible assets (which the Company believes have an indefinite life).
Under previous accounting standards, these assets were being amortized over 25 years. The Company
tests its FCC license intangible assets for impairment by comparing the estimated fair value of
these assets, based upon an independent appraisal, with their recorded amounts on an aggregate
basis as a single unit of accounting since the Company operates PAX TV as a single asset, a
consolidated distribution platform. No FCC license intangible asset impairment loss was recognized
upon adoption. However, due to the deferred tax consequences of SFAS No. 142, the Company was
required to increase its deferred tax asset valuation allowance in 2002. In addition, the Company
tested its FCC license intangible assets for impairment as of December 31, 2004 and 2003 by
comparing the estimated fair value of these assets, based upon an independent appraisal, with their
recorded amount. No impairment charge was required as a result of this testing. Intangible assets that have finite useful lives continue to be amortized over their estimated
useful lives and primarily consist of cable and satellite distribution rights which are amortized
on a straight-line basis over the terms of the related contracts, which terms are generally ten
years (see Note 6). In 1998, the Company began entering into cable and satellite distribution
agreements for periods generally up to ten years in markets where the Company does not own a
television station. Certain of these distribution agreements also provided the Company with some
level of promotional advertising to be run at the discretion of the distributor, primarily during
the first few years to support the launch of the Companys PAX TV network on the cable systems. The
Company had been amortizing these assets on an accelerated basis in order to give effect to the
advertising component included in certain of these agreements. In 2003, the Company determined that
it had previously over-amortized certain of these assets and recorded a $6.9 million reduction of
its amortization expense, resulting in a corresponding increase in intangible assets. The remaining
unamortized costs, which were being amortized over seven years, are being amortized over the
remaining contractual life of the agreements. Program Rights The Companys programming consists of both originally developed programs and syndicated
programs that have previously aired on other networks. The Company generally has unlimited
exclusive domestic broadcast rights for its original programs. For syndicated programs, the Company
licenses the exclusive domestic distribution rights for a fixed cost over the license term. Program
rights are carried at the lower of unamortized cost or estimated net realizable value. Program
rights and the related liabilities are recorded at the contractual amounts when the programming is
available to air. Original programming generally is amortized on
a straight line or accelerated method over three to four years based on
expected usage. Syndicated
programming rights are amortized over the licensing agreement term using the greater of the
straight line per run or straight line over the license term method. The estimated costs of
programming which will be amortized during the next year are included in current assets; program
rights obligations which become due within the next year are included in current liabilities. The Company periodically evaluates the net realizable value of its program rights based on
anticipated future usage of programming and the anticipated future ratings and related advertising
revenue to be generated on a daypart basis. The Company also evaluates whether future revenues will
be sufficient to recover the cost of programs the Company is committed to purchase in the future
and, if estimated future revenues are insufficient, the Company accrues a loss related to its
programming commitments. For the years ended December 31, 2004, 2003 and 2002, the Company recorded
charges of approximately $4.6 million, $1.1 million and $41.3 million, respectively, related to the
write-down of program rights to their estimated net realizable value and losses on programming
commitments. Cable and Satellite Distribution Rights As discussed above, the Company has entered into agreements with cable and satellite
distributors for carriage on their systems. F-9




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company generally enters into agreements with cable distributors in markets not currently
served by a Company owned television station. The Company pays fees based on the number of cable
television subscribers reached and in certain instances provides a specified amount of airtime per
hour or per week in which the distributor may sell local advertising. Obligations for cable
distribution rights which will be paid within the next year are included in current liabilities.
The Company has also entered into agreements with cable system operators to improve channel
positioning on certain cable systems. Amounts paid for channel improvement with a stipulated
termination date are amortized over the term of the agreement using the straight-line method.
Amounts paid for channel improvement with no stipulated termination date are amortized on a
straight-line basis over a maximum life of ten years. As of December 31, 2004, obligations for
cable distribution rights require collective payments by the Company of approximately $2.9 million
in 2005. The agreements with certain satellite distributors provide for payment in advertising credits,
to be determined at the prevailing market rate at the time of placement. Deferred revenue from the
advertising credits provided is recognized as advertising revenue when advertising credits are
utilized. An estimate of the advertising credit that will be utilized within the next year is
included in deferred revenues as a current liability in the accompanying consolidated balance
sheets and amounted to $7.5 million as of December 31, 2004 and 2003. An estimate of the
advertising credit that will be utilized beyond December 31, 2005 and 2004 is included in deferred
revenues as a long-term liability in the accompanying consolidated balance sheets and amounted to
$6.9 million as of December 31, 2004 and 2003. Additionally, these agreements provide a specified
amount of time per week in which the distributor may sell advertising time. Investments in Broadcast Properties Investments in broadcast properties represent options held by the Company to purchase certain
television broadcasting stations. In connection with these option agreements, the Company has
obtained the right to provide programming to the related stations pursuant to time brokerage
agreements (TBAs) and has options to purchase certain of the related station assets and FCC
licenses at various amounts and terms (see Note 15). Included in depreciation and amortization in the years ended December 31, 2004 and 2003,
respectively, is a $0.5 million and $5.4 million impairment charge recorded in connection with a
purchase option on a television station. The $5.4 million impairment recorded in 2003 existed in
periods prior to the year ended December 31, 2003. Long-Lived Assets Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and Accounting Principles
Board Opinion (APB) No. 30, Reporting the Results of OperationsReporting the Effects of the
Disposal of a Segment Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 establishes a single accounting model for assets to be disposed of by
sale whether previously held and used or newly acquired. SFAS No. 144 retains the provisions of APB
No. 30 for presentation of discontinued operations in the income statement, but broadens the
presentation to include a component of an entity. The adoption of SFAS No. 144 did not have a
material impact on the Companys consolidated financial position, results of operations or cash
flows. 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. 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. F-10




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) The Company classifies assets as held for sale following criteria established in SFAS No. 144,
including when, in the opinion of management, the sale of the asset is probable of completion
within one year. Assets held for sale are recorded at the lower of their carrying amount or fair
value less cost to sell. The Company does not depreciate assets while they are classified as held
for sale. The results of operations of assets held for sale are not classified as discontinued
operations since they are not considered a component under SFAS No. 144. Derivative Financial Instruments The Companys derivative financial instruments (including certain derivative instruments
embedded in other contracts) are recorded on the balance sheet as either an asset or a liability
measured at fair value. Changes in the derivative instruments fair value are recognized in
earnings unless specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instruments gains and losses to offset related results on the hedged
item in the statement of operations, to the extent effective, and requires that the Company must
formally document, designate, and assess the effectiveness of transactions that receive hedge
accounting. As described in Note 9, the Company utilized an interest rate swap to manage the impact of
interest rate changes on the Companys previously existing senior credit facility. The interest
rate swap matured on October 15, 2003 and was not renewed. Under the interest rate swap, the
Company agreed with the other party to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional
principal amount. Income or expense under these instruments was recorded on an accrual basis as an
adjustment to the yield of the underlying exposures over the periods covered by the contracts. The
Company has accounted for the swap as a cash flow hedge pursuant to SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended, with changes in the fair value
included as a component of other comprehensive loss. Other comprehensive gain (loss) represents the unrealized gain (loss) on the Companys
interest rate swap accounted for as a cash flow hedge totaling approximately $3.1 million and
($1.8) million for the years ended December 31, 2003 and 2002, respectively. No income tax benefit
has been recorded related to these losses due to uncertainty regarding realization of the Companys
deferred tax assets. 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. As of
December 31, 2004 and 2003, included in deferred revenues as a current liability in the
accompanying consolidated balance sheets is approximately $5.2 million and $4.5 million,
respectively, related to ratings guarantee shortfalls. Advertising Costs Advertising costs are expensed as incurred. For the years ended December 31, 2004, 2003 and
2002, advertising expenses amounted to $12.2 million, $8.4 million and $8.6 million, respectively,
and are included in selling, general and administrative expenses in the accompanying consolidated
statements of operations. Time Brokerage Agreements The Company operates certain stations under TBAs, whereby the Company has agreed to provide
the station with programming and sells and retains all advertising revenue during such programming.
The broadcast station licensee retains responsibility for ultimate control of the station in
accordance with FCC policies. The Company pays a fixed fee to the station owner as well as certain
expenses of the station and performs other functions. The financial results of TBA operated
stations are included in the Companys statements of operations from the date of commencement of
the TBA. Stock-Based Compensation Employee stock options are accounted for using the intrinsic value method. Stock-based
compensation to non-employees is accounted for using the fair 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. F-11




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Had compensation expense for employee stock options granted 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): Years Ended December 31,2004
    
    
    2003
    
    
    2002Net loss attributable to common stockholders
    
    $
    (245,735
    )
    
    $
    (146,317
    )
    
    $
    (446,285
    )Add: Stock-based compensation expense determined under the intrinsic
value method and included in reported net loss
    
    
    8,501
    
    
    
    12,766
    
    
    
    3,810Deduct: Total stock-based compensation expense determined under the
fair value method
    
    
    (8,632
    )
    
    
    (15,079
    )
    
    
    (7,317
    )Pro forma net loss attributable to common stockholders
    
    $
    (245,866
    )
    
    $
    (148,630
    )
    
    $
    (449,792
    )Basic and diluted net loss per share:As reported
    
    $
    (3.61
    )
    
    $
    (2.14
    )
    
    $
    (6.88
    )Pro forma
    
    
    (3.61
    )
    
    
    (2.17
    )
    
    
    (6.94
    )
 The fair value of each option grant was estimated on the date of grant using the Black Scholes
option pricing model assuming, for 2002, 2003, and 2004, respectively, a dividend yield of zero for
all years; expected volatility of 70%, 78% to 79%, and 72% to 74%; risk free rate of return of 2.7%
to 4.5%, 2.8% to 3.4%, and 2.6% to 3.9%; and expected lives of 1.5 to 6 years, 1 day, and 1 day. Income and Other Taxes The Company records deferred income taxes using the liability method. Under the liability
method, deferred tax assets and liabilities are recognized for the expected future tax consequences
of temporary differences between the financial statement and income tax bases of the Companys
assets and liabilities. An allowance is recorded, based upon currently available information, when it is more likely
than not that any or all of a deferred tax asset will not be realized. The Companys income tax
provision consists of taxes currently payable, if any, and the change during the year of deferred
tax assets and liabilities. As previously described, upon adoption of SFAS No. 142 on January 1, 2002, the Company no
longer amortizes its FCC license intangible assets. Under previous accounting standards, these
assets were being amortized over 25 years. Although the provisions of SFAS No. 142 stipulate that
indefinite-lived intangible assets are not amortized, the Company is required under SFAS No. 109,
Accounting for Income Taxes, to recognize deferred tax liabilities and assets for temporary
differences related to its FCC license intangible assets and the tax-deductible portion of these
assets. Prior to adopting SFAS No. 142, the Company considered its deferred tax liabilities related
to its FCC license intangible assets as a source of future taxable income in assessing the
realization of its deferred tax assets. Because indefinite-lived intangible assets are no longer
amortized for financial reporting purposes under SFAS No. 142, the related deferred tax liabilities
will not reverse until some indeterminate future period should FCC license intangible assets become
impaired or be disposed of. Therefore, the reversal of deferred tax liabilities related to the FCC
license intangible assets is no longer considered a source of future taxable income in assessing
the realization of deferred tax assets. As a result of this accounting change, the Company was
required to record an increase in its deferred tax asset valuation allowance resulting in a
deferred tax liability of $168.6 million during the year ended December 31, 2002. In addition, the
Company will continue to record increases in its valuation allowance in future periods based on
increases in the deferred tax liabilities and assets for temporary differences related to FCC
license intangible assets. In 2004 and 2003, the Company recorded a reserve for state taxes (not based on income) of $0.7
million and $3.1 million, respectively, resulting in a corresponding increase in accounts payable
and accrued liabilities, in connection with a tax liability related to certain states in which the
Company has operations. The 2003 charge included an amount for periods prior to 2003. Additionally, in 2004 the Company determined that it had not recorded certain state taxes for
purchases in jurisdictions in which the Company has operations. The Company has determined the
amount of taxes due to be $2.2 million, which resulted in an increase to property and equipment in
the amount of $1.4 million and an increase to selling, F-12




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) general and administrative expenses in the amount of $0.8 million. A significant portion of the
state taxes recorded in 2004 pertain to periods prior to 2004. The majority of these taxes are
delinquent. Because the amount is not material, however, the Company does not anticipate that it
will be required to pay any significant interest or penalties. Per Share Data Basic and diluted loss per share was computed by dividing the 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. The following securities, which could potentially dilute earnings per share in the future,
were not included in the computation of loss per share, because to do so would have been
antidilutive (in thousands): 2004
    
    
    2003
    
    
    2002Stock options outstanding
    
    
    5,859
    
    
    
    3,129
    
    
    
    11,426Class A common stock warrants and restricted Class A common stock
outstanding
    
    
    32,321
    
    
    
    32,032
    
    
    
    32,428Class A common stock reserved for issuance under convertible securities
    
    
    40,712
    
    
    
    39,903
    
    
    
    39,16778,892
    
    
    
    75,064
    
    
    
    83,021
 In June 2003, warrants to purchase 240,000 shares of Class A common stock issued in connection
with the issuance of the 9 3/4% Series A Convertible Preferred Stock in June 1998 and warrants to
purchase 155,500 shares of Class A common stock issued to an affiliate of a former member of the
Companys board of directors, which were valued upon issuance at approximately $1.7 million,
expired unexercised. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting
principles in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements 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 supercedes APB Opinion 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). SFAS No. 123R is effective for public
entities at the beginning of the first interim or annual period beginning after June 15, 2005. 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. 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 will not have any impact on the Companys financial
position, results of operations or cash flows. F-13




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, which
amends a portion of the guidance in Accounting Principles Board Opinion (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 impact on the Companys financial position, results of
operations or cash flows. In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003)
Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51 (FIN 46). FIN 46 clarifies the application of ARB No. 51 to certain entities in
which the equity investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Application of FIN 46 is required in financial
statements of public entities that have interests in variable interest entities or potential
variable interest entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. Application by public entities for all other types of entities is required
in financial statements for periods ending after March 15, 2004. The adoption of FIN 46 did not
have any impact on the Companys financial position, results of operations or cash flows. F-14




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. NBC TRANSACTIONS Effective September 15, 1999 (the Issue Date), the Company entered into an Investment
Agreement (the Investment Agreement) with National Broadcasting Company, Inc. (NBC),
pursuant to which NBC purchased shares of convertible exchangeable preferred stock (the Series B
preferred stock), and common stock purchase warrants from the Company for an aggregate purchase
price of $415 million. Further, Mr. Paxson, the majority stockholder of the Company, and certain
entities controlled by Mr. Paxson granted NBC the right (the Call Right) to purchase all (but
not less than all) 8,311,639 shares of Class B Common Stock of the Company beneficially owned by
Mr. Paxson. The common stock purchase warrants issued to NBC consist of a warrant to purchase up to
13,065,507 shares of Class A Common Stock at an exercise price of $12.60 per share (Warrant A)
and a warrant to purchase up to 18,966,620 shares of Class A Common Stock (Warrant B) at an
exercise price equal to the average of the closing sale prices of the Class A Common Stock for the
45 consecutive trading days ending on the trading day immediately preceding the warrant exercise
date (provided that such price shall not be more than 17.5% higher or 17.5% lower than the six
month trailing average closing sale price). The Warrants are exercisable through September 2009
subject to certain conditions and limitations. The Call Right has a per share exercise price equal to the higher of (i) the average of the
closing sale prices of the Class A Common Stock for the 45 consecutive trading days ending on the
trading day immediately preceding the exercise of the Call Right (provided that such price shall
not be more than 17.5% higher or 17.5% lower than the six month trailing average closing sale
prices), and (ii) $20.00. The owners of the shares which are subject to the Call Right may not
transfer such shares prior to the sixth anniversary of the Issue Date, and may not convert such
shares into any other securities of the Company (including shares of Class A Common Stock).
Exercise of the Call Right is subject to compliance with applicable provisions of the
Communications Act of 1934, as amended (the Communications Act), and the rules and regulations
of the FCC. The Call Right may not be exercised until Warrant A and Warrant B have been exercised
in full. The Call Right expires on the tenth anniversary of the Issue Date, or prior thereto under
certain circumstances. The Company valued the common stock purchase warrants issued to NBC and the Call Right at
$66.7 million. The Company recorded this value along with transaction costs as a reduction of the
face value of the Series B preferred stock. Such discount was accreted as preferred stock dividends
through September 2002 using the interest method. The Investment Agreement requires the Company to obtain the consent of NBC or its permitted
transferee with respect to certain corporate actions, as set forth in the Investment Agreement, and
grants NBC certain rights with respect to the operations of the Company. NBC was also granted
certain demand and piggyback registration rights with respect to the shares of Class A Common Stock
issuable upon conversion of the Series B preferred stock (or conversion of any exchange debentures
issued in exchange therefor), exercise of the Warrants or conversion of the Class B Common Stock
subject to the Call Right. NBC, the Company, Mr. Paxson and certain entities controlled by Mr. Paxson also entered into a
Stockholder Agreement, pursuant to which, if permitted by the Communications Act and FCC rules and
regulations, the Company may nominate persons named by NBC for election to the Companys board of
directors and Mr. Paxson and his affiliates have agreed to vote their shares of common stock in
favor of the election of such persons as directors of the Company. Should no NBC nominee be serving
as a member of the Companys board of directors, then NBC may appoint two observers to attend all
board meetings. The Stockholder Agreement further provides that the Company shall not, without the
prior written consent of NBC, enter into certain agreements or adopt certain plans, as set forth in
the Stockholder Agreement, which would be breached or violated upon the acquisition of the Company
securities by NBC or its affiliates or would otherwise restrict or impede the ability of NBC or its
affiliates to acquire additional shares of capital stock of the Company. The Company and NBC have entered into a number of agreements affecting the Companys business
operations, including an agreement under which NBC provides network sales, marketing and research
services for the Companys PAX TV Network, national advertising sales services and Joint Sales
Agreements (JSA) between the Companys stations and NBCs owned and operated stations serving
the same markets. Pursuant to the terms of the JSAs, the NBC stations sell all non-network spot
advertising of the Companys stations and receive commission compensation for such sales and the
Companys stations may agree to carry one hour per day of the NBC stations syndicated or news
programming. Certain Company station operations, including sales operations, are integrated with
the corresponding functions of the related NBC station and the Company reimburses NBC for the cost
of performing these operations. In March 2004 the Company entered into an agreement with NBC under
which NBC consulted with the Company on the F-15




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 2. NBC TRANSACTIONS(Continued) development, production and programming of scripted and unscripted television series, games shows
and specials for the 2004-2005 broadcast season. The Company committed significant resources to
this programming initiative, and the shows the Company developed were targeted largely to a
younger audience demographic that is more attractive to advertisers than the audience demographic
that has typically viewed the Companys programming. The Company launched those shows on PAX TV
at various times during the second half of 2004. To date, this programming initiative has not
served to materially improve the Companys audience ratings or advertising revenues. The Companys
consulting agreement with NBC has expired and, although the Company continues to fund its
remaining commitments to this programming initiative, the Company is not currently planning to
invest substantial additional resources in the development of new original programming. For the
years ended December 31, 2004, 2003 and 2002, the Company incurred expenses totaling approximately
$22.2 million, $20.6 million and $20.8 million, respectively, for commission compensation and cost
reimbursements to NBC. As further discussed in Note 12, on November 13, 2003, NBC exercised its right under the
Investment Agreement to demand that the Company redeem or arrange for a third party to acquire, by
payment in cash, all 41,500 outstanding shares of Series B preferred stock held by NBC. The
aggregate redemption price payable in respect of such shares, including accrued dividends thereon,
was $600.7 million and $557.5 million as of December 31, 2004 and 2003, respectively. 3. RESTRUCTURING 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 2002 consisting of $2.2 million in
termination benefits for 95 employees and $0.4 million for costs associated with exiting leased
properties and consolidating certain operations. Through December 31, 2004, the Company has paid
$2.1 million in termination benefits to 94 employees and paid $0.5 million of lease termination and
other costs. The Company accounted for these costs pursuant to the provisions of SFAS No. 146
Accounting for Costs Associated with Exit or Disposal Activities. 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 was nullified under SFAS No. 146. In connection with the NBC transactions described in Note 2, the Company entered into JSAs
with certain of NBCs owned and operated stations in 1999 and 2000. During the fourth quarter of
2000, the Company approved a plan to restructure its television station operations by entering into
JSAs primarily with NBC affiliate stations in each of the Companys remaining non-JSA markets. To
date, the Company has entered into JSAs for 45 of its television stations. The Companys
restructuring plan included two major components: (1) termination of 226 station sales and
administrative employees; and (2) exiting Company studio and sales office leased properties. The
Company has substantially completed the JSA restructuring plan. F-16




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PAXSON COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 3. RESTRUCTURING(Continued) The following summarizes the activity in the Companys restructuring accounts for the years
ended December 31, 2004, 2003 and 2002 (in thousands): Amounts ChargedBalance
    
    
    (Credited) to Costs
    
    
    Cash
    
    
    BalanceDecember 31, 2003
    
    
    and Expenses
    
    
    Deductions
    
    
    December 31, 2004Corporate RestructuringAccrued liabilities:Lease and other costs
    
    $
    51
    
    
    $
    
    
    
    $
    (51
    )
    
    $
    Severance
    
    
    5
    
    
    
    (5
    )
    
    
    
    
    
    
    $
    56
    
    
    $
    (5
    )
    
    $
    (51
    )
    
    $
    JSA RestructuringAccrued liabilities:Lease costs
    
    $
    89
    
    
    $
    
    
    
    $
    (87
    )
    
    $
    2
 Amounts ChargedBalance
    
    
    (Credited) to Costs
    
    
    Cash
    
    
    BalanceDecember 31, 2002
    
    
    and Expenses
    
    
    Deductions
    
    
    December 31, 2003Corporate RestructuringAccrued liabilities:Lease and other costs
    
    $
    262
    
    
    $
    115
    
    
    $
    (326
    )
    
    $
    51Severance
    
    
    732
    
    
    
    (67
    )
    
    
    (660
    )
    
    
    5$
    994
    
    
    $
    48
    
    
    $
    (986
    )
    
    $
    56JSA RestructuringAccrued liabilities:Lease costs
    
    $
    528
    
    
    $
    
    
    
    $
    (439
    )
    
    $
    89
 Amounts ChargedBalance
    
    
    (Credited) to Costs
    
    
    Cash
    
    
    BalanceDecember 31, 2001
    
    
    and Expenses
    
    
    Deductions
    
    
    December 31, 2002Corporate RestructuringAccrued liabilities:Lease and other costs
    
    $
    
    
    
    $
    422
    
    
    $
    (160
    )
    
    $
    262Severance
    
    
    
    
    
    
    2,218
    
    
    
    (1,486
    )
    
    
    732$
    
    
    
    $
    2,640
    
    
    $
    (1,646
    )
    
    $
    994JSA RestructuringAccrued liabilities:Lease costs
    
    $
    1,717
    
    
    $
    (194
    )
    
    $
    (995
    )
    
    $
    528Severance
    
    
    382
    
    
    
    (273
    )
    
    
    (109
    )
    
    
    $
    2,099
    
    
    $
    (467
    )
    
    $
    (1,104
    )
    
    $
    528
 4. CERTAIN TRANSACTIONS WITH RELATED AND OTHER PARTIES In addition to the transactions with NBC described in Note 2, the Company has entered into
certain operating and financing transactions with related and other parties as described below. DP Media, Inc. In June 2000, the Company completed the acquisition of DP Media, Inc. (DP Media) for aggregate
consideration of $113.5 million, $106.0 million of which had previously been advanced by the
Company during 1999. DP Media was beneficially owned by family members of Mr. Paxson, the majority
stockholder of the Company. DP Medias assets included a 32% equity interest in a limited liability
company controlled by the former stockholders of DP Media, which owns television station WWDP in
Norwell, Massachusetts. In April 2003, the owners of WWDP sold WWDP to Valuevision Media
Acquisition, Inc. for a purchase price of $32.5 million. The proceeds to the Company of $13.8
million resulted in a pre-tax gain of approximately $9.9 million. See Note 8. F-17




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 4. CERTAIN TRANSACTIONS WITH RELATED AND OTHER PARTIES(Continued) The Christian Network, Inc. The Company has entered into several agreements with The Christian Network, Inc. and certain
of its for profit subsidiaries (individually and collectively referred to herein as CNI). 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. CNI Master Agreement. In connection with the NBC transactions described elsewhere herein, in
September 1999 the Company entered into a Master Agreement for Overnight Programming, Use of
Digital Capacity and Public Interest Programming with CNI, pursuant to which the Company granted
CNI, for a term of 50 years (with automatic ten year renewals, subject to certain limited
conditions), certain rights to continue broadcasting CNIs programming on Company stations during
the hours of 1:00 a.m. to 6:00 a.m. When digital programming begins, the Company will make a
digital channel available for CNIs use for 24 hour CNI digital programming. License Agreement. The Company and CNI entered into a three year agreement in March 1999 under
which the Company paid license fees to CNI to broadcast CNIs religious programming. The license
agreement expired in May 2002 without being renewed. During the year ended December 31, 2002, the
Company paid approximately $93,000 in license fees in connection with this agreement. CNI Tax Indemnification Agreement. The Company and CNI entered into an agreement in May 1994
(the CNI Agreement) under which the Company agreed that, if the tax exempt status of CNI were
jeopardized by virtue of its relationships with the Company and its subsidiaries, the Company would
take certain actions to ensure that CNIs tax exempt status would no longer be so jeopardized. Such
steps could include, but not be limited to, rescission of one or more transactions or payment of
additional funds by the Company. If the Companys activities with CNI are consistent with the terms
governing their relationship, the Company believes that it will not be required to take any actions
under the CNI Agreement. However, there can be no assurance that the Company will not be required
to take any actions under the CNI Agreement at a material cost to the Company. Network Operations Center. During the third quarter of 2004, the Company purchased the
television production and distribution facility that it had previously leased from CNI, for an
aggregate purchase price of approximately $1.7 million. Mr. Paxson had personally guaranteed the
mortgage debt incurred by CNI in 1994 in connection with its acquisition of this facility. This
debt was repaid from proceeds of the Companys acquisition of the Facility. The Company utilizes
this facility primarily as its network operations center and originates the PAX TV network signal
from this location. For the years ended December 31, 2004, 2003 and 2002, the Company incurred
lease expense in connection with the lease of this facility in the amount of $147,000, $212,000 and
$209,000, respectively. In addition, the Company provided satellite uplink and assembly services at
no cost to CNI pursuant to the lease agreement. The Company and CNI are currently negotiating a fee
arrangement for the satellite and assembly services being provided to CNI by the Company. Loans During December 1996, the Company extended loans to members of its management to finance their
purchase of shares of Class A Common Stock in the open market. The loans are full recourse
promissory notes bearing interest at 5.75% per annum and are collateralized by a pledge of the
shares of Class A Common Stock purchased with the loan proceeds. As of December 31, 2004 and 2003,
the outstanding balances on such loans amounted to $0.3 million and $0.7 million, respectively.
These loans are past their payment terms and, therefore, have been fully reserved. F-18




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following as of December 31, (in thousands): 2004
    
    
    2003Broadcasting towers and equipment
    
    $
    233,235
    
    
    $
    245,492Office furniture and equipment
    
    
    16,834
    
    
    
    19,031Buildings and leasehold improvements
    
    
    22,622
    
    
    
    16,963Land and improvements
    
    
    1,232
    
    
    
    667Aircraft, vehicles and other
    
    
    3,945
    
    
    
    3,959277,868
    
    
    
    286,112Accumulated depreciation and amortization
    
    
    (174,342
    )
    
    
    (165,271
    )Property and equipment, net
    
    $
    103,526
    
    
    $
    120,841
 Depreciation and amortization expense related to property and equipment aggregated
approximately $32.6 million, $34.1 million and $33.3 million for the years ended December 31, 2004,
2003 and 2002, respectively. During the fourth quarter of 2004, the Company recorded additional
amortization expense of $1.7 million for certain leasehold improvements to adjust their
amortization period to the shorter of their useful lives or the lease term. Approximately $1.6
million pertained to periods prior to 2004. As described in Note 9, the Companys senior secured floating rate notes are secured by
substantially all of the assets of the Company, including property and equipment. 6. INTANGIBLE ASSETS Intangible assets consist of the following as of December 31, (in thousands): 2004
    
    
    2003Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortizable intangible assets:Cable and satellite distribution rights
    
    $
    127,793
    
    
    $
    (87,740
    )
    
    $
    128,810
    
    
    $
    (78,957
    )Other
    
    
    5,025
    
    
    
    (4,630
    )
    
    
    5,025
    
    
    
    (4,064
    )Indefinite lived intangible asset:FCC licenses
    
    
    843,462
    
    
    
    
    
    
    
    843,140
    
    
    
    $
    976,280
    
    
    $
    (92,370
    )
    
    $
    976,975
    
    
    $
    (83,021
    )
 Amortization expense related to intangible assets aggregated $10.6 million, $8.9 million and
$19.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. Estimated future amortization expense is as follows for the periods indicated (in thousands): 2005
    
    $
    9,9562006
    
    
    9,8322007
    
    
    9,5572008
    
    
    7,0442009
    
    
    1,195Thereafter
    
    
    2,864$
    40,448
 7. PROGRAM RIGHTS Program rights consist of the following as of December 31, (in thousands): 2004
    
    
    2003Program rights
    
    $
    208,055
    
    
    $
    371,146Accumulated amortization
    
    
    (149,621
    )
    
    
    (300,847
    )58,434
    
    
    
    70,299Less: current portion
    
    
    (38,853
    )
    
    
    (41,659
    )Program rights, net
    
    $
    19,581
    
    
    $
    28,640
 F-19




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. PROGRAM RIGHTS (continued) Program rights amortization expense amounted to $53.6 million, $51.1 million and $78.0 million
for the years ended December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004, the Companys programming contracts require collective payments by
the Company of approximately $45.5 million as follows (in thousands): Obligations forProgram
    
    
    Program RightsRights
    
    
    Commitments
    
    
    Total2005
    
    $
    18,436
    
    
    $
    25,340
    
    
    $
    43,7762006
    
    
    1,703
    
    
    
    
    
    
    
    1,703$
    20,139
    
    
    $
    25,340
    
    
    $
    45,479
 In 2004 and 2003, the Company recognized a charge of $4.6 million and $1.1 million,
respectively, to reduce certain programming rights to their net realizable value. This charge
resulted from a change in the estimated future advertising revenues expected to be generated by
certain programming as a result of a change in expected usage of such programming. In January 2003, the Company modified its programming schedule by replacing 26.5 hours per
week of entertainment programming with long form paid programming. As a result of this change,
the Company decided not to air certain syndicated and original programs. Therefore, the Company
revised its estimate of future advertising revenues to be generated related to these programs and
recognized a charge of approximately $38.4 million in the fourth quarter of 2002 related to these
programming assets. Additionally, as further described below, in the second quarter of 2002 the
Company recorded a $2.9 million accrued programming loss related to programming commitments for the
television series Touched By An Angel (Touched). On August 1, 2002, the Company entered into agreements with a subsidiary of CBS Broadcasting,
Inc. (CBS) and Crown Media United States, LLC (Crown Media) to sublicense the Companys
rights to broadcast Touchedto Crown Media for exclusive exhibition on the Hallmark Channel. Under
the terms of the agreement with Crown Media, the Company is to receive approximately $47.4 million
from Crown Media, $38.6 million of which is to be paid over a three-year period that commenced
August 2002 and the remaining $8.8 million, for the 2002/2003 season, is to be paid over a
three-year period that commenced August 2003. In addition, the agreement with Crown Media provides
that Crown Media is obligated to sublicense from the Company future seasons of Touchedshould CBS
renew the series. As further described below, CBS did not renew Touchedfor the 2003/2004 season. Under the terms of the Companys agreement with CBS, the Company remains obligated to CBS for
amounts due under its pre-existing license agreement, less estimated programming cost savings of
approximately $15.0 million. As of December 31, 2004 and 2003, the Companys liability to CBS
totaled approximately $26.9 million and $47.3 million, respectively. The sublicense transaction
resulted in a gain of approximately $4.0 million, which was deferred and is being recorded over the
term of the Crown Media agreement (the deferred gain is included in obligations to CBS in the
accompanying consolidated balance sheets and amounted to $0.9 million and $2.3 million as of
December 31, 2004 and 2003, respectively). The Company has a significant concentration of credit risk with respect to the amounts due
from Crown Media under the sublicense agreement. As of December 31, 2004, the maximum amount of
loss due to credit risk that the Company would sustain if Crown Media failed to perform under the
agreement totaled approximately $11.5 million, representing the present value of amounts due from
Crown Media. Under the terms of the sublicense agreement, the Company has the right to terminate
Crown Medias rights to broadcast Touchedif Crown Media fails to make timely payments under the
agreement. Therefore, should Crown Media fail to perform under the agreement, the Company could
regain its exclusive rights to broadcast Touchedon PAX TV pursuant to its existing licensing
agreement with CBS. Under its agreement with CBS, the Company is required to license future seasons of Touchedif the
series is renewed by CBS. Under its sublicense agreement with Crown Media, Crown Media is obligated
to sublicense such future seasons from the Company. The Companys financial obligations to CBS for
such seasons exceed the sublicense fees to be received from Crown Media. In the second quarter of
2002, upon the decision by CBS to renew Touchedfor the 2002/2003 season, the Company recorded a
loss of approximately $10.7 million. This amount was offset, in part, by a F-20




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued) 7. PROGRAM RIGHTS(Continued) reduction in the Companys loss on the 2001/2002 season of approximately $7.8 million, resulting in
a net accrued programming loss of $2.9 million. The change in estimate for the 2001/2002
season was due to the sublicensing agreement with Crown Media and a lower number of episodes
produced than previously estimated. In 2003, CBS determined that it would not renew Touched
for the 2003/2004 season and, as a consequence, a loss accrual was not required. The Companys obligation to CBS for Touchedwill be partially funded through the sublicense
fees from Crown Media. As of December 31, 2004, the Companys obligation to CBS and its receivable
from Crown Media related to Touchedare as follows (in thousands): Obligationsto
    
    
    Amounts Due fromCBS
    
    
    Crown Media
    
    
    Net Amount2005
    
    $
    17,726
    
    
    $
    (10,439
    )
    
    $
    7,2872006
    
    
    9,191
    
    
    
    (1,711
    )
    
    
    7,48026,917
    
    
    
    (12,150
    )
    
    
    14,767Amount representing interest
    
    
    
    
    
    
    610
    
    
    
    610$
    26,917
    
    
    $
    (11,540
    )
    
    $
    15,377
 For the years ended December 31, 2004, 2003 and 2002, the Company recognized as income a
portion of the deferred gains related to the sublicense transaction with Crown Media and certain
other syndicated programs totaling approximately $1.5 million, $2.1 million and $1.5 million,
respectively. These amounts are reflected in gain on modification of program rights obligations
in the accompanying consolidated statements of operations. 8. ASSETS HELD FOR SALE The results of operations and the gain or (loss) on sale of assets held for sale are included
in the determination of the Companys operating income (loss) from continuing operations in
accordance with SFAS No. 144 since these assets do not constitute a component of the Company under
SFAS No. 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 as of December 31, (in thousands): 2004
    
    
    2003Intangible assets, net
    
    $
    315
    
    
    $
    3,499Property and equipment, net
    
    
    2,241
    
    
    
    3,802$
    2,556
    
    
    $
    7,301
 Included in assets held for sale are certain broadcast towers with a carrying value of $2.2
million and $2.7 million as of December 31, 2004 and 2003, respectively, for which the Company is
in the process of transferring title and assigning the leases to the buyer. In May 2004, the Company completed the sale of its television station KPXJ, serving the
Shreveport, Louisiana market, for a cash purchase price of $10.0 million, resulting in a pre-tax
gain of approximately $6.1 million. 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 $12.3 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 $10.0 million resulting in a pre-tax gain of
approximately $3.1 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 $9.9 million. 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 $35.0 million resulting in a
pre-tax gain of approximately $26.6 million. F-21




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. ASSETS HELD FOR SALE (Continued) In October 2002, the Company completed the sale of its television station WPXB, serving
Merrimack, New Hampshire, to NBC. The Company received cash proceeds of $26.0 million from the sale
and realized a pre-tax gain of approximately $24.5 million. 9. SENIOR SECURED AND SENIOR SUBORDINATED NOTES Senior secured and senior subordinated notes consists of the following as of December 31, (in thousands): 2004
    
    
    2003Senior Secured Floating Rate Notes due 2010, secured by substantially all of the
assets of the Company, interest at LIBOR plus 2.75%
(4.82% at December 31, 2004)
    
    $
    365,000
    
    
    $
    12 1/4% Senior Subordinated Discount Notes due 2009
    
    
    496,263
    
    
    
    496,263103/4% Senior Subordinated Notes, due 2008
    
    
    200,000
    
    
    
    200,000Senior Credit Facility: $25.0 million revolving line of credit, maturing
June 30, 2006, interest at LIBOR plus 3.25% or Base Rate (as
defined) plus 2.25% at the Companys option (4.52% at
December 31, 2003)
    
    
    
    
    
    
    8,000 $50.0 million Term A loan, maturing December 31, 2005, interest at
LIBOR plus 3.25% or Base Rate (as defined) plus 2.25% at the
Companys option (4.85% at December 31, 2003), quarterly
principal payments that commenced in September 2003
    
    
    
    
    
    
    49,750 $285.0 million Term B loan, maturing June 30, 2006, interest at
LIBOR plus 3.25% or Base Rate (as defined) plus 2.25% at the
Companys option (4.43% at December 31, 2003), quarterly
principal payments that commenced in September 2001
    
    
    
    
    
    
    277,875Other
    
    
    443
    
    
    
    5051,061,706
    
    
    
    1,032,393Less: discount on Senior Subordinated Discount Notes
    
    
    (57,613
    )
    
    
    (106,785
    )Less: current portion
    
    
    (64
    )
    
    
    (61
    )$
    1,004,029
    
    
    $
    925,547
 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 is 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 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. F-22




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. SENIOR SECURED AND SENIOR SUBORDINATED NOTES  (Continued) During the years ended December 31, 2004 and 2003, respectively, the Company issued letters of
credit to support its obligation to pay for certain original programming. As of December 31, 2004,
there was approximately $24.6 million of outstanding letters of credit all of which have been
pre-funded by the Company and are reflected as deposits for programming letters of credit in the
accompanying consolidated balance sheets. As of December 31, 2003, there were $16.6 million of
outstanding letters of credit supported by the revolving credit portion of the Companys previously
existing Senior Credit Facility. The settlement of such letters of credit generally occurs in the
first quarter of the year. In January 2002, the Company completed an offering of senior subordinated discount notes due
in 2009 (the 12
1/4%
Notes). Gross proceeds of the offering totaled approximately $308.3 million and
were used to refinance the Companys 121/2% exchange debentures due 2006 and to pay costs related to
the offering. The 121/4% Notes were sold at a discounted price of 62.132% of the principal amount at
maturity which represents a yield to maturity of 121/4%. Cash interest on the 12 1/4% Notes will be
payable semi-annually beginning on July 15, 2006. The 12 1/4% Notes are guaranteed by the Companys
subsidiaries. The Company recognized a loss due to the early extinguishment of debt totaling $17.6
million in the first quarter of 2002 resulting primarily from the redemption premium and the
write-off of unamortized debt costs associated with the repayment of the 121/2% exchange debentures. The 121/4% Notes are redeemable at the Companys option on or after January 15, 2006 at the
redemption prices set forth below (expressed as a percentage of the face value) plus accrued and
unpaid interest, if any, to the date of redemption. Twelve Month PeriodBeginning January 15,2006
    
    
    106.125
    %2007
    
    
    103.063
    %2008 and thereafter
    
    
    100.000
    %
 In July 2001, the Company sold $200.0 million of 103/4% Senior Subordinated Notes due 2008 (the
103/4% Notes). Interest on the 103/4% notes is payable on January 15 and July 15 of each year. The
103/4% Notes are redeemable at the Companys option on or after July 15, 2005 at the redemption
prices set forth below (expressed as a percentage of the face value) plus accrued interest to the
date of redemption: Twelve Month PeriodBeginning July 15,2005
    
    
    105.375
    %2006
    
    
    102.688
    %2007
    
    
    100.000
    %
 The indentures governing the Senior Secured Notes, the 12 1/4% Notes and the 10 3/4% 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 its 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. F-23




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. SENIOR SECURED AND SENIOR SUBORDINATED NOTES(Continued) The Senior Credit Facility that was refinanced with the proceeds from the January 2004
offering discussed above consisted of a $25.0 million revolving credit facility, a $50.0 million
Term A facility and a $285.0 million Term B facility. The interest rate under the Senior Credit
Facility, as amended, was LIBOR plus 3.25% or Base Rate (as defined) plus 2.25%, at the Companys
option. In September 2001, the Company entered into an interest rate swap in the notional amount of
$144.0 million to hedge the impact of interest rate changes on a portion of the Companys variable
rate indebtedness. The interest rate swap matured on October 15, 2003 and was not renewed. The
fixed rate under the swap was 3.64% (6.89% including the spread over LIBOR under the senior credit
facility) and variable rates were indexed to LIBOR. The Company amended and restated the Senior
Credit Facility on May 5, 2003 to consolidate previous amendments and allow for the issuance of
letters of credit, subject to availability, under a $25.0 million revolving credit facility. At
December 31, 2003, there was $8.0 million in borrowings outstanding under the revolving credit
facility. Aggregate maturities of senior secured and senior subordinated notes at December 31, 2004 are
as follows (in thousands): 2005
    
    $
    642006
    
    
    712007
    
    
    792008
    
    
    200,0862009
    
    
    496,358Thereafter
    
    
    365,048$
    1,061,706
 In connection with the Companys senior secured notes and senior subordinated notes, the
Company has incurred debt issuance costs totaling approximately $26.3 million which are amortized
to interest expense over the term of the indebtedness using the effective interest method. Included
in other assets as of December 31, 2004 and 2003, are unamortized debt issuance costs amounting to
$17.8 million and $18.6 million, respectively. F-24




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES The provision for federal and state income taxes for the years ended December 31, 2004, 2003
and 2002 is as follows (in thousands): 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    542
    
    
    $
    
    
    
    $
    (542
    )State
    
    
    132
    
    
    
    119
    
    
    
    (120
    )674
    
    
    
    119
    
    
    
    (662
    )Deferred:Federal
    
    
    35,080
    
    
    
    14,513
    
    
    
    50,723State
    
    
    9,020
    
    
    
    1,244
    
    
    
    4,348Change in valuation allowance
    
    
    (63,525
    )
    
    
    (22,427
    )
    
    
    (223,682
    )(19,425
    )
    
    
    (6,670
    )
    
    
    (168,611
    )Total provision for income taxes
    
    $
    (18,751
    )
    
    $
    (6,551
    )
    
    $
    (169,273
    )
 Deferred tax assets and deferred tax liabilities reflect the tax effect of differences between
financial statement carrying amounts and tax bases of assets and liabilities as follows as of
December 31, (in thousands): 2004
    
    
    2003Deferred tax assets:Net operating loss carryforwards
    
    $
    362,300
    
    
    $
    314,692Programming
    
    
    9,621
    
    
    
    18,369Deferred compensation
    
    
    23,915
    
    
    
    20,687Deferred interest expense
    
    
    43,290
    
    
    
    26,278Other
    
    
    3,627
    
    
    
    593442,753
    
    
    
    380,619Deferred tax asset valuation allowance
    
    
    (434,062
    )
    
    
    (370,537
    )Net deferred tax assets
    
    
    8,691
    
    
    
    10,082Deferred tax liabilities:Basis difference on FCC licenses no longer amortized for
financial reporting purposes under SFAS 142
    
    
    (194,706
    )
    
    
    (175,281
    )Basis difference on other fixed assets and certain other intangible
assets
    
    
    (8,691
    )
    
    
    (10,082
    )Net deferred tax liability
    
    $
    (194,706
    )
    
    $
    (175,281
    )
 The reconciliation of the income tax benefit computed at the U.S. federal statutory tax rate,
to the provision for income taxes is as follows (in thousands): 2004
    
    
    2003
    
    
    2002Tax benefit at U.S. federal statutory tax rate
    
    $
    38,199
    
    
    $
    14,743
    
    
    $
    58,651State income tax benefit, net of federal tax
    
    
    4,344
    
    
    
    1,264
    
    
    
    5,024Effect of increase in state tax rate on net deferred liabilities
    
    
    4,864
    
    
    
    
    
    
    
    Non-deductible preferred stock redemption premium
    
    
    
    
    
    
    
    
    
    
    (6,647
    )Disqualified original issue discount
    
    
    (2,832
    )
    
    
    (2,451
    )
    
    
    (2,104
    )Non-deductible items
    
    
    (264
    )
    
    
    (247
    )
    
    
    (515
    )Valuation allowance
    
    
    (63,525
    )
    
    
    (22,427
    )
    
    
    (223,682
    )Tax benefit of disposed FCC license intangible
    
    
    
    
    
    
    3,078
    
    
    
    Other
    
    
    463
    
    
    
    (511
    )
    
    
    Provision for income taxes
    
    $
    (18,751
    )
    
    $
    (6,551
    )
    
    $
    (169,273
    )
 F-25




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES(Continued) At December 31, 2004 and 2003, the Company has recorded a valuation allowance for its deferred
tax assets 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. The Company recorded a valuation allowance in the amount of
$22.4 million as of December 31, 2003, and $64.0 million as of December 31, 2004. As previously
described in Note 1, following the adoption of SFAS No. 142 on January 1, 2002, the Company no
longer amortizes its FCC license intangible assets for financial reporting purposes. Therefore, the
reversal of deferred tax liabilities related to FCC license intangible assets is no longer
considered a source of future taxable income in assessing the realization of deferred tax assets.
As a result of this accounting change, the Company was required to record an increase in its
deferred tax asset valuation allowance resulting in a deferred tax liability of $168.6 million
during the year ended December 31, 2002. The Company structured the disposition of its radio division in 1997 and its acquisition of
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 million of gain. The IRS has examined the Companys 1997 tax return and has
issued the Company a 30-day letter proposing to disallow all of the Companys gain deferral. The
Company filed a protest to this determination with the IRS appeals division, but cannot predict the
outcome of this matter at this time, and may not prevail. In addition, the 30-day letter offered
the Company an alternative position that, in the event the IRS is unsuccessful in disallowing all
of the gain deferral, approximately $62 million of the $333 million gain deferral will be
disallowed. The Company filed a protest to this alternative determination as well. The Company may
not prevail with respect to this alternative determination. Should the IRS successfully challenge
the Companys position and disallow all or part of its gain deferral, because the Company had net
operating losses in the years subsequent to 1997 in excess of the amount of the deferred gain, the
Company would not be liable for any tax deficiency, but could be liable for state income taxes. The
Company has estimated the amount of state income tax for which it could be liable as of December
31, 2004, to be approximately $8.0 million should the IRS succeed in disallowing the entire
deferred gain. In addition, the Company could be liable for interest on the tax liability for the
period prior to the carryback of its 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 December 31, 2004, to be approximately $18.0 million and $4.0 million, respectively, should
the IRS succeed in disallowing the entire deferred gain. Because the Company previously
established a deferred tax liability at the time of the like-kind exchange and because the
Company has previously established a valuation allowance against its net operating losses, the use
of the Companys losses to offset any deferred gain disallowance by the IRS would result in a
benefit from income taxes. This matter is currently with the Appeals Office of the Internal
Revenue Service. The Companys tax provision is based on various factors including statutory rates and tax
planning opportunities available in the various jurisdictions in which the Company operates. In
the ordinary coarse of business, there are transactions for which the ultimate tax outcome is
uncertain, thus judgment is required in determining the provision for income taxes and the
associated realizability of deferred tax assets and liabilities. The Company establishes reserves
when it becomes probable that a tax return position may be challenged and that the Company may not
succeed in completely defending that challenge. The Company adjusts these reserves in light of
changing facts and circumstances, such as the settlement of a tax audit. The Companys annual tax
rate includes the impact of reserve provisions and changes to reserves. While it is often
difficult to predict the final outcome or the timing of resolution of any particular matter, the
Company believes that its reserves reflect the probable outcome of known tax contingencies.
Resolution of tax contingencies would be recognized as an increase or decrease to the Companys tax
rate in the period of resolution. In the fourth quarter of 2004, the Company recorded a $4.9 million deferred tax provision, of
which $4.5 million pertained to periods prior to 2004, resulting from a change in the blended state
income tax rate used to estimate the expected future state tax consequences of temporary
differences between the financial statement and income tax bases of the Companys assets and
liabilities. The Company has net operating loss carryforwards for income tax purposes subject to certain
carryforward limitations of approximately $929.0 million at December 31, 2004, expiring beginning
in the year 2009 and ending in the year 2024. A portion of the net operating losses, amounting to
approximately $10.0 million, is limited to annual utilization. Additionally, further limitations on
the utilization of the Companys net operating tax loss carryforwards could result in the event of
certain changes in the Companys ownership. F-26




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. STOCK INCENTIVE PLANS The Company has established various stock incentive plans to provide incentives to directors,
officers, employees and others who perform services for the Company through awards of options and
shares of restricted stock. Awards granted under the plans are at the discretion of the Companys
Compensation Committee of the Board of Directors and may be in the form of either incentive or
nonqualified stock options or awards of restricted stock. Awards granted under the plans generally
vest over a three to five year period. At December 31, 2004, 3,444,603 shares of Class A common
stock were available for additional awards under the plans. In October 2003, the Company granted options under the Companys 1998 Stock Incentive Plan, as
amended, to purchase 3,598,750 shares of the Companys Class A common stock at an exercise
price of $0.01 per share to certain employees and directors. The options provided for a one
business day exercise period. All holders of the options exercised their options and received
Class A common stock subject to vesting restrictions (restricted stock award). The restricted
stock awards included retention grants totaling 2,278,000 shares which will vest in their
entirety at the end of a five year period. Of the remaining restricted stock awards, 1,000,750
will vest ratably over a three year period and 320,000 will vest ratably over a five year
period. The award resulted in non-cash stock based compensation expense, which is being
recognized using the straight-line method over the vesting period of the awards. For the years
ended December 31, 2004 and 2003, the Company recognized approximately $7.1 million and $1.5
million, respectively, in stock based compensation expense in connection with these grants.
Approximately $3.2 million will be recognized in 2005; and $6.1 million will be
recognized between 2006 and 2008. The options are to vest as follows: RestrictedYear Ended
    
    stock awards and optionsDecember 31,
    
    vesting2005
    
    
    564,5002006
    
    
    321,1672007
    
    
    64,0002008
    
    
    1,956,0002,905,667
 In October 2004, the Company completed an exchange offer pursuant to which 3,197,250
restricted shares of Class A common stock were exchanged for options to purchase an equivalent
number of shares of Class A common stock, at an exercise price of $0.01 per share with identical
vesting provisions as the original awards. The restricted shares were originally issued to certain
employees and directors in the October 2003 grant. This exchange did not result in any additional
stock-based compensation expense. The number of shares of Class A common stock issued and
outstanding at the time of exchange was reduced by an amount equal to the number of restricted
shares exchanged. In January 2003, the Company consummated a stock option exchange offer under which the Company
granted to holders who tendered their eligible options in the exchange offer new options under the
Companys 1998 Stock Incentive Plan, as amended, to purchase one share of the Companys Class A
common stock for each two shares of Class A common stock issuable upon the exercise of tendered
options, at an exercise price of $0.01 per share. Because the terms of the new options provided for
a one business day exercise period, all holders who tendered their eligible options in the exchange
offer exercised their new options promptly after the issuance of those new options. Approximately
5.5 million options issued under the Companys stock option plans and 1.8 million nonqualified
options issued in addition to the options granted under its stock option plans were tendered in the
exchange offer and approximately 2.6 million new shares of Class A common stock were issued upon
exercise of the new options, net of approximately 1.0 million shares of Class A common stock
withheld, in accordance with the provisions of the 1998 Stock Incentive Plan, at the holders
elections to cover withholding taxes and the option exercise price totaling approximately $2.4
million. The stock option exchange resulted in a non-cash stock-based compensation expense of
approximately $8.7 million, of which approximately $8.6 million related to vested and unvested
shares issued upon exercise of the new options was recognized in the year ended December 31, 2003
and the remaining $0.1 million was recognized in 2004. In addition, the remaining deferred stock
compensation expense associated with the original stock option awards totaling approximately $2.5
million at December 31, 2002 associated with tendered options was recognized using the
straight-line method over the vesting period of the modified awards ($0.2 million was recognized
in the year ended December 31, 2004 and $2.3 million recognized in the year ended December 31,
2003). As of December 31, 2004, there were 40,000 shares of restricted stock issued upon the
exercise of options issued in the January 2003 exchange that had not vested as a result of
elections to defer vesting made by the holders. F-27




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. STOCK INCENTIVE PLANS(Continued) During 1999, the Compensation Committee of the Board of Directors reduced the per share
exercise price of 840,000 unvested stock options held by the Companys former CEO to $.01 and
360,000 vested stock options held by the Companys former CEO to $1.00. The Company recognized
stock based compensation expense of approximately $0.6 million for the year ended December 31,
2002, related to these options. A summary of the activity in the Companys stock incentive plans is as follows for the years
ended December 31,: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding, beginning of year
    
    
    2,606,686
    
    
    $
    2.70
    
    
    
    9,103,336
    
    
    $
    5.88
    
    
    
    9,452,436
    
    
    $
    5.91Granted
    
    
    4,316,000
    
    
    
    .01
    
    
    
    7,529,409
    
    
    
    .04
    
    
    
    80,500
    
    
    
    7.25Forfeited
    
    
    (915,625
    )
    
    
    4.88
    
    
    
    (6,410,350
    )
    
    
    7.25
    
    
    
    (240,950
    )
    
    
    7.25Exercised
    
    
    (670,348
    )
    
    
    .01
    
    
    
    (7,615,709
    )
    
    
    .04
    
    
    
    (188,650
    )
    
    
    6.37Outstanding, end of year
    
    
    5,336,713
    
    
    
    .49
    
    
    
    2,606,686
    
    
    
    2.70
    
    
    
    9,103,336
    
    
    
    5.88Weighted average fair value of options granted
during the year
    
    
    
    
    
    $
    1.64
    
    
    
    
    
    
    $
    3.72
    
    
    
    
    
    
    $
    7.66
 The majority of the Companys option grants have been at exercise prices which have
historically been below the quoted market price of the underlying common stock at the date of
grant. The following table summarizes information about employee and director stock options
outstanding and exercisable at December 31, 2004: WeightedNumber
    
    
    Average
    
    
    NumberOutstanding
    
    
    Remaining
    
    
    Exercisable atDecember 31,
    
    
    Contractual
    
    
    December 31,Exercise Prices
    
    2004
    
    
    Life
    
    
    2004$0.01
    
    
    4,385,652
    
    
    
    7.5
    
    
    
    707,902$1.00
    
    
    360,000
    
    
    
    1.6
    
    
    
    360,000$2.11
    
    
    5,000
    
    
    
    1.4
    
    
    
    5,000$3.42
    
    
    539,511
    
    
    
    1.5
    
    
    
    539,511$7.25
    
    
    46,550
    
    
    
    3.7
    
    
    
    46,5505,336,713
    
    
    
    
    
    
    
    1,658,963
 In addition to the options granted under its stock incentive plans, the Company has granted
nonqualified options to purchase shares of its Class A common stock to members of senior management
and others. At December 31, 2004 and 2003, there were 522,500 options outstanding under these
grants with a weighted average exercise price of $3.04, all of which options are exercisable and
500,000 of which expire in August 2006, 15,000 of which expire in October 2011 and 7,500 of which
expire in May 2012. During 2002, the Companys Chairman and CEO voluntarily surrendered 1.0 million
options previously granted. The Company recognized stock-based compensation related to these grants
of approximately $(0.4) million for the year ended December 31, 2002. F-28




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. STOCK INCENTIVE PLANS(Continued) A summary of the activity in the Companys nonqualified options not granted under its stock
incentive plans is as follows for the years ended December 31,: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Number of
    
    
    Exercise
    
    
    Number of
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding, beginning of year
    
    
    522,500
    
    
    $
    3.04
    
    
    
    2,322,500
    
    
    $
    8.62
    
    
    $
    3,200,000
    
    
    
    10.23Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122,500
    
    
    
    7.25Forfeited
    
    
    
    
    
    
    
    
    
    
    (1,800,000
    )
    
    
    10.24
    
    
    
    (1,000,000
    )
    
    
    10.35Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of year
    
    
    522,500
    
    
    
    3.04
    
    
    
    522,500
    
    
    
    3.04
    
    
    
    2,322,500
    
    
    
    8.62Weighted average fair value of options granted
during the year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    6.70
 The following table summarizes information about nonqualified options outstanding and
exercisable at December 31, 2004: WeightedAverageRemainingNumber
    
    
    Contractual
    
    
    NumberExercise Price
    
    Outstanding
    
    
    Life
    
    
    Exercisable$2.85
    
    
    500,000
    
    
    
    1.6
    
    
    
    500,000$7.25
    
    
    22,500
    
    
    
    7.0
    
    
    
    22,500522,500
    
    
    
    
    
    
    
    522,500
 12. MANDATORILY REDEEMABLE PREFERRED STOCK In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This statement establishes standards for
classifying and measuring as liabilities certain financial instruments that embody obligations of
the issuer and have characteristics of both liabilities and equity. SFAS No. 150 requires liability
classification for mandatorily redeemable equity instruments not convertible into common stock such
as the Companys 141/4% Junior Exchangeable Preferred Stock. The Company adopted SFAS No. 150
effective July 1, 2003. Upon adoption, the Company recorded a deferred asset for the unamortized
issuance costs and recorded a liability for the mandatorily redeemable preferred stock balance
related to its 141/4% Junior Exchangeable Preferred Stock. In addition, the amortization of the
issuance costs and the dividends related to the 141/4% Junior Exchangeable Preferred Stock are being
recorded as interest expense beginning July 1, 2003 versus the recording of these costs as
dividends and accretion on redeemable preferred stock in prior periods. Restatement of prior
periods is not permitted upon adoption of SFAS No. 150. The Companys 93/4% Series A Convertible
Preferred Stock and 16.2% Series B Convertible Exchangeable Preferred Stock are not affected by the
provisions of SFAS No. 150 because of their equity conversion features. The following represents a summary of the changes in the Companys mandatorily redeemable
preferred stock for each of the three years in the period ended December 31, 2004 and the aggregate
liquidation preference and accumulated dividends as of December 31, 2004 (in thousands): F-29




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. MANDATORILY REDEEMABLE PREFERRED STOCK(Continued) 14 1/4%Junior
    
    
    9 3/4%
    
    
    16.2% Series B
    
    
    121/2%Exchangeable
    
    
    Convertible
    
    
    Convertible
    
    
    ExchangeablePreferred
    
    
    Preferred
    
    
    Preferred
    
    
    PreferredStock
    
    
    Stock
    
    
    Stock
    
    
    Stock
    
    
    TotalMandatorily redeemable and
convertible preferred stock:Balance at January 1, 2002
    
    $
    310,068
    
    
    $
    103,140
    
    
    $
    471,062
    
    
    $
    279,890
    
    
    $
    1,164,160Accretion
    
    
    1,185
    
    
    
    496
    
    
    
    20,021
    
    
    
    24
    
    
    
    21,726Accrual of cumulative dividends
    
    
    43,245
    
    
    
    10,684
    
    
    
    33,200
    
    
    
    1,244
    
    
    
    88,373Exchange into debentures (see
Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (281,158
    )
    
    
    (281,158
    )Balance at December 31, 2002
    
    
    354,498
    
    
    
    114,320
    
    
    
    524,283
    
    
    
    
    
    
    
    993,101Accretion
    
    
    596
    
    
    
    499
    
    
    
    
    
    
    
    
    
    
    
    1,095Accrual of cumulative
Dividends
    
    
    24,044
    
    
    
    11,765
    
    
    
    33,200
    
    
    
    
    
    
    
    69,009Reclassification as a liability on
July 1, 2003
    
    
    (379,138
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (379,138
    )Balance at December 31, 2003
    
    
    
    
    
    
    126,584
    
    
    
    557,483
    
    
    
    
    
    
    
    684,067Accretion
    
    
    
    
    
    
    503
    
    
    
    
    
    
    
    
    
    
    
    503Accrual of cumulative dividends
    
    
    
    
    
    
    12,955
    
    
    
    43,220
    
    
    
    
    
    
    
    56,175Balance at December 31, 2004
    
    $
    
    
    
    $
    140,042
    
    
    $
    600,703
    
    
    $
    
    
    
    $
    740,745Mandatorily redeemable preferred stock:Balance at July 1, 2003
    
    $
    379,138Reclassification of unamortized
issuance costs on July 1, 2003
    
    
    4,062Accrual of cumulative dividends
from July 1, 2003 through
December 31, 2003
    
    
    27,539Balance at December 31, 2003
    
    
    410,739Accrual of cumulative dividends
    
    
    60,616Balance at December 31, 2004
    
    $
    471,355Aggregate liquidation preference
and accumulated dividends at
December 31, 2004
    
    $
    471,355
    
    
    $
    141,058
    
    
    $
    600,703
    
    
    $
    
    
    
    $
    1,213,116
 121/2% Exchangeable Preferred Stock In January 2002 the Company exchanged all issued and outstanding shares of its 121/2%
Exchangeable Preferred Stock in the amount of $281.2 million, including accumulated but unpaid
dividends, into 121/2% Exchange Debentures. The 121/2% Exchange Debentures were then redeemed with
proceeds from the issuance of the 121/4% Notes described in Note 9. 141/4% Junior Exchangeable Preferred Stock During 1998, the Company issued 20,000 shares of Cumulative Junior Exchangeable Preferred
Stock (the Junior Exchangeable Preferred Stock) with a $200.0 million aggregate liquidation
preference for gross proceeds of an equivalent amount. At December 31, 2004 and 2003, the Company
had authorized 72,000 shares of $0.001 par value Junior Exchangeable Preferred Stock of which
46,310 and 40,355 shares were issued and outstanding, respectively. Holders of the Junior
Exchangeable Preferred Stock were initially entitled to cumulative dividends at an annual rate of
131/4% of the liquidation preference, payable semi-annually in cash or additional shares beginning
November 15, 1998 and accumulating from the issue date. If dividends for any period ending after
May 15, 2003 are paid in additional shares of Junior Exchangeable Preferred Stock, the dividend
rate will increase 1% for that dividend payment period. Because the F-30




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. MANDATORILY REDEEMABLE PREFERRED STOCK(Continued) Company elected to continue to pay dividends in additional shares, the dividend rate increased to
141/4% after May 15, 2003 in accordance with the terms of the security. The Company is required to redeem all of the then outstanding Junior Exchangeable Preferred
Stock on November 15, 2006, at a price equal to the aggregate liquidation preference thereof plus
accumulated and unpaid dividends to the date of redemption. The Junior Exchangeable Preferred Stock
is redeemable at the Companys option at any time at the redemption prices set forth below
(expressed as a percentage of liquidation preference) plus accumulated and unpaid dividends to the
date of redemption: Twelve month periodbeginning May 15,2004
    
    
    103.313
    %2005 and thereafter
    
    
    100.000
    %
 Upon a change of control, the Company is required to offer to purchase the Junior Exchangeable
Preferred Stock at a price equal to 101% of the liquidation preference thereof plus accumulated and
unpaid dividends. The Company may, provided it is not contractually prohibited from doing so,
exchange the outstanding Junior Exchangeable Preferred Stock on any dividend payment date for 141/4%
Exchange Debentures due 2006. The Exchange Debentures have redemption features similar to those of
the Junior Exchangeable Preferred Stock. For the years ended December 31, 2004, 2003 and 2002, the
Company paid dividends of approximately $59.6 million, $50.2 million and $42.5 million,
respectively, by the issuance of additional shares of Junior Exchangeable Preferred Stock. Accrued
Junior Exchangeable Preferred Stock dividends aggregated approximately $8.2 million and $7.2
million at December 31, 2004 and 2003, respectively. 93/4% Convertible Preferred Stock During 1998, the Company issued 7,500 shares of 93/4% Series A Convertible Preferred Stock
(Convertible Preferred Stock) with an aggregate liquidation preference of $75.0 million, and
warrants to purchase 240,000 shares of Class A common stock. Of the gross proceeds of $75.0
million, approximately $960,000 was allocated to the value of the warrants, which were exercisable
at a price of $16 per share through June 2003. In June 2003, the warrants to purchase 240,000
shares of Class A common stock expired unexercised. At December 31, 2004 and 2003, the Company had authorized 17,500 shares of $0.001 par value
Convertible Preferred Stock of which 14,105 and 12,810 shares were issued and outstanding,
respectively. Holders of the Convertible Preferred Stock are entitled to receive cumulative
dividends at an annual rate of 93/4%, payable quarterly beginning September 30, 1998 and accumulating
from the issue date. The Company may pay dividends either in cash, in additional shares of
Convertible Preferred Stock, or (subject to an increased dividend rate) by the issuance of shares
of Class A common stock equal in value to the amount of such dividends. For the years ended
December 31, 2004, 2003 and 2002, the Company paid dividends of approximately $13.0 million, $11.8
million and $10.7 million, respectively, by the issuance of additional shares of Convertible
Preferred Stock. At December 31, 2004 and 2003, there were no accrued and unpaid dividends on the
Convertible Preferred Stock. The Company is required to redeem the Convertible Preferred Stock on December 31, 2006, at a
price equal to the aggregate liquidation preference thereof plus accumulated and unpaid dividends
to the date of redemption. The Convertible Preferred Stock is redeemable at the Companys option,
at the redemption price set forth below (expressed as a percentage of liquidation preference) plus
accumulated and unpaid dividends to the date of redemption: Twelve month periodbeginning June 30,2004
    
    
    102.00
    %2005 and thereafter
    
    
    100.00
    %
 F-31




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PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. MANDATORILY REDEEMABLE PREFERRED STOCK(Continued) Upon a change of control, the Company is required to offer to purchase the Convertible
Preferred Stock at a price equal to the liquidation preference thereof plus accumulated and unpaid
dividends. The Convertible Preferred Stock contains restrictions, primarily based on the trading
price of the common stock, on the issuance of additional preferred stock ranking senior to the
Convertible Preferred Stock. Each share of Convertible Preferred Stock is convertible into shares
of Class A common stock at an initial conversion price of $16 per share. If the Convertible
Preferred Stock is called for redemption, the conversion right will terminate at the close of
business on the date fixed for redemption. Holders of the Convertible Preferred Stock have voting
rights on all matters submitted for a vote to the Companys common stockholders and are entitled to
one vote for each share of Class A common stock into which their Convertible Preferred Stock is
convertible. 16.2% Series B Convertible Preferred Stock Pursuant to the Investment Agreement, NBC acquired $415 million aggregate liquidation
preference of a new series of the Companys convertible exchangeable preferred stock which accrues
cumulative dividends from the issue date at an initial annual rate of 8% and is convertible
(subject to adjustment under the terms of the Certificate of Designation relating to the Series B
preferred stock) into 31,896,032 shares of the Companys Class A common stock at an initial
conversion price of $13.01 per share, which increases at a rate equal to the dividend rate ($18.83
per share at December 31, 2004). On September 15, 2004, the rate at which dividends accrue on the
Series B preferred stock was adjusted to 16.2% from 8% as required by the terms of the Certificate
of Designation of the Companys Series B preferred stock. At December 31, 2004 and 2003, the
Company had 41,500 shares of $0.001 par value Series B preferred stock authorized, issued and
outstanding. On November 13, 2003, the Company received notice from NBC that NBC has exercised 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 approximately
$600.7 million and $557.5 million as of December 31, 2004 and 2003, respectively. 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 (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., 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 million investment in the
Company if the Company does not redeem, the Series B preferred stock on or before November 13,
2004. NBC delivered a notice of demand for redemption on November 13, 2003, and has since alleged,
both through statements to the press and in its complaint filed in Delaware, 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 have filed briefs in the litigation and have each moved for judgment on
the pleadings. The court heard oral argument on the respective motions on February 14, 2005 and
has not yet issued its ruling. As the Company did not effect the Redemption by November 13, 2004, NBC generally is permitted to
transfer, without restriction, any of the Companys securities acquired by it, its right to acquire
Mr. Paxsons Class B common stock, the contractual rights described by the Investment Agreement and
its other rights under the related transaction agreements, provided that Warrant A, Warrant B and
the right to acquire Mr. Paxsons Class B common stock will expire, to the extent unexercised, 30
days after any such transfer. If NBC transfers any of the Companys securities or its right
to F-32




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. MANDATORILY REDEEMABLE PREFERRED STOCK(Continued) acquire Mr. Paxsons Class B common stock, the transferee will remain subject to the terms and
conditions of such securities, including those limitations on exercise described above. NBC also has the right to require that the Company redeem any Series B preferred stock and
Class A common stock issued upon conversion of the Series B preferred stock then held by NBC upon
the occurrence of various events of default (a Default Redemption). If NBC exercises this
right, the Company will have up to 180 days to consummate the redemption. If at any time during the
180 day redemption period, the terms of the Companys outstanding debt and preferred stock do not
prohibit the redemption and the Company has sufficient funds on hand to consummate the redemption,
the Company must consummate the redemption at that time. NBC may not exercise Warrant A, Warrant B
or its right to purchase shares of Class B common stock beneficially owned by Mr. Paxson during the
180 day redemption period. Should the Company fail to effect a Default Redemption within 180 days after NBC has exercised
its right to require the Company to redeem its securities, NBC will have 180 days within which to
exercise Warrant A and Warrant B and its right to acquire Mr. Paxsons Class B common stock, and
generally will be permitted to transfer, without restriction, any of the Companys securities
acquired by it, its right to acquire Mr. Paxsons Class B common stock, the contractual rights
provided by the NBC investment agreement, and its other rights under the related transaction
agreements, provided that Warrant A, Warrant B and the right to acquire Mr. Paxsons Class B common
stock shall expire, to the extent unexercised, 30 days after any such transfer. If NBC does not
effect any of these transactions within the 180 day period, the Company will have the right, for 30
days, to redeem NBCs securities. If the Company does not effect a redemption during this period,
NBC will have the right to require the Company to effect, at the Companys option, either a public
sale or a liquidation of the Company and may participate as a bidder in any such transaction. If
the highest bid in any public sale of the Company would be insufficient to pay NBC the redemption
price of its securities, NBC will have a right of first refusal to purchase the Company for the
highest bid amount. NBC will not be permitted to exercise Warrant A, Warrant B or its right to
acquire Mr. Paxsons Class B common stock during the public sale or liquidation process. The Companys ability to effect any redemption is restricted by the terms of the Companys
outstanding debt and preferred stock. In order to be able to redeem the Series B preferred stock,
the Company would need not only to raise sufficient cash to fund payment of the redemption price,
but also to obtain the consents of the holders of the Companys outstanding debt and preferred
stock or repay, redeem or refinance these securities in a manner that obviated the need to obtain
the consents of the holders. Alternatively, the Company would need to identify a third party
willing to purchase NBCs Series B preferred stock directly from NBC or to enter into a merger,
acquisition or other transaction with the Company as a result of which NBCs Series B preferred
stock would be redeemed or acquired at the stated redemption price. The Company has the right, at any time, to redeem any or all of the Companys outstanding
Series B preferred stock at a redemption price per share equal to the higher of (i) the liquidation
preference of $10,000 per share plus accrued and unpaid dividends, and (ii) the product of 80% of
the average of the closing sale prices of the Class A common stock for the ten consecutive trading
days ending on the trading day immediately preceding the Companys notice to NBC exercising the
optional redemption, and the number of shares of Class A common stock into which a share of Series
B preferred stock is convertible (approximately 768.58 shares of Class A common stock as of
December 31, 2004). If the Company elects to redeem a portion of the Companys outstanding Series B
preferred stock, the Company is required to declare and pay, in full, all of the accumulated and
unpaid dividends on the Series B preferred stock. As of December 31, 2004 and 2003, accumulated and
unpaid dividends on the Series B preferred stock aggregated approximately $185.7 million and $142.5
million, respectively. The Series B preferred stock is exchangeable, in whole or in part, at the option of the
holder, subject to the Companys debt and preferred stock covenants limiting additional
indebtedness but in any event not later than January 1, 2007, into convertible debentures of the
Company maturing on December 31, 2009 and ranking on a parity with the Companys other subordinated
indebtedness. Should NBC determine that the rules and regulations of the FCC prohibit it F-33




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 12. MANDATORILY REDEEMABLE PREFERRED STOCK(Continued) from holding shares of Class A common stock, NBC may convert the Series B preferred stock held by
it into an equal number of shares of non-voting common stock of the Company, which non-voting
common stock shall be immediately convertible into Class A common stock upon transfer by NBC. The Series B preferred stock is non-voting, except as otherwise required by law and except in
certain circumstances, including with respect to:  
    amending certain rights of the holders of the Series B preferred stock; and
    issuing certain equity securities that rank on a parity with or senior to the Series B
preferred stock. Redemption Features of Preferred Stock The following table presents the redemption value of the three classes of preferred stock
outstanding at December 31, 2004 should the Company elect to redeem the preferred stock in the
indicated year, assuming no dividends are paid in cash prior to redemption (in thousands): Junior Exchangeable
    
    
    Convertible Preferred
    
    
    Series B ConvertiblePreferred Stock
    
    
    Stock
    
    
    Preferred Stock141/4%(1)
    
    
    93/4%(2)
    
    
    16.2%(3)2005
    
    $
    540,916
    
    
    $
    155,323
    
    
    $
    667,9332006
    
    
    609,879
    
    
    
    171,029
    
    
    
    735,1632007
    
    
    
    
    
    
    
    
    
    
    802,3932008
    
    
    
    
    
    
    
    
    
    
    869,6232009
    
    
    
    
    
    
    
    
    
    
    936,853
   (1)
    
    Mandatorily redeemable on November 15, 2006; redeemable by the Company.(2)
    
    Mandatorily redeemable on December 31, 2006; redeemable by the Company.(3)
    
    As further discussed above, 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, by payment in cash, all 41,500
outstanding shares of the Companys Series B preferred stock held by NBC. Covenants Under Preferred Stock Terms 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. 13. COMMON STOCK AND COMMON STOCK WARRANTS Class A common stock and Class B common stock will vote as a single class on all matters
submitted to a vote of the stockholders, with each share of Class A common stock entitled to one
vote and each share of Class B common stock entitled to ten votes; Class C common stock is
non-voting. Each share of Class B common stock is convertible, at the option of its holder, into
one share of Class A common stock at any time. Under certain circumstances, Class C common stock
may be converted, at the option of the holder, into Class A common stock. In connection with the NBC transactions discussed in Note 2, NBC acquired a warrant to
purchase up to 13,065,507 shares of Class A Common stock at an exercise price of $12.60 per share
(Warrant A) and a warrant to purchase up to 18,966,620 shares of Class A Common Stock
(Warrant B) at an exercise price equal to the average of the closing sale prices of the Class A
Common Stock for the 45 consecutive trading days ending on the trading day immediately preceding
the warrant exercise date (provided that such price shall not be more than 17.5% higher or 17.5%
lower than the six month trailing average closing sale price). The Warrants are exercisable for ten
years from the issue date, subject to certain conditions and limitations. F-34




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. COMMON STOCK AND COMMON STOCK WARRANTS (Continued) In connection with the Series A Convertible Preferred Stock sale in June 1998, the Company
issued warrants to purchase 240,000 shares of Class A common stock at an exercise price of $16. The
warrants were valued at $960,000. In June 2003, the warrants to purchase 240,000 shares of Class A
common stock expired unexercised. In June 1998, the Company issued to an affiliate of a former member of its Board of Directors
five year warrants entitling the holder to purchase 155,500 shares of Class A common stock at an
exercise price of $12.60 per share. In June 2003, the warrants to purchase 155,500 shares of Class
A common stock expired unexercised. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by the Company using
available market information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 2004. Although management is not
aware of any factors that would significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial statements since that date,
and current estimates of fair value may differ significantly from the amounts presented herein. The
following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate such value: Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses.The
fair values approximate the carrying values due to their short term nature. Investments in broadcast properties.The fair value of investments in broadcast properties is
estimated based upon an independent appraisal. The fair value approximates the carrying value. Long-term debt.The fair value of the Companys long-term debt is estimated based on current
market rates and instruments with the same risk and maturities. The fair value of the Companys
borrowings under the Senior Credit Facility approximates its carrying value. The fair market values
of the Companys Senior Secured Floating Rate Notes, 103/4% Notes and 121/4% Notes are estimated based
on year end quoted market prices for such securities. At December 31, 2004, the estimated fair
values of the Companys Senior Secured Floating Rate Notes, 103/4% Notes and 121/4% Notes were
approximately $ 368.7 million, $210.0 million and $464.0 million, respectively. Mandatorily redeemable securities.The fair value of the Companys mandatorily redeemable
preferred stock is estimated based on quoted market prices plus accumulated but unpaid dividends,
except for the Series B preferred stock, which is estimated at the December 31, 2004 aggregate
liquidation preference plus accumulated dividends as no quoted market prices are available for
these securities. The estimated fair value of the Companys mandatorily redeemable preferred stock
is as follows (in thousands): 141/4% Junior Exchangeable Preferred
    
    $
    346,44693/4% Convertible Preferred
    
    
    77,58216.2% Series B Convertible Preferred
    
    
    600,703$
    1,024,731
 F-35




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. COMMITMENTS AND CONTINGENCIES Leases Future minimum annual payments under non-cancelable operating leases for broadcasting
facilities and equipment as of December 31, 2004 are as follows (in thousands): 2005
    
    $
    19,7012006
    
    
    17,5162007
    
    
    15,8922008
    
    
    14,6792009
    
    
    12,450Thereafter
    
    
    107,160$
    187,398
 The Company incurred total operating expenses of approximately $25.4 million, $18.8 million
and $17.9 million for the years ended December 31, 2004, 2003 and 2002, respectively, under these
leases. In the fourth quarter of 2004, the Company recorded an adjustment in the amount of $4.0
million in order to recognize additional lease expense for lease arrangements that provide for
escalating lease payments. Approximately $3.1 million pertained to periods prior to 2004. In December 2001, the Company completed the sale and leaseback of certain of its tower assets
for aggregate proceeds of $34.0 million. This transaction resulted in a deferred gain of
approximately $5.2 million which is being recognized over the lease term as a reduction of rent
expense. As part of the transaction, the Company entered into operating leases related to both its
analog and digital antennas at these facilities for terms of up to 20 years. Annual rent expense
over the lease term is approximately $4.0 million. For certain tower assets with a net book value
of approximately $2.2 million as of December 31, 2004 ($2.7 million as of December 31, 2003), the
Company has been unable to transfer title or assign leases to the buyer. The Company is in the
process of transferring title and assigning leases to the buyer. These assets are included in
assets held for sale in the accompanying consolidated balance sheets. In the interim, at closing,
the Company entered into management agreements with the buyer on terms consistent with the
operating leases. Included in the $34.0 million proceeds was approximately $12.1 million of
deferred consideration for the managed sites. Of the $12.1 million deferred consideration received,
$2.2 million remained as of December 31, 2004 and is included in other long-term liabilities in the
accompanying consolidated balance sheets ($2.6 million as of December 31, 2003). Under the terms of
the agreement with the buyer, the proceeds received by the Company related to these assets are not
refundable to the buyer in the event the Company is unable to complete the transfer of title for
these assets. As of December 31, 2004 the Company is obligated under employment agreements with its senior
management to make payments totaling approximately $2.4 million in 2005, $2.5 million in 2006 and
$1.4 million in 2007. Investment Commitments In 1997, the Company paid $2.0 million for an option to acquire a television station serving
the Memphis, Tennessee market and simultaneously paid $2.0 million for an option to acquire a
television station serving the New Orleans, Louisiana market. The Company may exercise its rights
to acquire these television stations for an option exercise price of $18.0 million for each station
beginning January 1, 2007 through December 31, 2008. The owners of these stations also have the
right to require the Company to purchase these stations at any time after January 1, 2007 through
December 31, 2008. These stations are currently operating under TBAs with the Company. The purchase
of these assets is subject to various conditions, including the receipt of regulatory approvals.
The completion of these investments is also subject to several factors and to the satisfaction of
various conditions, and there can be no assurance that these investments will be completed. As
discussed in Note 1, for the years ended December 31, 2004 and 2003, the Company recorded an
impairment charge of $ 0.5 million and $5.4 million, respectively, in connection with the purchase
option for one of these stations. Routine Litigation The Company is involved in routine litigation from time to time in the ordinary course of its
business. In the opinion of management, the ultimate resolution of these routine matters will not
have a material effect on the Companys consolidated financial position or results of operations
and cash flows. F-36




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. COMMITMENTS AND CONTINGENCIES (continued) NBC Legal Proceeding 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 (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., 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. Any further increase in the annual rate at which
dividends accrue on the Series B preferred stock resulting from this litigation could have a
material adverse effect on the Companys consolidated financial position and results of operations. 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 million investment in the
Company if the Company does not redeem, the Series B preferred stock on or before November 13,
2004. NBC delivered a notice of demand for redemption on November 13, 2003, and has since alleged,
both through statements to the press and in its complaint filed in Delaware, 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 aggregate redemption price payable in respect of the 41,500 shares
of Series B preferred stock held by NBC, including accrued dividends thereon, was approximately
$600.7 million as of December 31, 2004. 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 and 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 and results of operations and cash
flows. The Company and NBC have filed briefs in the litigation and have each moved for judgment on
the pleadings. The court heard oral argument on the respective motions on February 14, 2005 and
has not yet issued its ruling. Exploration of Strategic Alternatives The Companys business operations presently do not provide sufficient cash flow to support its
debt service and preferred stock dividend requirements. 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 continues 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 its core business operations and increasing cash flow. Insurance Litigation The Companys antenna, transmitter and other broadcast equipment from its New York television
station were destroyed upon the collapse of the World Trade Center on September 11, 2001. The
Company has property and business interruption insurance coverage to mitigate losses sustained,
although the extent of coverage of such insurance is currently being litigated. F-37




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information and non-cash operating, investing and financing activities
are as follows (in thousands): Years Ended December 31,2004
    
    
    2003
    
    
    2002Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    36,906
    
    
    $
    41,883
    
    
    $
    43,630Cash paid for income taxes
    
    $
    250
    
    
    $
    1,053
    
    
    $
    625Non-cash operating, investing and financing activities:Programming received in a settlement
    
    $
    
    
    
    $
    1,000
    
    
    $
    Accretion of discount on Senior Subordinated Notes
    
    $
    49,172
    
    
    $
    43,660
    
    
    $
    37,480Dividends accrued on redeemable and convertible preferred
Stock
    
    $
    56,175
    
    
    $
    69,009
    
    
    $
    88,373Discount accretion on redeemable and convertible
Securities
    
    $
    503
    
    
    $
    1,095
    
    
    $
    21,726Stock option exercise proceeds and withholding taxes
remitted through withholding of shares received upon
exercise
    
    $
    
    
    
    $
    2,359
    
    
    $
    Reduction of stock subscription notes receivable through
offset of deferred and other compensation
    
    $
    37
    
    
    $
    770
    
    
    $
    
 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): Seasonal revenue fluctuations are common within the television broadcasting industry and
result primarily from fluctuations in advertising expenditures. The Company believes that
television advertisers generally spend relatively more for long form paid programming in the first
and fourth calendar quarters each year, spend relatively less for long form paid programming in the
second calendar quarter and spend the least for long form paid programming in the third calendar
quarter. The Company believes that television advertisers generally spend relatively more for
commercial advertising time in the second and fourth calendar quarters, spend relatively less
during the first calendar quarter of each year and spend the least for commercial advertising
during the third calendar quarter. The Companys quarterly results of operations are as follows: For the 2004 Quarters EndedDecember 31(2)(4)
    
    
    September 30 (3)
    
    
    June 30
    
    
    March 31(2)(in thousands except share and per share data)NET REVENUES
    
    $
    69,587
    
    
    $
    65,872
    
    
    $
    69,877
    
    
    $
    71,294Expenses, excluding depreciation, amortization
and stock-based compensation
    
    
    64,876
    
    
    
    56,515
    
    
    
    59,375
    
    
    
    60,954Stock-based compensation
    
    
    2,507
    
    
    
    1,239
    
    
    
    2,533
    
    
    
    2,222Depreciation and amortization
    
    
    11,440
    
    
    
    10,527
    
    
    
    11,437
    
    
    
    10,260Total expenses
    
    
    78,823
    
    
    
    68,281
    
    
    
    73,345
    
    
    
    73,436(Loss) gain on sale or disposal of broadcast
and other assets, net
    
    
    (1,164
    )
    
    
    42
    
    
    
    6,067
    
    
    
    (109
    )Operating (loss) income
    
    $
    (10,400
    )
    
    $
    (2,367
    )
    
    $
    2,599
    
    
    $
    (2,251
    )Net loss attributable to common stockholders
    
    $
    (78,694
    )
    
    $
    (58,034
    )
    
    $
    (48,776
    )
    
    $
    (60,231
    )Basic and diluted loss per common share
    
    $
    (1.15
    )
    
    $
    (0.85
    )
    
    $
    (0.72
    )
    
    $
    (0.89
    )Weighted average common shares outstanding
    
    
    68,511,860
    
    
    
    68,372,183
    
    
    
    68,134,814
    
    
    
    67,540,702Stock price (1)High
    
    $
    1.74
    
    
    $
    3.30
    
    
    $
    4.00
    
    
    $
    4.60Low
    
    $
    0.90
    
    
    $
    1.30
    
    
    $
    2.15
    
    
    $
    3.51
   (1)
    
    The Companys Class A common stock is listed on the American Stock Exchange under the
symbol PAX.(2)
    
    In first quarter of 2004, the Company recorded an insurance reimbursement of $1.1 million as
insurance recoveries in other income in the consolidated statements of operations. In the
fourth quarter of 2004, the Company reclassified the insurance recoveries received in the
first quarter F-38




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):(Continued)  to selling, general and administrative expenses in order to offset 2004 expenses incurred in
connection with litigation over the extent of the Companys insurance coverage.(3)
    Includes a charge of $4.6 million for an adjustment of programming to net realizable value
resulting from a change in estimated future advertising revenues expected to be generated by
certain programming as a result of a change in expected usage of such programming, a $3.0
million reduction in music license fees resulting from the conclusion of a dispute and the
commencement of a new agreement with a music license organization, and $1.1 million in costs
incurred in connection with a required adjustment of the dividend rate with respect to the
Companys Series B preferred stock held by NBC.(4)
    In the fourth quarter of 2004, the Company recorded an adjustment in the amount of $4.0
million in order to recognize additional lease expense for lease arrangements that provided
for escalating lease payments and a $4.9 million adjustment to recognize additional provisions
for income taxes resulting from a change in the state income tax rate used to determine the
provision and a $1.7 million amortization expense charge for certain leasehold improvements to
adjust their amortization period to the shorter of their useful lives or the lease term. For the 2003 Quarters EndedDecember 31
    
    
    September 30 (3)
    
    
    June 30 (2)
    
    
    March 31(in thousands except share and per share data)NET REVENUES
    
    $
    70,282
    
    
    $
    64,195
    
    
    $
    65,860
    
    
    $
    70,602Expenses, excluding depreciation, amortization
and stock-based compensation
    
    
    59,930
    
    
    
    55,315
    
    
    
    52,466
    
    
    
    54,873Stock-based compensation
    
    
    3,032
    
    
    
    1,223
    
    
    
    1,097
    
    
    
    7,414Depreciation and amortization
    
    
    11,055
    
    
    
    10,018
    
    
    
    7,340
    
    
    
    14,570Total expenses
    
    
    74,017
    
    
    
    66,556
    
    
    
    60,903
    
    
    
    76,857(Loss) gain on sale or disposal of broadcast
and other assets, net
    
    
    (3,089
    )
    
    
    (243
    )
    
    
    28,407
    
    
    
    26,514Operating (loss) income
    
    $
    (6,824
    )
    
    $
    (2,604
    )
    
    $
    33,364
    
    
    $
    20,259Net loss attributable to common stockholders
    
    $
    (51,833
    )
    
    $
    (54,024
    )
    
    $
    (17,013
    )
    
    $
    (23,447
    )Basic and diluted loss per common share
    
    $
    (0.73
    )
    
    $
    (0.80
    )
    
    $
    (0.25
    )
    
    $
    (0.35
    )Weighted average common shares outstanding
    
    
    71,305,999
    
    
    
    67,752,309
    
    
    
    67,658,154
    
    
    
    66,799,581Stock price (1)High
    
    $
    6.07
    
    
    $
    6.48
    
    
    $
    6.99
    
    
    $
    2.65Low
    
    $
    3.62
    
    
    $
    3.70
    
    
    $
    2.18
    
    
    $
    1.91
   (1)
    
    The Companys Class A common stock is listed on the American Stock Exchange under the
symbol PAX.(2)
    
    In the second quarter of 2003, the Company determined that it had over-amortized certain
cable distribution agreements and recorded a $4.0 million reduction of its amortization
expense.(3)
    
    In the third quarter of 2003, the Company determined that it had been over-amortizing certain
satellite distribution agreements and certain other cable distribution agreements and recorded
a $4.5 million reduction of its amortization expense. Additionally, in the third quarter of
2003, the Company recorded a reserve for state taxes in the amount of $2.9 million in
connection with a tax liability related to certain states in which the Company has operations.
Included in depreciation and amortization is a $3.7 million impairment charge recorded in the
third quarter of 2003, in connection with a purchase option on a television station. 18. SUBSEQUENT EVENTS During the first quarter of 2005, the Company terminated 50 employees and incurred termination
costs of $1.4 million. In March 2005, the Company notified all of its JSA partners other than NBC that it was
exercising its right to terminate the JSAs, effective June 30, 2005, and notified all of its
network affiliates that it was exercising its right to terminate the affiliation agreements,
effective June 30, 2005. The Company also notified NBC that it 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. The Company is also
reviewing its network sales agency agreement with NBC, its JSAs with NBC (covering 14 stations in
12 markets), and other elements of its business operations as it seeks to implement changes that
will improve its cash flow. F-39




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. 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 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 U.S. GAAP. CONDENSED CONSOLIDATING BALANCE SHEETS: As of December 31, 2004 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupAssetsCurrent assets
    
    $
    177,900
    
    
    $
    11,561
    
    
    $
    
    
    
    $
    189,461Receivable from wholly owned subsidiaries
    
    
    891,601
    
    
    
    
    
    
    
    (891,601
    )
    
    
    Intangible assets, net
    
    
    50,790
    
    
    
    833,120
    
    
    
    
    
    
    
    883,910Investment in and advances to wholly owned
subsidiaries
    
    
    33,837
    
    
    
    
    
    
    
    (33,837
    )
    
    
    Property, equipment and other assets, net
    
    
    50,003
    
    
    
    100,931
    
    
    
    
    
    
    
    150,934Total assets
    
    $
    1,204,131
    
    
    $
    945,612
    
    
    $
    (925,438
    )
    
    $
    1,224,305Liabilities, Mandatorily Redeemable and
Convertible Preferred Stock and
Stockholders DeficitCurrent liabilities
    
    $
    102,792
    
    
    $
    9,247
    
    
    $
    
    
    
    $
    112,039Deferred income taxes
    
    
    194,706
    
    
    
    
    
    
    
    
    
    
    
    194,706Senior secured and senior subordinated notes,
net of current portion
    
    
    1,004,029
    
    
    
    
    
    
    
    
    
    
    
    1,004,029Notes payable to Parent Company
    
    
    
    
    
    
    891,601
    
    
    
    (891,601
    )
    
    
    Mandatorily redeemable preferred stock
    
    
    471,355
    
    
    
    
    
    
    
    
    
    
    
    471,355Other long-term liabilities
    
    
    17,845
    
    
    
    10,927
    
    
    
    
    
    
    
    28,772Total liabilities
    
    
    1,790,727
    
    
    
    911,775
    
    
    
    (891,601
    )
    
    
    1,810,901Mandatorily redeemable and convertible
preferred stock
    
    
    740,745
    
    
    
    
    
    
    
    
    
    
    
    740,745Commitments and contingenciesStockholders 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
 F-40




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED
CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS: Twelve Months Ended December 31, 2004 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNET REVENUES
    
    $
    168,252
    
    
    $
    108,378
    
    
    $
    
    
    
    $
    276,630Expenses:Programming and broadcast operations
    
    
    12,861
    
    
    
    43,611
    
    
    
    
    
    
    
    56,472Program Rights Amortization
    
    
    53,616
    
    
    
    
    
    
    
    
    
    
    
    53,616Selling, general and administrative
    
    
    60,721
    
    
    
    61,114
    
    
    
    
    
    
    
    121,835Stock-based compensation
    
    
    8,501
    
    
    
    
    
    
    
    
    
    
    
    8,501Adjustment of programming to net realizable value
    
    
    4,645
    
    
    
    
    
    
    
    
    
    
    
    4,645Other operating expense
    
    
    691
    
    
    
    4,461
    
    
    
    
    
    
    
    5,152Depreciation and amortization
    
    
    13,545
    
    
    
    30,119
    
    
    
    
    
    
    
    43,664Total operating expenses
    
    
    154,580
    
    
    
    139,305
    
    
    
    
    
    
    
    293,885Gain on sale or disposal of broadcast and
other assets, net
    
    
    817
    
    
    
    4,019
    
    
    
    
    
    
    
    4,836Operating income (loss)
    
    
    14,489
    
    
    
    (26,908
    )
    
    
    
    
    
    
    (12,419
    )Other income (Expense):Interest expense
    
    
    12,957
    
    
    
    (107,149
    )
    
    
    
    
    
    
    (94,192
    )Dividends on mandatorily redeemable
preferred stock
    
    
    (60,616
    )
    
    
    
    
    
    
    
    
    
    
    (60,616
    )Other income, net
    
    
    4,280
    
    
    
    12
    
    
    
    
    
    
    
    4,292Loss on extinguishment of debt
    
    
    (6,286
    )
    
    
    
    
    
    
    
    
    
    
    (6,286
    )Equity in losses of consolidated subsidiaries
    
    
    (134,045
    )
    
    
    
    
    
    
    134,045
    
    
    
    (Loss) income before income taxes
    
    
    (169,221
    )
    
    
    (134,045
    )
    
    
    134,045
    
    
    
    (169,221
    )Income tax provision
    
    
    (18,751
    )
    
    
    
    
    
    
    
    
    
    
    (18,751
    )Net (loss) income
    
    
    (187,972
    )
    
    
    (134,045
    )
    
    
    134,045
    
    
    
    (187,972
    )Dividends and accretion on redeemable and
convertible preferred stock
    
    
    (57,763
    )
    
    
    
    
    
    
    
    
    
    
    (57,763
    )Net (loss) income attributable to common
stockholders
    
    $
    (245,735
    )
    
    $
    (134,045
    )
    
    $
    134,045
    
    
    $
    (245,735
    )
 F-41




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED
CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS: Twelve Months Ended December 31, 2004 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNet cash (used in) provided by operating activities
    
    $
    (21,411
    )
    
    $
    11,694
    
    
    $
    
    
    
    $
    (9,717
    )Cash flows from investing activities:Decrease in short term investments
    
    
    6,955
    
    
    
    
    
    
    
    
    
    
    
    6,955Deposits for programming letters of credit
    
    
    (24,603
    )
    
    
    
    
    
    
    
    
    
    
    (24,603
    )Purchases of property and equipment
    
    
    (4,320
    )
    
    
    (11,525
    )
    
    
    
    
    
    
    (15,845
    )Proceeds from sales of broadcast properties
    
    
    9,988
    
    
    
    
    
    
    
    
    
    
    
    9,988Proceeds from sale of broadcast towers and
property and equipment
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Other
    
    
    
    
    
    
    (170
    )
    
    
    
    
    
    
    (170
    )Net cash used in investing activities
    
    
    (11,952
    )
    
    
    (11,695
    )
    
    
    
    
    
    
    (23,647
    )Cash flows from financing activities:Borrowings of long-term debt
    
    
    365,000
    
    
    
    
    
    
    
    
    
    
    
    365,000Repayments of long-term debt
    
    
    (335,687
    )
    
    
    
    
    
    
    
    
    
    
    (335,687
    )Payments of loan origination costs
    
    
    (11,441
    )
    
    
    
    
    
    
    
    
    
    
    (11,441
    )Proceeds from exercise of common stock
options, net
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Repayment of stock subscription notes receivable
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    413Net cash provided by financing activities
    
    
    18,288
    
    
    
    
    
    
    
    
    
    
    
    18,288Increase (decrease) in cash and cash equivalents
    
    
    (15,075
    )
    
    
    (1
    )
    
    
    
    
    
    
    (15,076
    )Cash and cash equivalents, beginning of period
    
    
    97,090
    
    
    
    33
    
    
    
    
    
    
    
    97,123Cash and cash equivalents, end of period
    
    $
    82,015
    
    
    $
    32
    
    
    $
    
    
    
    $
    82,047
 F-42




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED
CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING BALANCE SHEETS: As of December 31, 2003 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupAssetsCurrent assets
    
    $
    184,612
    
    
    $
    9,764
    
    
    $
    
    
    
    $
    194,376Receivable from wholly owned subsidiaries
    
    
    892,601
    
    
    
    
    
    
    
    (892,601
    )
    
    
    Intangible assets, net
    
    
    61,486
    
    
    
    832,468
    
    
    
    
    
    
    
    893,954Investment in and advances to wholly owned
subsidiaries
    
    
    58,045
    
    
    
    
    
    
    
    (58,045
    )
    
    
    Property, equipment and other assets, net
    
    
    71,404
    
    
    
    123,943
    
    
    
    
    
    
    
    195,347Total assets
    
    $
    1,268,148
    
    
    $
    966,175
    
    
    $
    (950,646
    )
    
    $
    1,283,677Liabilities, Mandatorily Redeemable and
Convertible Preferred Stock and
Stockholders DeficitCurrent liabilities
    
    $
    119,572
    
    
    $
    7,672
    
    
    $
    
    
    
    $
    127,244Deferred income taxes
    
    
    175,281
    
    
    
    
    
    
    
    
    
    
    
    175,281Senior secured and senior subordinated notes,
net of current portion
    
    
    925,547
    
    
    
    
    
    
    
    
    
    
    
    925,547Notes payable to Parent Company
    
    
    
    
    
    
    892,601
    
    
    
    (892,601
    )
    
    
    Mandatorily redeemable preferred stock
    
    
    410,739
    
    
    
    
    
    
    
    
    
    
    
    410,739Other long-term liabilities
    
    
    42,787
    
    
    
    7,857
    
    
    
    
    
    
    
    50,644Total liabilities
    
    
    1,673,926
    
    
    
    908,130
    
    
    
    (892,601
    )
    
    
    1,689,455Mandatorily redeemable and convertible
preferred stock
    
    
    684,067
    
    
    
    
    
    
    
    
    
    
    
    684,067Commitments and contingenciesStockholders deficit
    
    
    (1,089,845
    )
    
    
    58,045
    
    
    
    (58,045
    )
    
    
    (1,089,845
    )Total liabilities, mandatorily redeemable
and convertible preferred stock, and
stockholders deficit
    
    $
    1,268,148
    
    
    $
    966,175
    
    
    $
    (950,646
    )
    
    $
    1,283,677
 F-43




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS: Twelve Months Ended December 31, 2003 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNET REVENUES
    
    $
    169,086
    
    
    $
    101,853
    
    
    $
    
    
    
    $
    270,939Expenses:Programming and broadcast operations
    
    
    14,107
    
    
    
    37,847
    
    
    
    
    
    
    
    51,954Program Rights Amortization
    
    
    51,082
    
    
    
    
    
    
    
    
    
    
    
    51,082Selling, general and administrative
    
    
    49,881
    
    
    
    61,095
    
    
    
    
    
    
    
    110,976Stock-based compensation
    
    
    12,766
    
    
    
    
    
    
    
    
    
    
    
    12,766Other operating expense
    
    
    4,056
    
    
    
    4,516
    
    
    
    
    
    
    
    8,572Depreciation and amortization
    
    
    7,751
    
    
    
    35,232
    
    
    
    
    
    
    
    42,983Total operating expenses
    
    
    139,643
    
    
    
    138,690
    
    
    
    
    
    
    
    278,333Gain on sale or disposal of broadcast and
other assets, net
    
    
    9,921
    
    
    
    41,668
    
    
    
    
    
    
    
    51,589Operating income
    
    
    39,364
    
    
    
    4,831
    
    
    
    
    
    
    
    44,195Other income (Expense):Interest expense
    
    
    (91,698
    )
    
    
    (504
    )
    
    
    
    
    
    
    (92,202
    )Dividends on mandatorily redeemable
preferred stock
    
    
    (27,539
    )
    
    
    
    
    
    
    
    
    
    
    (27,539
    )Other income, net
    
    
    5,803
    
    
    
    81
    
    
    
    
    
    
    
    5,884Equity in income of consolidated subsidiaries
    
    
    4,408
    
    
    
    
    
    
    
    (4,408
    )
    
    
    (Loss) income before income taxes
    
    
    (69,662
    )
    
    
    4,408
    
    
    
    (4,408
    )
    
    
    (69,662
    )Income tax provision
    
    
    (6,551
    )
    
    
    
    
    
    
    
    
    
    
    (6,551
    )Net (loss) income
    
    
    (76,213
    )
    
    
    4,408
    
    
    
    (4,408
    )
    
    
    (76,213
    )Dividends and accretion on redeemable and
convertible preferred stock
    
    
    (70,104
    )
    
    
    
    
    
    
    
    
    
    
    (70,104
    )Net (loss) income attributable to common
stockholders
    
    $
    (146,317
    )
    
    $
    4,408
    
    
    $
    (4,408
    )
    
    $
    (146,317
    )
 F-44




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED
CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS: Twelve Months Ended December 31, 2003 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNet cash (used in) provided by operating activities
    
    $
    7,517
    
    
    $
    25,399
    
    
    $
    
    
    
    $
    32,916Cash flows from investing activities:Decrease in short term investments
    
    
    4,125
    
    
    
    
    
    
    
    
    
    
    
    4,125Purchases of property and equipment
    
    
    (1,487
    )
    
    
    (25,245
    )
    
    
    
    
    
    
    (26,732
    )Proceeds from sales of broadcast properties
    
    
    83,332
    
    
    
    
    
    
    
    
    
    
    
    83,332Proceeds from sale of broadcast towers and
property and equipment
    
    
    360
    
    
    
    
    
    
    
    
    
    
    
    360Other
    
    
    
    
    
    
    (156
    )
    
    
    
    
    
    
    (156
    )Net cash provided by (used in) investing activities
    
    
    86,330
    
    
    
    (25,401
    )
    
    
    
    
    
    
    60,929Cash flows from financing activities:Borrowings of long-term debt
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000Repayments of long-term debt
    
    
    (20,152
    )
    
    
    
    
    
    
    
    
    
    
    (20,152
    )Payments of loan origination costs
    
    
    (2,259
    )
    
    
    
    
    
    
    
    
    
    
    (2,259
    )Proceeds from exercise of common stock
options, net
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    115Payments of employee income taxes on exercise
of common stock options
    
    
    (2,335
    )
    
    
    
    
    
    
    
    
    
    
    (2,335
    )Repayment of stock subscription notes receivable
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    144Net cash used in financing activities
    
    
    (22,487
    )
    
    
    
    
    
    
    
    
    
    
    (22,487
    )Increase (decrease) in cash and cash equivalents
    
    
    71,360
    
    
    
    (2
    )
    
    
    
    
    
    
    71,358Cash and cash equivalents, beginning of period
    
    
    25,730
    
    
    
    35
    
    
    
    
    
    
    
    25,765Cash and cash equivalents, end of period
    
    $
    97,090
    
    
    $
    33
    
    
    $
    
    
    
    $
    97,123
 F-45




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS: Twelve Months Ended December 31, 2002 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNET REVENUES
    
    $
    178,800
    
    
    $
    98,121
    
    
    $
    
    
    
    $
    276,921Expenses:Programming and broadcast operations
    
    
    14,072
    
    
    
    37,132
    
    
    
    
    
    
    
    51,204Program Rights Amortization
    
    
    77,835
    
    
    
    145
    
    
    
    
    
    
    
    77,980Selling, general and administrative
    
    
    67,215
    
    
    
    65,090
    
    
    
    
    
    
    
    132,305Adjustment of programming to net realizable
value
    
    
    41,270
    
    
    
    
    
    
    
    
    
    
    
    41,270Other operating expenses
    
    
    4,424
    
    
    
    4,021
    
    
    
    
    
    
    
    8,445Depreciation and amortization
    
    
    23,824
    
    
    
    34,705
    
    
    
    
    
    
    
    58,529Total operating expenses
    
    
    228,640
    
    
    
    141,093
    
    
    
    
    
    
    
    369,733Gain on sale or disposal of broadcast and
other assets, net
    
    
    1,857
    
    
    
    21,049
    
    
    
    
    
    
    
    22,906Operating income
    
    
    (47,983
    )
    
    
    (21,923
    )
    
    
    
    
    
    
    (69,906
    )Other income (Expense):Interest expense
    
    
    16,203
    
    
    
    (101,417
    )
    
    
    
    
    
    
    (85,214
    )Dividends on mandatorily redeemable preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    5,313
    
    
    
    446
    
    
    
    
    
    
    
    5,759Loss on extinguishment of debt
    
    
    (17,552
    )
    
    
    
    
    
    
    
    
    
    
    (17,552
    )Equity in losses of consolidated subsidiaries
    
    
    (122,894
    )
    
    
    
    
    
    
    122,894
    
    
    
    (Loss) income before income taxes
    
    
    (166,913
    )
    
    
    (122,894
    )
    
    
    122,894
    
    
    
    (166,913
    )Income tax provision
    
    
    (169,273
    )
    
    
    
    
    
    
    
    
    
    
    (169,273
    )Net (loss) income
    
    
    (336,186
    )
    
    
    (122,894
    )
    
    
    122,894
    
    
    
    (336,186
    )Dividends and accretion on redeemable and
convertible preferred stock
    
    
    (110,099
    )
    
    
    
    
    
    
    
    
    
    
    (110,099
    )Net (loss) income attributable to common
stockholders
    
    $
    (446,285
    )
    
    $
    (122,894
    )
    
    $
    122,894
    
    
    $
    (446,285
    )
 F-46




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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 19. CONDENSED
CONSOLIDATING FINANCIAL INFORMATION(Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS: Twelve Months Ended December 31, 2002 (in thousands)Wholly Owned
    
    
    Consolidating
    
    
    ConsolidatedParent Company
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    GroupNet cash (used in) provided by operating
activities
    
    $
    (105,156
    )
    
    $
    29,728
    
    
    $
    
    
    
    $
    (75,428
    )Cash flows from investing activities:Increase in short term investments
    
    
    (4,923
    )
    
    
    
    
    
    
    
    
    
    
    (4,923
    )Purchases of property and equipment
    
    
    (2,180
    )
    
    
    (28,997
    )
    
    
    
    
    
    
    (31,177
    )Proceeds from sales of broadcast properties
    
    
    26,647
    
    
    
    
    
    
    
    
    
    
    
    26,647Proceeds from sale of broadcast towers and
property and equipment
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    143Proceeds from insurance recoveries
    
    
    2,722
    
    
    
    
    
    
    
    
    
    
    
    2,722Other
    
    
    (363
    )
    
    
    (738
    )
    
    
    
    
    
    
    (1,101
    )Net cash provided by (used in) investing
activities
    
    
    22,046
    
    
    
    (29,735
    )
    
    
    
    
    
    
    (7,689
    )Cash flows from financing activities:Borrowings of long-term debt
    
    
    336,338
    
    
    
    
    
    
    
    
    
    
    
    336,338Repayments of long-term debt
    
    
    (2,898
    )
    
    
    
    
    
    
    
    
    
    
    (2,898
    )Redemption of preferred stock
    
    
    (284,410
    )
    
    
    
    
    
    
    
    
    
    
    (284,410
    )Payments of loan origination costs
    
    
    (10,886
    )
    
    
    
    
    
    
    
    
    
    
    (10,886
    )Debt extinguishment premium and costs
    
    
    (14,302
    )
    
    
    
    
    
    
    
    
    
    
    (14,302
    )Proceeds from exercise of common stock
options, net
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    1,182Net cash used in financing activities
    
    
    25,024
    
    
    
    
    
    
    
    
    
    
    
    25,024Increase (decrease) in cash and cash
equivalents
    
    
    (58,086
    )
    
    
    (7
    )
    
    
    
    
    
    
    (58,093
    )Cash and cash equivalents, beginning
of period
    
    
    83,816
    
    
    
    42
    
    
    
    
    
    
    
    83,858Cash and cash equivalents, end of period
    
    $
    25,730
    
    
    $
    35
    
    
    $
    
    
    
    $
    25,765
 F-47




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##### Table of Contents



SCHEDULE II PAXSON COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS For the Three Years Ended December 31, 2004 (In thousands) Column A
    
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EAdditionsChargedBalance at
    
    
    to
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    Costs and
    
    
    
    
    
    
    
    
    
    
    End ofof Year
    
    
    Expenses
    
    
    Other
    
    
    Deductions
    
    
    YearFor the year ended December 31, 2004:Allowance for doubtful accounts
    
    $
    1,090
    
    
    $
    155
    
    
    $
    
    
    
    $
    (597
    )(1)
    
    $
    648Deferred tax assets valuation allowance
    
    $
    370,537
    
    
    $
    63,525
    (2)
    
    $
    
    
    
    $
    
    
    
    $
    434,062Restructuring reserves
    
    $
    145
    
    
    $
    (5
    )
    
    $
    
    
    
    $
    (138
    )(3)
    
    $
    2For the year ended December 31, 2003:Allowance for doubtful accounts
    
    $
    2,100
    
    
    $
    (418
    )
    
    $
    
    
    
    $
    (592
    )(1)
    
    $
    1,090Deferred tax assets valuation allowance
    
    $
    348,110
    
    
    $
    22,427
    (2)
    
    $
    
    
    
    $
    
    
    
    $
    370,537Restructuring reserves
    
    $
    1,522
    
    
    $
    48
    
    
    $
    
    
    
    $
    (1,425
    )(3)
    
    $
    145For the year ended December 31, 2002:Allowance for doubtful accounts
    
    $
    3,635
    
    
    $
    (126
    )
    
    $
    
    
    
    $
    (1,409
    )(1)
    
    $
    2,100Deferred tax assets valuation allowance
    
    $
    124,428
    
    
    $
    223,682
    (2)
    
    $
    
    
    
    $
    
    
    
    $
    348,110Restructuring reserves
    
    $
    2,099
    
    
    $
    2,173
    
    
    $
    
    
    
    $
    (2,750
    )(3)
    
    $
    1,522
   (1)
    
    Write off of uncollectible receivables.(2)
    
    Valuation allowance for net deferred tax assets due to uncertainty surrounding the Companys
utilization of future tax benefits.(3)
    
    Cash payments of termination benefits and lease obligations. F-48