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

 

 

 

Form 10-K

 

 

Commission File Number 1-13452

ION MEDIA NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:
(561) 659-4122

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if registrant is not required to file reports pursuant to Rule 13 or Section 15(d) of the Act.  Yes o     No þ

 

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.  Yes þ     No o

 

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.  þ

 

Indicate by check mark whether the registrant is a Large Accelerated filer, an Accelerated filer, or a Non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer  o     Accelerated Filer  o     Non-accelerated Filer  þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o     No þ

 

The aggregate market value of common stock held by non-affiliates of the registrant was $43,787,892 (based upon the $0.92 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, 2006). 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 16, 2007 was: 65,320,057 shares of Class A Common Stock, $0.001 par value, and 8,311,639 shares of Class B Common Stock, $0.001 par value.

 

 

TABLE OF CONTENTS

 

PART I

 

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 our network programming, including stations reaching all of the top 20 U.S. markets and 39 of the top 50 U.S. markets. We provide network programming seven days per week, 24 hours per day, and reach approximately 94 million homes, or 84% 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. Our current schedule of entertainment programming principally consists of television series and feature films that have appeared previously on other broadcast networks which we have purchased the right to air. The balance of our programming consists of long form paid programming (principally infomercials), programming produced by third parties who have purchased from us the right to air their programming during specific time periods and local 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.

 

As part of our strategic plan to rebrand and reposition our company, in February 2006 we commenced doing business under the name “ION Media Networks” and on June 26, 2006, following approval of our stockholders, we changed our corporate name from “Paxson Communications Corporation” to “ION Media Networks, Inc.”

 

Recent Events

 

We did not redeem our outstanding shares of Cumulative Junior Exchangeable Preferred Stock (the “141/4% Junior Exchangeable preferred stock”) and 93/4% Series A Convertible Preferred Stock (“Convertible Preferred Stock”) by their required redemption dates of November 15, 2006 and December 31, 2006, respectively. As a result of our failure to redeem these series of preferred stock by their scheduled mandatory redemption dates, the holders of each series have the right, voting separately as one class, to elect two additional directors to our board of directors. Groups of holders of each series have notified us that they have begun the process necessary to exercise their right to elect additional directors. We therefore expect four additional directors to be elected to our board of directors in the near future.

 

On January 19, 2007, the owner of the television station serving the New Orleans market, which we operate under a time brokerage agreement (“TBA”), exercised its right to require us to purchase this station for a purchase price of $18 million.

 

On January 17, 2007, our board of directors received a proposal from NBC Universal, Inc. (“NBCU”) and Citadel Limited Partnership (“Citadel”) for a restructuring of our outstanding common and preferred stock that, if implemented, would include a tender offer for the shares of our Class A common stock on the terms contemplated by the November 7, 2005 transaction between us, NBCU and Lowell W. Paxson, our controlling stockholder and former chairman and chief executive officer (see “NBCU Relationship”). The proposal was amended on February 22, 2007 and March 29, 2007. As amended, the proposal provides that the tender offer would be conducted by an affiliate of Citadel and would be extended to all holders of our outstanding shares of Class A common stock, other than the shares held by Mr. Paxson and his affiliates and certain shares issued after November 7, 2005 in connection with stock-based compensation awards made after that date to our employees and directors. The proposal contemplates that the tender offer would commence upon the earlier of FCC approval of the transfer to an affiliate of Citadel of NBCU’s call right on the voting securities held by affiliates of Mr. Paxson, or May 6, 2007, at a price determined by the formula set out in the Amended and Restated Stockholder Agreement, dated November 7, 2005, among us, NBCU, Mr. Paxson and his affiliates. The proposal would require us to conduct an exchange offer with the holders of our mandatorily redeemable preferred stock that we were unable to redeem in 2006, under which accepting preferred stockholders would receive newly issued convertible subordinated debt of our company. Our board of directors, and the special committee of the board that was formed in June 2006 to

explore potential strategic transactions and pursue third party expressions of interest in our company, are evaluating the proposal. The proposal is not binding on us and has not been negotiated by or on behalf of us. The transactions contemplated by the proposal would be subject to numerous conditions, risks and uncertainties, and there is no assurance that the proposal would be approved by our board of directors, or that any proposal that may ultimately be approved by our board of directors will actually be consummated.

 

As contemplated by the Amended and Restated Stockholder Agreement between us and NBCU dated November 7, 2005, on February 16, 2007 our board of directors approved an affiliate of Citadel as a permitted transferee of NBCU’s Call Right on the voting securities held by affiliates of Mr. Paxson.

 

On February 16, 2007, representatives of certain holders of our 141/4% Junior Exchangeable preferred stock purporting to represent a group (the “Ad Hoc Group”) holding in excess of 65% of the outstanding shares of the 141/4% Junior Exchangeable preferred stock presented a proposal to our board of directors for a proposed recapitalization transaction in which all of our outstanding preferred stock and common stock would be either exchanged for other securities, redeemed or cancelled and retired. The proposal is preliminary in nature and is being evaluated by our board of directors and the special committee of the board. The proposal is not binding on us and has not been negotiated by or on behalf of us. The transactions contemplated by the proposal would be subject to numerous conditions, risks and uncertainties, and there is no assurance that the proposal in its current form could actually be implemented, that the proposal would be approved by our board of directors, or that any proposal that may ultimately be approved by our board of directors will actually be consummated.

 

Business Strategy

 

Our principal business objective is to improve our operating performance and pursue more lucrative revenue sources in order to improve our cash flow. We have a history of significant losses and our business operations presently do not provide sufficient cash flow to support our debt service requirements and to pay cash dividends on and meet the redemption requirements of our preferred stock. We continue to consider and are attempting to develop strategic alternatives for our company, which may include finding a third party to acquire our company through a merger or other business combination or through a purchase of our equity securities, finding a strategic partner for our company who would provide the financial resources to enable us to redeem, restructure or refinance our preferred stock, or the sale of all or part of our assets. We believe that if we are able to improve our cash flow we may be able to improve our ability to take advantage of future opportunities to strengthen our business that may arise as a result of 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.

 

We continue to implement significant changes to our business strategy, including changes in our programming and sales operations. Among the key elements of our new strategy are:

 

 

While we expect that a substantial portion of our revenues will continue to be derived from long form paid programming, primarily infomercials, we are pursuing a more diversified revenue mix, which includes the

reintroduction of classic TV series and popular movies through multiple content agreements with Warner Bros., Sony and NBCU, which we entered into during 2006. In October of 2006, we executed a programming agreement with RHI Entertainment, a company involved in the production and distribution of miniseries and movies for television, that will provide our television network with access to RHI’s library of over 4,000 hours of content as well as select original programming. Under this agreement, RHI will serve as our exclusive television programming supplier on Friday, Saturday and Sunday nights for an initial two-year period beginning June 29, 2007. RHI will plan and program the 7 p.m. to 11 p.m. time periods, totaling 12 hours of programming per week. The agreement also provides for the U.S. broadcast premiere of at least six new RHI productions each year.

 

In September 2006, in partnership with NBCU, Scholastic Corp., Classic Media/Big Idea, and Corus Entertainment Inc., we launched qubo, a multi-platform children’s entertainment network. The qubo analog service currently airs in weekly three hour programming blocks on ION Television and NBC and in Spanish over NBCU’s Telemundo network. In January 2007, we launched a dedicated digital channel airing qubo 24 hours per day, seven days per week (“24/7”) across our entire television station group. We also expect to enter into additional content revenue sharing relationships in 2007 with various other content providers that we believe will broaden our television network’s content appeal and demographic positioning. In February of 2007 we launched “ION Life”, a 24/7 digital broadcast network dedicated to health and wellness for consumers and families.

 

We presently derive our revenues from the sale of network long form paid programming, network spot advertising and station advertising:

 

 

Our primary operating expenses include selling, general and administrative expenses, depreciation and amortization expenses, programming expenses and employee compensation costs.

 

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, 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.

 

Operating Strategy

 

The principal components of our current operating strategy are:

 

 

Distribution

 

We distribute our programming through a television distribution system comprised of our owned and operated broadcast television stations, cable television systems in various markets not served by our stations, satellite television providers and independently owned network-affiliated broadcast stations. According to Nielsen, our programming currently reaches 84% of U.S. television households (approximately 94 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 and the rules and regulations of 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 TBAs), all of which carry our network programming, including stations reaching all of the top 20 U.S. markets and 39 of the top 50 U.S. markets. Our owned and operated station group reaches approximately 60% 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 (“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 TBAs with the station owners. Under these agreements, we provide the station with network programming and retain the advertising revenues from the sale of advertising time during substantially all of our network programming hours, in the case of WPXL and WPXX, and during half of our network 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. On January 19, 2007, the owner of the television station serving the New Orleans market exercised its right to require us to purchase this station for a purchase price of $18 million.

 

The table below provides information about our owned and operated stations (including stations we operate pursuant to TBAs).

 

 

 

 

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. The 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. One of our carriage agreements with a satellite television provider allows the satellite provider to sell and retain the advertising revenue from a portion of the non-network advertising time during our network 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 24% of U.S. prime time television households in DMAs not already served by our stations.

 

Our Network Affiliated Stations.  To increase the distribution of our network programming, we entered into affiliation agreements with stations in markets where we do not otherwise own or operate a broadcast station. We had affiliation agreements with respect to 49 television stations reaching approximately 3% of U.S. prime time television households. We exercised our right to terminate all of our affiliation agreements, effective June 30, 2005; 29 of these stations continue to be our affiliates under a month-to-month arrangement. 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 presently operate the television network known as “ION Television”, formerly known as “i,” and prior to that known as “PAX TV.” ION Television provides programming seven days per week, 24 hours per day. During our network entertainment programming hours, which are currently between 6:00 p.m. and 11:00 p.m. or midnight eastern time, we offer entertainment programs that are largely free of excessive violence, explicit sexual themes and foul language. Our network entertainment lineup currently mainly consists of syndicated programs, feature films and a limited amount of entertainment and sports programming on a market-by-market basis. We also air the qubo children’s programming service on Friday afternoons between 3:00 p.m. and 6:00 p.m.

 

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. As we continue to pursue additional strategic programming alliances and content revenue sharing relationships, we may choose to increase the number of hours during which we air entertainment programming and reduce the amount of long form paid programming we air if doing so would result in increased revenues. It is possible that the programming we air after 11:00 p.m. will target a different demographic audience than what we have historically targeted during prime time hours.

 

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 significantly reducing our overall programming expenses. During 2006 we entered into new content license agreements with Sony, Warner Bros., and NBCU that provide us with broadcast rights to television series and movie titles that were previously not available to us, and which we believe will broaden our network’s content appeal and demographic positioning. These agreements, which are for an initial one year period with an option for renewal, permit us to access an entire programming library, as determined by the licensor, as opposed to one particular television series, allowing us to quickly adapt our programming schedule in order to increase its popularity and achieve higher ratings. We also have the ability to test the performance of a particular series without entering into an expensive long term commitment.

 

In June 2005, we entered into an agreement with The Christian Network, Inc., a not-for-profit corporation (“CNI”), amending the Master Agreement for Overnight Programming, Use of Digital Capacity and Public Interest Programming, dated September 10, 1999 (the “Master Agreement”), between us and CNI. Under the Master Agreement, we provided CNI with the right to broadcast its programming on our analog television stations during the hours of 1:00 a.m. to 6:00 a.m. and to use a portion of the digital broadcasting capacity of our television stations in exchange for CNI’s providing public interest programming. Pursuant to the June 2005 amendment, effective July 1, 2005, CNI relinquished its right to require us to broadcast its programming during the overnight hours on the analog signal of each of our stations, and accelerated the exercise of its right under the Master Agreement to require those of our television stations that have commenced broadcasting multiple digital programming streams (also known as multicasting) to carry CNI’s programming up to 24 hours per day, seven days per week, on one of the station’s digital programming streams. CNI retains its existing right to require those of our stations that have not yet commenced digital multicasting (currently 8 stations) to carry CNI’s programming on one of the station’s digital programming streams promptly following the date each such station commences digital multicasting. As consideration for the June 2005 amendment, we paid CNI an aggregate of $3.25 million during 2005 and 2006, and since July 1, 2005, we have been airing long form paid programming during the overnight hours.

 

Ratings

 

During the latter half of 2005, we phased out our sales of spot advertisements that are based on audience ratings and shifted to a strategy of selling spot advertisements that are not dependent upon audience ratings, such as direct response advertising, and selling blocks of airtime to third party programmers. We did not sell any ratings-based advertisements in 2006. We have since concluded that in order to increase our revenues and achieve our business objectives, we need to return to the general network spot advertising market. We announced this change on January 17, 2007. We expect our transition back to ratings-based advertisements to be essentially completed in time for the 2007-2008 broadcast season. As a result, we expect that the advertising revenues from our network entertainment programming will be largely dependent upon the popularity of our programming, in terms of audience ratings, and the attractiveness of our viewing audience demographic to advertisers.

 

Advertising

 

We offer advertisers the opportunity to reach our network’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 network or it may be aired only in specific geographic markets. We have realigned our long form sales teams into three categories; national long form sales, local long form sales and direct response.

 

We also sell commercial airtime to advertisers who want to reach our entire nationwide network viewing audience with a single advertisement, which we refer to as network spot advertising. Prior to July 1, 2005, NBCU served as our exclusive sales representative to sell most of our network spot advertising. Network spot advertising represented approximately 18.8%, 20.7% and 20.7% of our net revenue during the years ended December 31, 2006, 2005 and 2004, respectively. Our network advertising revenue also includes advertising, generally of a direct response nature, which reaches our cable and satellite viewers in markets not served by our stations during time that is otherwise allocated to station spot advertising, and which also reaches viewers in local markets during unsold station spot advertising time.

 

We also sell commercial airtime 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. Prior to July 1, 2005, NBCU provided national advertising sales services for a majority of our stations. In markets in which our stations had been operating under joint sales agreements (“JSAs”), our JSA partner served as our exclusive sales representative to sell our local station advertising. For stations for which NBCU did not provide national account representation, our JSA partner performed this function. Our station advertising represented approximately 32.6%, 35.1% and 39.5% of our net revenue during the years ended December 31, 2006, 2005 and 2004 (including 29.9%, 25.7% and 22.8%, respectively, of our net revenue during such years which was derived from long form paid programming).

 

We terminated the non-NBCU JSAs effective June 30, 2005. We suspended, by mutual agreement, our national sales agency agreement with NBCU, pursuant to which NBCU sold national spot advertisements for 49 of our 60 stations, our network sales agency agreement with NBCU and each of our JSAs with NBCU (covering 14 of our stations in 12 markets). Since July 1, 2005, substantially all advertising sales functions previously handled by our JSA partners and NBCU have been handled by our own employees.

 

Advertising rates that are not dependent on audience ratings are typically negotiated and based upon:

 

 

NBCU Relationship

 

On September 15, 1999, we entered into an investment agreement with NBCU under which wholly-owned subsidiaries of NBCU 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 NBCU entered into an agreement with Lowell W. Paxson, our controlling stockholder and former chairman and chief executive officer (“Mr. Paxson”) and entities controlled by Mr. Paxson, under which the NBCU 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.

 

On November 7, 2005, R. Brandon Burgess, a former NBCU senior executive, joined us as our chief executive officer and a director, and we entered into various agreements with NBCU, Mr. Paxson, our controlling stockholder and our former chairman and chief executive officer, and affiliates of each of NBCU and Mr. Paxson, pursuant to which the parties agreed, among other things, to the following:

 

 

 

Series B preferred stock.  We and NBCU amended the terms of the Series B preferred stock so that it accrues cumulative, non-compounded dividends from October 1, 2005 at an annual rate of 11% on the $603.6 million liquidation preference that was outstanding after the stock issuance described above, and is convertible (subject to anti-dilution adjustments) into 301,785,000 shares of our Class A common stock for an initial conversion price of $2.00 per share. The conversion price of the Series B preferred stock increases at a rate equal to the dividend rate. The Series B preferred stock continues to be exchangeable, at the option of the holder, into our convertible debentures ranking on a parity with our other subordinated indebtedness, provided that any exchange prior to April 16, 2013 is subject to the covenants in our outstanding debt that limit our ability to incur additional indebtedness and any exchange prior to the closing of the tender offer or the delivery by NBCU of shares of Series B preferred stock for distribution to the holders of the Class A common stock (each as described below under “Stockholder Agreement”) is subject to additional limitations. We continue to have the right to redeem any convertible debentures for which shares of Series B preferred stock are exchanged at a price equal to 80% of the current market price of the number of shares of Class A common stock into which such debentures are convertible, based upon a conversion price of $13.01 per share, subject to provisions in our debt and preferred stock instruments that may limit our ability to make any such redemption payments.

 

After giving effect to the transactions described above, as of November 7, 2005, NBCU’s affiliate owned 60,357 shares of our Series B preferred stock with an aggregate liquidation preference, as of September 30, 2005, of $603.6 million. On November 7, 2005, NBCU’s affiliate purchased from us an additional 250 shares of Series B preferred stock for a cash purchase price of $2.5 million (which is equal to the liquidation preference of such shares). These shares are convertible into an additional 1,250,000 shares of Class A common stock. NBCU agreed not to exchange these shares into convertible debentures prior to April 18, 2010.

 

As part of the transactions, the warrants acquired in September 1999 by a wholly-owned subsidiary of NBCU, pursuant to which the holder had the right to purchase up to 13,065,507 shares of our Class A common stock at an exercise price of $12.60 per share, and 18,966,620 shares of our 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, were cancelled.

 

Investment Agreement.  We entered into an Amended and Restated Investment Agreement with NBCU, replacing the original investment agreement. Under this agreement, we are required to obtain the consent of NBCU or its permitted transferee with respect to certain corporate actions, including:

 

 

 

Some of these consent rights (budget approval, the sale of stations in the top 50 DMAs, and any increase in the size of our board of directors) will only be exercisable by a permitted transferee of NBCU’s investment in us. Most of these consent rights terminate if the call right described below expires unexercised or NBCU or its permitted transferee ceases to own shares of Series B preferred stock that are convertible into at least an aggregate of 151,000,000 shares of our Class A common stock (which number shall be reduced pro rata if NBCU returns shares for distribution to the holders of our Class A common stock). NBCU has a right of first refusal, which terminates if the call right described below expires unexercised, to purchase any of our television stations serving a top 50 market that we propose to sell. If the call right expires unexercised, NBCU also has the right to demand that we redeem its investment in the Series B preferred stock in case of certain events of default under the transaction agreements, subject in each case to certain conditions.

 

Right to Purchase Mr. Paxson’s Stock.  A wholly-owned subsidiary of NBCU entered into a Call Agreement with Mr. Paxson and certain entities controlled by Mr. Paxson (collectively with Mr. Paxson, the “Paxson Stockholders”), pursuant to which the NBCU subsidiary was granted the right (the “call right”), for a period of 18 months, to purchase all (but not less than all) 8,311,639 shares of our Class B common stock (entitled to ten votes per share) and 15,455,062 shares of our Class A common stock (entitled to one vote per share) beneficially owned by the Paxson Stockholders (collectively, the “call shares”). The call right is exercisable at a price of $0.29 per share of Class B common stock and $0.25 per share of Class A common stock and expires on the earlier of (a) May 7, 2007 and (b) 75 days after consummation of a tender offer meeting certain requirements described below by either a permitted transferee of the call right or another person other than NBCU.

 

The closing of the exercise of the call right is subject to compliance with applicable provisions of the Communications Act of 1934 and the rules and regulations of the FCC. The Call Agreement limits the number and scope of waivers of the FCC’s media multiple ownership rules that may be contained in any application for FCC approval of the transfer of the call shares. The Call Agreement previously in effect between the Paxson Stockholders and an affiliate of NBCU, entered into on September 15, 1999, was cancelled.

 

If the closing of the purchase of the call shares pursuant to the exercise of the call right has not occurred within 18 months after the filing of the related application for FCC approval (subject to one six month extension under certain circumstances), the right to purchase the call shares shall terminate. NBCU may transfer the call right to a third party which our board of directors approves in the reasonable exercise of its business judgment. Prior to the closing of the exercise of the call right or the termination of the call right, the Paxson Stockholders are not permitted to transfer any call shares other than to certain trusts and other estate planning vehicles of Mr. Paxson, so long as Mr. Paxson or one of his affiliates remains our single majority stockholder under applicable FCC rules. We are not a party to the Call Agreement. On February 16, 2007, our board of directors approved an affiliate of Citadel as a permitted transferee of NBCU’s Call Right.

 

We and the Paxson Stockholders entered into a Company Stock Purchase Agreement, dated as of November 7, 2005, under which we are obligated to purchase the call shares if the call right expires unexercised or terminates without closing. The purchase price of the call shares payable by us is the same as the exercise price of the call right payable under the Call Agreement. Closing of our purchase of the call shares is subject to the receipt of all required regulatory approvals, including the approval of the FCC of our purchase of the Class B common stock included in

the call shares. Should we become obligated to purchase the call shares, we and the Paxson Stockholders are required to file promptly with the FCC an application requesting that the FCC consent to the transfer of the shares of Class B common stock to be purchased. This application may not include requests for any waivers of the FCC’s rules.

 

NBCU has placed in escrow $3,863,765, which is the aggregate exercise price of the call right with respect to the Class A common stock included in the call shares. These funds shall be used to pay the purchase price payable by us for such shares should we become obligated to purchase such shares by reason of the expiration or termination of the call right. We deposited $2,410,375 in cash (substantially all of the proceeds of the sale of the additional shares of Series B preferred stock described above) as collateral for an irrevocable letter of credit supporting our obligation to pay the purchase price for the shares of Class B common stock. The Paxson Stockholders have the right to draw all but $482,000 of this amount under the letter of credit at any time following expiration or termination of the call right. The balance of the purchase price for such shares shall be paid by drawing on the letter of credit following receipt of all required regulatory approvals. If not consummated prior thereto, our obligation to purchase the call shares shall terminate two years after the expiration or termination of the call right and, in such event, the Paxson Stockholders will retain their shares of our Class B common stock.

 

Stockholder Agreement.  We, NBCU and the Paxson Stockholders entered into an Amended and Restated Stockholder Agreement, effective as of November 7, 2005, replacing the original stockholder agreement entered into on September 15, 1999, that provides, among other things, that:

 

 

(i) the effectiveness of a transfer of the call right by NBCU’s affiliate to a permitted transferee;

 

(ii) the exercise of the call right; and

 

(iii) the transfer by NBCU’s affiliate of a number of shares of Series B preferred stock that, on an as-converted basis, together with any shares of Series B preferred stock previously transferred by the NBCU affiliate, represents in excess of 50% of the total voting power of our outstanding voting stock.

 

NBCU may also facilitate the commencement by a third party of the tender offer at any time prior to the occurrence of any of the foregoing events, in which event NBCU or its permitted transferee will be required to exercise the call right within 75 days after the closing of the tender offer (unless, in the case of a proposed transfer of the call right to a third party, our board of directors does not approve NBCU’s permitted transferee, in which case the call right will continue for its original duration), and if NBCU or its permitted transferee fails to do so, it shall be obligated to pay us $2,410,375 as liquidated damages (which is the amount payable by us to the Paxson Stockholders in respect of our obligation to purchase the Class B common stock under the Company Stock Purchase Agreement if the call right expires or is terminated). If none of the events requiring NBCU or its permitted transferee to conduct the tender offer occurs, we shall remain obligated to purchase the Class A and Class B common stock held by the Paxson Stockholders pursuant to the Company Stock Purchase Agreement, and no person will be required to conduct a tender offer.

 

 

 

Should NBCU’s affiliates wish to transfer the call right or a number of shares of Series B preferred stock that, on an as-converted basis, together with any shares of Series B preferred stock previously transferred by the NBCU affiliate (but excluding shares of Series B preferred stock retained by the NBCU affiliate), represents in excess of 50% of the total voting power of our outstanding voting stock, they may do so only to a transferee that is approved by our board of directors. NBCU must give us advance notice of the proposed transfer and our board of directors must approve or disapprove the proposed transferee within 30 days after receiving such notice. In deciding whether to approve a proposed transferee, our board is required to principally take into account that the proposed transferee (i) is, and subject to obtaining any permitted waivers of FCC rules that are permitted under the Call Agreement to be included in the application to the FCC, upon consummation of the proposed transfer shall be, in compliance with applicable FCC rules relating to ownership and operation of our television stations, and (ii) is able to fulfill the financial obligations arising in connection with the exercise of the call right and the consummation of the tender offer, and shall have delivered to our board of directors a proposal for satisfying the rights that any holders of our outstanding debt securities may have by reason of the proposed transfer (such as the right to require us to repurchase such securities by reason of the occurrence of a change of control). Our board of directors is required to approve a proposed transferee if the proposed transferee satisfies the standard in clause (i) above and either provides reasonably satisfactory evidence that it has sufficient liquid financial resources to fulfill the financial obligations referred to in clause (ii) above without the need for external financing or presents firm commitments in customary form from nationally recognized sources for such financing. On February 16, 2007, our board of directors approved an affiliate of Citadel as a permitted transferee of NBCU’s Call Right.

 

Prior to the exercise or termination of the call right, NBCU’s affiliate is not permitted to transfer shares of Series B preferred stock, other than (i) up to three transfers to not more than three persons of up to 15,000 shares of Series B preferred stock and (ii) transfers necessary for the NBCU affiliate to comply with FCC attribution rules (in amounts constituting less than a controlling interest). After the exercise or termination of the call right, NBCU’s affiliate may transfer shares of Series B preferred stock to any person without limitation, except that if the transfer occurs prior to the earliest to occur of the closing of the exercise of the call right, the closing of our purchase of the Class B common stock, or the second anniversary of the expiration or termination of the call right, the transferee must be in compliance with FCC attribution rules.

 

NBCU has appointed two observers to attend all board of directors and board committee meetings in accordance with the agreement. If permitted by the Communications Act and FCC rules and regulations, at the request of a permitted transferee of the call right or the Series B preferred stock, we may nominate persons named by the permitted transferee for election to our board of directors. We have agreed to use our reasonable best efforts to cause our board of directors to consist of nine members, comprised of not more than two employee directors (one of whom shall be our chief executive officer), and the rest of whom shall be independent directors. Currently, our board of directors consists of our chief executive officer and six independent directors. As required by the Stockholder Agreement, the Paxson Stockholders granted an irrevocable proxy to vote their shares of Class A and Class B common stock at our annual meeting of stockholders that took place on June 23, 2006 in favor of amendments to our certificate of incorporation to increase the number of authorized shares of our common stock to a number sufficient to provide for the conversion of the Series B preferred stock at the amended conversion price of $2.00 per share and the approval of a stock-based compensation plan under which the additional 50 million shares of Class A common stock described above are authorized to be issued (26 million of which are subject to grants made to our chief executive officer and our then president and chief operating officer as of November 7, 2005 and 24 million of which

are reserved for issuance pursuant to grants to be awarded thereafter). The Paxson Stockholders also agreed to vote their shares in any election of our directors in proportion to the votes of our other stockholders, other than our directors and officers, and against any proposal that would, upon consummation, result in a change in control, other than a change in control contemplated by the NBCU transaction agreements, or that would impede or otherwise adversely affect any of the transactions contemplated by the NBCU transaction agreements.

 

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. Our network 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.  Our network 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. 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 station licenses are subject to renewal at various times between 2007 and 2014. 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. We presently have pending license renewal applications for 18 of our full power stations, four of which have been challenged by filing a petition to deny. We believe that our licenses will be renewed in the ordinary course, including the four renewal applications presently being challenged.

 

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.

 

The FCC treats as attributable those 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 as they apply to television ownership have not become effective because the U.S. Court of Appeals for the Third Circuit issued an order in September 2003 staying their effectiveness. 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 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. For the television station ownership rules relevant to us, the stay remains in effect pending further review by the Third Circuit of the FCC’s further actions on remand. If the new rules ultimately should become effective they would 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, the 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 2006 and early 2007, the FCC held proceedings pursuant to the June 2004 remand from the Third Circuit. We cannot predict when a decision will be issued.

 

The Consolidated Appropriations Act of 2004 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 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. This Act also provides that the FCC shall conduct a quadrennial, rather than biennial, review of its ownership rules.

 

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 current 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. In reviewing the FCC’s new media ownership rules in its opinion

referred to above, the Third Circuit determined that this Congressional action meant that it could not entertain challenges to the television cap or to the FCC’s decision to retain the 50% UHF discount.

 

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 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.

 

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 are between five and 17 television stations in the DMA at the time of the acquisition 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 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, or TBAs. 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 TBAs 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.

 

Alien Ownership.  Under the Communications Act, no FCC broadcast license may be held by an entity 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 entity controlled by any other entity 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 and the FCC’s rules and policies impose certain public interest programming obligations on television broadcasters. Broadcasters are required 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.

 

Broadcasters are generally required to broadcast an average of at least three hours per week of “core” children’s television programming on analog and all digital channels. The FCC’s rules limit the amount of advertising in television programming designed for children 12 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” and on sponsorship identification. 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.  Each commercial television broadcast station is required to elect, every three years, to either require cable television system operators in the station’s local market to carry their signals, which we refer to as “must carry” rights, or to negotiate for retransmission consent to carry the station. These “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 elected the “must carry” alternative on local cable systems for the three-year election period that commenced January 1, 2006.

 

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 determined that cable television systems are not required to carry both the analog and digital television signals of local television

stations, and that a cable television system is required to carry a digital signal only if the broadcaster first gives up its analog signal. Broadcasters with multiple digital programming streams are required to designate a single, primary video stream eligible for mandatory carriage. Broadcasters operating with both analog and digital signals could negotiate with cable television systems for carriage of their digital signal in addition to their analog signal under retransmission consent. We have filed a petition with the FCC seeking reconsideration of this decision.

 

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 by passage of the Satellite Home Viewer Extension and Reauthorization Act of 2004 (“SHVERA”). The FCC rules implementing SHVIA are similar to the must-carry and retransmission consent rules that apply to cable television systems. Our network 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 network 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 which under recent legislation is now scheduled to end on February 17, 2009. 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. We are in compliance with the construction requirements for digital facilities. Not all of our stations have been constructed, but those which have not been are in compliance with the FCC rules, having obtained proper authority from the FCC. 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 such ancillary or supplementary 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, 2006, we had 453 full-time employees and 68 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.

 

Trademarks and Service Marks

 

We have 39 registered trademarks and service marks (26 in the United States, seven in Mexico and six in Europe) and pending applications for registration of another 15 trademarks and service marks in the United States. We do not own any patents or have any pending patent applications.

 

Available Information

 

Our internet website address is “www.ionmedia.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 reports with, or furnish them 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, 2006 we had total indebtedness of $1.1 billion, all of which is senior secured indebtedness, and redeemable preferred stock with an aggregate liquidation preference of approximately $1.5 billion (approximately $1.3 billion of which is 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 contained in the terms of the indentures governing our senior notes and the term loan facility governing our first priority term loans, and is subject to restrictions in 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, the term loan facility and the terms of our 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. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, invest in new programming, 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 are unable to service our indebtedness, we will 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 affected on satisfactory terms, if at all.

 

We have a history of significant 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, 2006, 2005 and 2004, our earnings were insufficient to cover our combined fixed charges and preferred stock dividend requirements by approximately $236.0 million, $289.7 million and $220.7 million, respectively. We expect to continue to experience net losses in the foreseeable future, principally due to interest charges on our outstanding debt and dividends on our outstanding preferred stock. Our 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 additional borrowings, and with our existing cash on hand. Our senior secured notes and the first priority term loans, assuming we elect not to pay interest in the form of additional notes on our second priority notes, require us to make annual cash interest payments of approximately $108 million. We may not be able to generate sufficient operating cash flow to pay our debt service and preferred stock dividend requirements and we may not be able to obtain sufficient additional financing to meet such requirements on terms acceptable to us, or at all.

 

We failed to redeem our outstanding preferred stock by the scheduled redemption dates in the fourth quarter of 2006, and the holders have the right to elect additional directors to our board of directors and to thereby influence our management and policies.

 

We were required to redeem our 141/4% Junior Exchangeable preferred stock and our Convertible Preferred Stock by November 15, 2006 and December 31, 2006, respectively, in each case at a redemption price equal to the aggregate liquidation preference of the outstanding shares plus accrued and unpaid dividends. The redemption price of these securities as of December 31, 2006 was $620.0 million and $171.0 million, respectively. Dividends

continue to accrue on the outstanding shares of preferred stock. We do not have the financial resources to redeem these securities for cash and do not expect to have adequate cash to redeem these securities at any time in the foreseeable future. The terms of our outstanding debt limit the amount of these securities that we are permitted to redeem. As a result of our failure to redeem these series of preferred stock by their scheduled mandatory redemption dates, the holders of each series have the right, voting separately as one class, to elect the lesser of two directors and that number of directors constituting 25% of the members of our board of directors. Groups of holders of each series have notified us that they have begun the process necessary to exercise their right to elect additional directors. We therefore expect four additional directors to be elected to our board of directors in the near future. Directors elected by the holders of our preferred stock will be in a position to exert a substantial influence on our management and policies, which could have an adverse effect on us.

 

The owner of two of the television stations that we operate under time brokerage agreements has the right to require us to purchase these stations at an aggregate purchase price of $36 million, and has exercised that right for one of the two stations.

 

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. The owner of these stations has the right to require us to purchase these stations at any time after January 1, 2007 through December 31, 2008, at the same price. We are currently operating these stations under TBAs, whereby we pay monthly fees to the station owners. On January 19, 2007, the owner of the television station serving the New Orleans market exercised its right to require us to purchase this station for a purchase price of $18 million (see “We have a history of significant operating losses and negative cash flow and we may not become profitable in the future.”) We have been in discussions with the station owner regarding the timing and other terms and conditions of our purchase of the station. The value of this station has been adversely affected by developments in the New Orleans television market related to the effects of Hurricane Katrina, and there can be no assurance that the current value of this station equals or exceeds the price at which we are obligated to purchase the station.

 

We may not be successful in operating a broadcast television network.

 

We launched our broadcast television network on August 31, 1998, and are now in our ninth 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 our programming, our business model is unproven and to date has not been successful. We continue to implement significant changes to our business strategy, including changes in our programming and sales operations, in our ongoing efforts to improve our operating performance. Effective January 29, 2007, we changed our network brand identity from “i” to “ION Television”, which reflects our decision to expand from independent programming to content for broader audiences across various age groups. We cannot assure you that our broadcast television network operations will 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 if our new sales strategy is unsuccessful, our financial results could be adversely affected.

 

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 and commercial spot advertisements at acceptable rates. 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. We have announced our return to the general network spot advertising market, in which advertising sales are dependent upon audience ratings. Our ratings have declined substantially over the past few years, and we cannot assure you that our return to the general network spot market or

the strategic programming alliances that we have entered into will be successful. Although we have significantly reduced our programming expenses, if our new sales strategy is unsuccessful, our financial results could be adversely affected.

 

We may lose a portion of our television distribution platform.

 

We exercised our right to terminate all of our network affiliation agreements effective June 30, 2005 (although most of our network affiliates have continued their affiliation under a month-to-month arrangement). We will seek to replace the distribution lost by the termination of these agreements (consisting of approximately 3% of U.S. primetime 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. 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.

 

We may be unable to satisfy our obligations to repurchase our senior debt if we experience a change of control.

 

If we were to experience a change of control, with certain significant exceptions, the indentures governing our senior notes and our term loan facility require us to offer to purchase all of the outstanding notes and term loans. Our failure to repurchase tendered notes or term loans upon a change of control would result in an event of default under the indentures and the term loan facility. If a change of control were to occur, we cannot assure you that we would have sufficient funds to purchase the senior notes and term loans or any other securities which we would be required to offer to purchase. We expect that we would require additional financing from third parties to fund any such purchases, and we cannot assure you that we would be able to obtain financing on acceptable terms or at all.

 

The exercise by NBCU, or a permitted transferee of NBCU’s investment in us, of the rights under our agreements with NBCU could adversely affect our business.

 

NBCU has rights under its agreements with us that give it the ability to influence our management and policies and to prevent us from taking actions which our management may otherwise desire to take. Under certain circumstances, these rights may be transferred to, and exercised by, a transferee of NBCU’s investment in us. NBCU or any such transferee may have interests that differ from those of our other stockholders and debt holders. Our agreements with NBCU provide that we must obtain consent for:

 

 

 

Some of these rights (budget approval, the sale of stations in the top 50 DMAs, and any increase in the size of our board of directors) will only be exercisable by a permitted transferee of NBCU’s investment in us. Most of these rights will terminate if NBCU’s right to purchase Mr. Paxson’s shares under the agreement entered into on November 7, 2005 expires unexercised. The exercise of any of these rights by NBCU or its transferee could limit our ability to take actions that our management deems to be in our best interest, which could have an adverse effect on us.

 

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 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, finding a third party to acquire our company through a merger or other business combination or acquisition of our equity securities, or the sale of all or part of our assets, 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, NBCU and the other holders of our preferred stock. Federal Communications Commission (“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 relatively low tax basis in our television station assets 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 adversely affected by actions of the FCC, the U.S. 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 as they apply to television ownership have not become effective because the U.S. Court of Appeals for the Third Circuit issued an order in September 2003 staying their effectiveness. 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 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. For the television station ownership rules relevant to us, the stay remains in effect pending further review by the Third Circuit of the FCC’s further actions on remand. If the new rules ultimately should become effective they would 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, the 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 2006 and early 2007, the FCC held proceedings pursuant to the June 2004 remand from the Third Circuit. We cannot predict when a decision will be issued.

 

The Consolidated Appropriations Act of 2004 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 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.

 

In assessing compliance with the national ownership caps (including the recently enacted 39% cap), the FCC counts each “ultra high frequency,” or 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 “very high frequency,” or VHF, stations. All of our television stations are UHF stations and, without the UHF Discount, we would not meet the current 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. In reviewing the FCC’s new media ownership rules in its opinion referred to above, the Third Circuit determined that this Congressional action meant that it could not entertain challenges to the television cap or to the FCC’s decision to retain the 50% UHF discount.

 

We cannot predict whether any legislation will be adopted by Congress that will significantly change the media ownership rules. Further changes in the nationwide television ownership cap, any further limitation on the ability of a party to own two television stations with signal contour overlap or in the same designated market area, or action by the FCC or Congress affecting the continued availability of the existing UHF discount may adversely affect the opportunities we might have for sale of our television broadcast stations to those television station group owners and major television broadcast networks that otherwise would be the most likely purchasers of these assets.

 

We are required by the FCC to abandon the analog broadcast service of 22 of our full power stations occupying the 700 MHz spectrum, and the digital broadcast service of two 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 being transitioned to use by new wireless and public safety entities. Federal law now requires that, by February 17, 2009, incumbent broadcasters must surrender analog signals and broadcast only on their allotted digital frequency. 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. 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 predict the impact, if any, on our business of the abandonment of our broadcast television service in the 700 MHz spectrum.

 

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 52 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 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. We cannot assure you that we will be able to retain the services of any of our key executives. If any of our key executives 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 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 in part 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 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 our network, 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.

 

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:

 

 

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, as amended, which we refer to as the Communications Act. 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 2007 and 2014. Third parties may challenge our license renewal applications. We presently have pending license renewal applications for 18 of our full power stations, four of which have been challenged by third parties. Although we believe that our licenses will be renewed in the ordinary course, including the four license renewal applications presently being challenged, we cannot assure you that our licenses 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 empowers the FCC to regulate other aspects of our business, in addition to imposing licensing requirements. For example, the FCC has the authority to:

 

 

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. In addition, the actions and other media holdings of our principals and our investors in some instances could reflect upon our qualifications as a television licensee.

 

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.

 

Each television broadcast station is required to elect, every three years, to either require cable television system operators in the station’s 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. 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 that commenced January 1, 2006. If the law were changed to eliminate or materially alter “must carry” rights, our business could be adversely affected.

 

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 has determined that broadcasters are not entitled to mandatory carriage of both their analog and digital signals, and that a cable system is required to carry a digital signal only if the broadcaster first gives up its analog signal. Broadcasters with multiple digital programming streams are required to designate a single, primary video stream eligible for mandatory carriage. Broadcasters operating with both analog and digital signals could negotiate with cable television systems for carriage of their digital signal in addition to their analog signal under retransmission consent. We cannot predict what effect those rules will have on our business.

 

The appraised value of our television stations has continued to decline over the past several years, and 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 received the appraisal of our television stations that we obtain annually as required by the terms of our existing senior secured notes and our term loan facility. The appraiser concluded that, as of December 1, 2006, the estimated fair market value of the 57 television stations owned and operated by us was $2.06 billion as start-up entities, based entirely on the broadcasting “stick” value of these stations, without consideration of the digital spectrum or analog band clearing value associated with these stations, if any. Additionally, the scope of the appraisal did not consider any values attributable to our other assets, including our program library or the value of our cable and satellite distribution to households that are not served by our broadcast television stations.

 

The appraisals of our assets, including our broadcast television stations, that are prepared by independent valuation firms from time to time are each 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. Prospective investors in our securities should not place undue reliance on the appraisals.

 

None.

 

We own a 15,000 square foot building in West Palm Beach, Florida that serves as our corporate headquarters. We also own a satellite up-link facility in Clearwater, Florida through which we supply our central programming feed, including our network programming, to satellite transmitters which relay the signal to our stations.

 

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. We generally lease our broadcast transmission towers and studio and office space occupied by our stations. We 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 additional or replacement space, if required.

 

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 currently broadcast 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 signal of comparable quality.

 

We believe our existing facilities are adequate for our current and anticipated future needs. No single property is material to our overall operations.

 

We are involved in 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.

 

No matters were submitted to a vote of security holders during the fourth quarter of the period covered by this report.

 

PART II

 

Market Information

 

Our Class A common stock is currently listed on the American Stock Exchange under the symbol “ION.” The following table sets forth, for the periods indicated, the high and low sales prices per share for our Class A common stock.

 

 

On March 19, 2007, the closing sale price of our Class A common stock on the American Stock Exchange was $1.32 per share. As of that date, there were approximately 476 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 our 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 our outstanding debt and preferred stock contain restrictions on our ability to pay dividends with respect to our common stock.

Stock Performance Graph

 

The graph below compares the cumulative total return on our Class A Common Stock from December 31, 2001 through December 31, 2006 with the cumulative total return of the American Stock Exchange Market Value Index and The Kagan TV Station Average Index.

 

 

INDEXED RETURNS

 

 

 

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, 2006. 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, 2006 and 2005, and the related consolidated statements of operations and of cash flows for each of the three years in the period ended December 31, 2006, and notes thereto appearing elsewhere herein.

 

 

 

 

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 TBAs), which reach all of the top 20 U.S. markets and 39 of the top 50 U.S. markets. We operate “ION Television” (formerly known as i, and prior to that as PAX TV), a network that provides programming seven days per week, 24 hours per day, and reaches approximately 94 million homes, or 84% 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. Our current schedule of entertainment programming principally consists of syndicated programs and feature films that have appeared previously on other broadcast networks which we have purchased the right to air. The balance of our programming consists of long form paid programming (principally infomercials), programming produced by third parties who have purchased from us the right to air their programming during specific time periods, public interest programming and a limited amount of children’s programming.

 

As part of our strategic plan to rebrand and reposition our company, in February 2006 we commenced doing business under the name “ION Media Networks” and on June 26, 2006, following approval of our stockholders, we changed our corporate name from “Paxson Communications Corporation” to “ION Media Networks, Inc.”

 

We air a substantial amount of long form paid programming, as we believe this provides us with a stable revenue base. Long form paid programming comprised 79%, 70% and 63% of our net revenues for the years ending December 31, 2006, 2005 and 2004, respectively.

 

We continue to implement significant changes to our business strategy, including changes in our programming and sales operations. Among the key elements of our new strategy are:

 

 

While we expect that a substantial portion of our revenues will continue to be derived from long form paid programming, primarily infomercials, we are pursuing a more diversified revenue mix, which includes the reintroduction of classic TV series and popular movies through multiple content agreements with Warner Bros., Sony and NBC Universal, Inc. (“NBCU”), which we entered into during 2006. In September of 2006, in partnership with NBCU, Scholastic, Classic Media, and Corus Entertainment, we launched qubo, a multi-platform children’s entertainment network. The qubo analog service currently airs in weekly three hour programming blocks on ION Television and NBC and in Spanish over NBCU’s Telemundo network. In January of 2007, we launched a dedicated digital channel airing qubo 24 hours per day, seven days per week (“24/7”) across our entire television station group. We have also entered into additional relationships in 2007 with other content providers that we believe will broaden our television network’s content appeal and demographic positioning. In February of 2007 we launched “ION Life”, a 24/7 digital broadcast network dedicated to health and wellness for consumers and families.

 

Our primary operating expenses include selling, general and administrative expenses, depreciation and amortization expenses, programming expenses and employee compensation costs.

 

We have a history of significant losses and our business operations presently do not provide sufficient cash flow to support our debt service requirements and to pay cash dividends on and meet the redemption requirements of our preferred stock (see “Liquidity and Capital Resources”). We continue to consider and are attempting to develop strategic alternatives for our company, which may include finding a third party to acquire our company through a purchase of our equity securities (see “Recent Events”), 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 the sale of all or part of our assets, as we seek to improve our core business operations and increase our cash flow.

 

On November 7, 2005, we entered into various agreements with NBCU, Lowell W. Paxson, our controlling stockholder and former chairman and chief executive officer, and certain of their respective affiliates, pursuant to which the parties agreed, among other things, to the following:

 

 

 

Financial Performance:

 

 

Balance Sheet:

 

Our cash and cash equivalents decreased during 2006 by $32.3 million to $58.6 million, as our operations did not generate sufficient cash to cover our payments for debt service and capital expenditures during the year. As of December 31, 2006, our total debt amounted to approximately $1.13 billion. Additionally, we have three series of mandatorily redeemable preferred stock currently outstanding with a total carrying value of $1.48 billion as of December 31, 2006, of which $791.0 million was required to be redeemed in the fourth quarter of 2006 (see Liquidity and Capital Resources below).

 

Sources of Cash:

 

Our principal sources of cash during 2006 were revenues from the sale of long form paid programming, direct response advertising and network spot advertising, which we also expect to be our principal sources of cash in 2007. We are also exploring the sale of certain non-core assets, which, if completed during 2007, 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.

 

In January 2007, we announced our re-entry into the general network spot advertising market. As a result, program ratings will be one of the key indicators of the performance of our network spot business in 2007. As more viewers watch our programming, our ratings increase which can increase our revenues. As the year progresses, we will monitor pricing in the scatter market to determine where network advertising rates are trending.

 

Outlook for 2007:

 

We expect 2007 to be a challenging year for us. Our cash interest obligations for 2007 are approximately $107.8 million. If our revenues do not materialize as planned or our financial results are otherwise not as anticipated, our total cash and cash equivalents balances may continue to decrease during the course of 2007. (see Liquidity and Capital Resources below).

 

Our principal business objective is to improve our operating performance and cash flow so that we will be able to improve the degree to which our operations support 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 2007 we intend to maintain an efficient operating structure and a flexible programming strategy as we evaluate and implement strategies to improve our business operations. While we are not investing substantial additional amounts in new entertainment programming, we are evaluating other programming strategies and opportunities that might be available to us that would improve our cash flow. We expect that entertainment programming will continue to constitute a significant portion of our network programming schedule. In order for us to improve our revenues and cash flow in 2007, we need to generate sufficient audience ratings from our entertainment programming and realize increases in long form paid programming rates and direct response advertising rates.

 

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.

 

RESULTS OF OPERATIONS

 

Critical Accounting Policies and Estimates

 

The following discussion and analysis of our results of operations and financial condition 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, the allowance for doubtful accounts, 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 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. We periodically evaluate the net realizable value of our program rights based on anticipated future usage of the programming 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 currently generated. 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 and fair value 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 the indentures governing our senior notes, our first lien term loans and our outstanding preferred stock limit our ability to incur indebtedness, including our ability to enter into capital leases.

 

We review our long-lived assets, which include property and equipment and intangibles, for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. If our analysis indicates that a possible impairment exists, based on our estimate of undiscounted future cash flows, we are required to estimate the fair value of the asset. An impairment charge is recorded for the excess of the asset’s carrying value over its fair value, if any. The fair value is 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, on an aggregate basis, the estimated fair value with the carrying amount. Our FCC licenses are evaluated as a single unit of accounting since we operate our consolidated distribution platform as a single asset. The fair value of these assets is based on a third party appraisal which incorporates selling prices for similar assets as well as discounted cash flow measurements. 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 the conditions or circumstances influencing fair value, we could be required to recognize an impairment charge. In addition, with respect to property and equipment and intangible assets with finite useful lives, which we amortize using the straight line method, we periodically evaluate the potential time frame in which these long-lived assets may become obsolete to determine whether accelerated depreciation is necessary. Due to federal legislation that was enacted in February 2006, which set February 17, 2009 as the completion date for the transition from analog to digital broadcasting, the depreciable lives of certain long-lived assets which may have limited or no use as a result of the future migration from analog to digital broadcasting, which had an aggregate net book value of approximately $12.3 million at December 31, 2006, have been reduced accordingly (see Item 1A. Risk Factors — We are required by the FCC to abandon the analog broadcast service of 22 of our full power stations occupying the 700 MHz spectrum, and the digital broadcast service of two stations occupying the 700 MHz spectrum, and may suffer adverse consequences if we are unable to secure alternative distribution on reasonable terms). As a result, we adjusted our depreciation and amortization expense prospectively to ensure that these assets are fully depreciated upon migration at February 17, 2009.

 

We recognize revenues as commercial spots and long form paid programming are aired and, where applicable, 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. Any shortfalls in ratings guarantees are reflected in net revenues in the accompanying consolidated statements of operations with the corresponding liability being reflected in deferred revenues in the accompanying balance sheets. As discussed elsewhere in this report, we did not sell commercial spots that are based on audience ratings or offer ratings guarantees to our advertisers between July 1, 2005 and December 31, 2006.

 

We carry accounts receivable at the amount we believe to be collectible. Accordingly, we provide allowances for accounts receivable we believe to be uncollectible based on our management’s best estimates. In determining the necessary allowance for doubtful accounts receivable, we analyze our historical bad debt experience, the creditworthiness of our customers, and the aging of our accounts receivable. If our allowance for doubtful accounts were to increase by 10%, it would have resulted in additional expense of approximately $27,000 and $40,000 for the twelve months ending December 31, 2006 and 2005, respectively. 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.

 

Restructuring

 

During 2005, we adopted a plan to substantially reduce or eliminate our sales of local spot advertisements that are based on audience ratings and to realize greater efficiencies in our sales organization. In connection with this plan we:

 

 

We and NBCU had entered into a number of agreements affecting our business operations, including an agreement under which NBCU provided network sales, marketing and research services. Pursuant to the terms of the JSAs between our stations and NBCU’s owned and operated stations serving the same markets, the NBCU stations sold all non-network spot advertising of our stations and received commission compensation for such sales. Certain of our station operations, including sales operations, were integrated with the corresponding functions of the related NBCU station and we reimbursed NBCU for the cost of performing these operations. For the years ended December 31, 2005 and 2004, we incurred expenses totaling approximately $12.0 million and $22.2 million, respectively, for commission compensation and cost reimbursements to NBCU in connection with these arrangements.

 

During 2005, we recorded a restructuring charge in the amount of $30.9 million in connection with the aforementioned restructuring activities. The restructuring charge primarily consisted of the recognition of a liability in the amount of $26.0 million for costs that we continue to incur for the remaining terms of contracts that no longer provide any economic benefit to us, one-time termination benefits in connection with personnel reductions (including $1.1 million in stock-based compensation expense) and personnel reductions for our JSA partners and NBCU. During 2006, a contract that no longer provides any economic benefit to us was amended, reducing the estimated amount due under the contract by approximately $7.2 million. As a result, we recorded a corresponding credit to restructuring charges in our statement of operations.

 

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 31, 2006 and 2005

 

Net revenues decreased 10% to $228.9 million for the year ended December 31, 2006 from $254.2 million for the year ended December 31, 2005, primarily due to our shift to non-rated spot advertisements and direct response advertisements, which sell at lower rates.

 

Programming and broadcast operations expenses were $53.7 million during year ended December 31, 2006, compared with $56.9 million for the comparable period in the prior year. The decrease is primarily due to lower music license fees of $2.1 million, which is the result of a retroactive revision to the fee structure employed by a music license organization, and the elimination of JSA-related expenses in 2006 resulting from our 2005 restructuring. These savings were partially offset by $2.1 million of higher utilities, repairs and maintenance and program residual expenses in 2006. In addition, federal legislation was enacted in the first quarter of 2006 which set a definitive date for the completion of the transition from analog to digital broadcasting. Some of our operating leases contain terms whereby the rental payments decrease when we cease broadcasting an analog signal. Because we recognize rent expense on a straight line basis over the life of the lease, the definitive reduction in future payments for these leases resulted in a reduction in rent expense of approximately $0.6 million in the first quarter of 2006.

 

Program rights amortization expense decreased to $32.1 million in 2006, compared with $61.1 million in 2005. The decrease is due to continued amortization of our existing programming assets, which we have replaced with less

expensive, shorter term license agreements. Program rights amortization expense in 2006 includes $8.2 million related to the write down to net realizable value and the reduction of the amortizable lives of certain programming as a result of new program license agreements entered into during 2006.

 

Selling, general and administrative expenses (“SG&A”) were $70.3 million during the year ended December 31, 2006, compared with $98.1 million for the prior year. The decrease is primarily due to the elimination of JSA and related expenses of approximately $18.3 million, lower expenses for research and ratings services of $10.6 million and reduced legal, audit and consulting fees of approximately $3.1 million, partially offset by higher employee-related costs of approximately $3.1 million. The decrease in expenses for research and ratings services in 2006 is primarily due to these costs being accrued as part of our 2005 restructuring charge. We expect that certain of these expenses will increase in 2007 in connection with our re-entry into the general network spot advertising market.

 

SG&A also includes stock-based compensation expense of approximately $10.4 million in 2006, as compared with $9.6 million of stock-based compensation expense in 2005. On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), requiring all stock options and other equity instruments awarded to employees to be recognized at fair value (see Note 12 to the consolidated financial statements). Substantially all of the stock-based compensation expense that we recorded in 2006 pertained to the stock options and restricted stock units that were granted to our chief executive officer and then chief operating officer in November of 2005. Stock-based compensation expense in 2006 includes approximately $0.7 million pertaining to the accelerated vesting of certain equity awards in connection with the separation agreement we entered into with our former chief operating officer. Stock-based compensation expense in 2005 includes $5.3 million pertaining to the accelerated vesting of previously unvested common stock that resulted from the agreements we entered into on November 7, 2005 with NBCU and Mr. Paxson as previously discussed.

 

Our adoption of SFAS No. 123R resulted in an increase to SG&A and net loss attributable to common stockholders of approximately $3.7 million over what we would have recorded under the original provisions of SFAS No. 123. We did not accelerate any vesting or make any modifications to existing equity compensation awards prior to January 1, 2006 in anticipation of the adoption of SFAS No. 123R.

 

Depreciation and amortization expense was $36.3 million during the year ended December 31, 2006, as compared to $38.8 million in the prior year. In connection with the termination of our JSAs in 2005, we shortened the lives of certain leasehold improvements at JSA locations to coincide with the termination of the related JSA agreements, resulting in additional depreciation expense of $1.4 million in 2005. Additionally, assets becoming fully depreciated or disposed during the course of 2006 resulted in lower depreciation expense.

 

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. On April 30, 2005, we settled our claims against the insurer for $24.5 million (less $7.7 million previously paid). We received payment of $16.8 million pursuant to the settlement agreement on May 3, 2005, $1.1 million of which was recorded as an offset against expenses incurred in litigating this claim (which were included in selling, general and administrative expenses), and the remainder of which was recorded as “insurance recoveries.”

 

On August 10, 2006, the terms of a contract for which we had accrued all of our obligations as part of our 2005 restructuring were amended to reduce the estimated amount due under the contract as of June 30, 2006 by approximately $7.2 million. We recorded a corresponding credit to restructuring charges in our statement of operations for the year ended December 31, 2006. During the year ended December 31, 2005, we recorded a restructuring charge of $30.9 million in connection with our 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.

 

During the third quarter of 2006, we recorded a charge of approximately $1.3 million related to the obsolescence and disposal of some of our property and equipment.

 

Interest expense in 2006 increased to $112.8 million from $110.7 million in 2005, primarily due to increased principal balances in 2006. Interest expense in 2005 includes $3.8 million in connection with our tentative settlement reached with the IRS regarding the 1997 disposition of our radio division.

 

Dividends on mandatorily redeemable preferred stock were $79.1 million for the year ended December 31, 2006 compared to $69.6 million for the year ended December 31, 2005, due to the compounding effect of in kind dividends paid on our 141/4% Junior Exchangeable preferred stock in 2006.

 

In December of 2005 we refinanced all of our outstanding debt, which resulted in a loss on the extinguishment of debt in the amount of $54.1 million.

 

In 2006 we formed a joint venture with four other parties to establish a children’s programming service. We recorded a loss in the equity of this unconsolidated investment of $1.8 million in the year ended December 31, 2006. Included in other income, net, for the year ended December 31, 2005 is a $3.4 million gain resulting from the expiration of an agreement that required us to provide advertising to another party.

 

The provision for income taxes for 2006 was $19.4 million, compared to an income tax benefit of $14.7 million for 2005. In June of 2005 we reached a tentative settlement with the IRS regarding the 1997 disposition of our radio division and our acquisition of television stations during the period following this disposition that we believed would qualify as a “like-kind” exchange under Section 1031 of the Internal Revenue Code. The settlement resulted in our recognition, for income tax purposes, of an additional $200.0 million gain from the disposition of our radio division. Because we had net operating losses in the years subsequent to 1997 in excess of the additional gain recognized, we were not liable for any federal tax deficiency. However, as a result of reaching the tentative settlement with the IRS, we concluded that it was more likely than not that our net operating loss deferred tax assets, up to the amount of additional gain recognized, would be realized. As a result, we reduced the previously established valuation allowance for these net operating loss deferred tax assets by $37.2 million in 2005. This amount was partially offset by an estimated additional state income tax liability of $2.8 million resulting from the tentative settlement and $19.7 million of income tax expense incurred during 2005. The settlement was finalized in March of 2006 and we have since paid all of the state income taxes and related interest required as a result of the settlement.

 

Dividends and accretion on redeemable and convertible preferred stock amounted to $82.9 million for the year ended December 31, 2006 compared to $39.4 million for the year ended December 31, 2005. As part of the agreements entered into with NBCU on November 7, 2005, we issued $188.6 million aggregate liquidation preference of additional preferred stock to NBCU in satisfaction of $288.6 million of accrued and unpaid dividends on our preferred stock held by it as of September 30, 2005.

 

Years Ended December 31, 2005 and 2004

 

Net revenues decreased 8.1% to $254.2 million for the year ended December 31, 2005 from $276.6 million for year ended December 31, 2004, primarily because of lower ratings during the first six months of 2005 as compared to the prior year, and the shift to non-rated spot advertisements, which sell at lower rates, during the second half of 2005. Our 2005 revenues include approximately $3.9 million pertaining to additional advertising spots that we aired in settlement of our liability for shortfalls in ratings guarantees, as compared to a net increase in the liability, which resulted in a reduction of revenues, of $1.2 million in 2004.

 

Programming and broadcast operations expenses were $56.9 million during the year ended December 31, 2005, compared with $57.5 million in the prior year. The decrease in 2005 was mainly due to lower employee and other costs related to the 2005 restructuring in the amount of $3.3 million and lower rent expense of $2.9 million in 2005 resulting from the 2004 adjustment for lease escalation clauses pertaining to prior years, largely offset by a settlement regarding music license fees payable by us that was finalized during 2004 which positively affected our 2004 programming and broadcast operations expenses by approximately $3.0 million. In addition, we had higher residuals and other program production expenses of $1.3 million and higher utilities, repair and maintenance expense of $1.2 million in 2005.

Program rights amortization expense was $61.1 million during the year ended December 31, 2005, compared with $53.6 million in the prior year. The increase was primarily due to increased amortization associated with new original and syndicated programming in 2005 when compared to the prior year.

 

Selling, general and administrative expenses were $98.1 million during the year ended December 31, 2005, compared with $130.0 million for the year ended December 31, 2004. Approximately $19.2 million of this decrease was attributable to reduced selling costs associated with our discontinuing the sale of commercial spot advertisements that are based on audience ratings. Additionally, $6.2 million of expenses associated with research and ratings services used to support the sale of commercial spot advertisements that are based on audience ratings, were recorded as a restructuring charge effective July 1, 2005 as these costs will continue to be incurred for the remaining term of the contract that no longer provides any economic benefit to us. We also reduced advertising and promotional expenses by approximately $13.1 million in 2005 as compared with 2004. These savings were partially offset by higher personnel costs and stock-based compensation in 2005.

 

Depreciation and amortization expense was $38.8 million during the year ended December 31, 2005 compared with $43.7 million in the prior year. This decrease was primarily due to assets becoming fully depreciated, partially offset by $1.4 million of depreciation expense for leasehold improvements at JSA locations for which we shortened the amortizable lives to coincide with the termination of the related agreements.

 

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. In March 2003, the insurer 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. On April 30, 2005, we settled our claims against the insurer for $24.5 million (less $7.7 million previously paid). We received payment of $16.8 million pursuant to the settlement agreement on May 3, 2005, $1.1 million of which was recorded as an offset against expenses incurred in this litigation (which were included in selling, general and administrative expenses), and the remainder of which was recorded as “insurance recoveries.”

 

During the year ended December 31, 2005, we recorded a restructuring charge of $30.9 million in connection with our 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 (see Restructuring above). The charge was composed primarily of costs that we will continue to incur under the remaining terms of contracts that no longer provide any economic benefit to us.

 

During 2004, we recognized a charge of $4.6 million to reduce certain programming rights to their net realizable value.

 

In May 2004 we completed the sale of our television station KPXJ, serving the Shreveport, Louisiana market, for approximately $10.0 million, resulting in a pre-tax gain of approximately $6.1 million.

 

Interest expense for the year ended December 31, 2005 increased to $110.7 million from $94.2 million in 2004. The increase was primarily due to an increase in interest rates, higher accretion on our 121/4% senior subordinated discount notes and interest on federal and state income taxes in the amount of $3.8 million in connection with our acceptance of a settlement with the IRS as described below.

 

Dividends on mandatorily redeemable preferred stock were $69.6 million for the year ended December 31, 2005 compared to $60.6 million for the year ended December 31, 2004, as we continued to pay cumulative dividends on our 141/4% Junior Exchangeable preferred stock in the form of additional shares.

 

On December 30, 2005 we refinanced substantially all of our $1.1 billion of outstanding indebtedness (see Liquidity and Capital Resources below). This transaction resulted in a charge in 2005 of $54.1 million, which was comprised primarily of early redemption premiums and, to a lesser extent, the write off of unamortized debt issuance costs related to the retired debt. 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 previously existing senior credit facility, which resulted in a $6.3 million charge in 2004 for the write off of the unamortized debt issuance costs associated with the senior credit facility.

Included in other income, net, for the year ended December 31, 2005 is a $3.4 million gain resulting from the expiration of an agreement that required us to provide advertising to another party, partially offset by accretion expense of $0.7 million related to our restructuring accrual.

 

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 $333.0 million of gain. The IRS examined our 1997 tax return and proposed to disallow all of our gain deferral. In addition, the IRS proposed an alternative position that, in the event it were unsuccessful in disallowing all of our gain deferral, would disallow approximately $62.0 million of the $333.0 million gain deferral on the basis that some of the assets were not “like-kind.” We filed a protest to these positions with the IRS appeals division.

 

In June 2005, we reached a tentative settlement of this matter that would result in our recognition, for income tax purposes, of an additional $200.0 million of the gain resulting from the disposition of our radio division in 1997. Because we had net operating losses in the years subsequent to 1997 in excess of the additional gain to be recognized, we would not be liable for any federal tax deficiency, but would be liable for state income taxes. We estimated the amount of state income taxes for which we would be liable as of December 31, 2005 to be approximately $2.8 million. In addition, we would be liable for interest on the tax liability for the period prior to the carry back of our net operating losses and for interest on any state income taxes that may be due. We estimated the combined amount of federal and state interest as of December 31, 2005 to be $3.8 million. Because we previously established a deferred tax liability at the time of the “like-kind” exchange and because we previously established a valuation allowance against our net operating losses, the use of our losses to offset the additional gain to be recognized resulted in a $37.2 million reduction of the established valuation allowance. As a result of reaching the tentative settlement with the IRS in June 2005, we concluded that it was more likely than not that our net operating losses, up to the amount of the additional gain to be recognized, would be realized and that it was probable that we would incur additional state income taxes as well as federal and state interest expense. As a result, in 2005 we recognized an income tax benefit in the amount of $34.4 million resulting from the realization of our net operating losses, net of state income taxes. On March 15, 2006 the closing agreement was executed.

 

For the year ended December 31, 2005, we recorded a provision for income taxes in the amount of $19.7 million, exclusive of the aforementioned reduction to our deferred tax asset valuation allowance and additional state income taxes. For the year ended December 31, 2004, we recorded a provision for income taxes in the amount of $18.8 million. The provision for income taxes in 2005 reflects an additional $1.2 million provision resulting from a change in the effective 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 our assets and liabilities, which resulted primarily from the tentative settlement reached with the IRS.

 

Dividends and accretion on redeemable and convertible preferred stock amounted to $39.4 million for the year ended December 31, 2005, compared to $57.8 million for the year ended December 31, 2004. The decrease is due to the restructuring of the terms of our Series B preferred stock owned by NBCU (see Liquidity and Capital Resources below).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary capital requirements are to fund debt service payments, capital expenditures for our television properties and programming rights payments. Our primary source of liquidity is our cash on hand. As of December 31, 2006, we had $58.6 million in cash and cash equivalents and had working capital, exclusive of preferred stock that was required to be redeemed in the fourth quarter of 2006 (see discussion below), of approximately $13.9 million. We believe that our cash on hand, cash we expect to generate from future operations and our ability to service a portion of our debt through in-kind payments in lieu of cash will provide the liquidity necessary to meet our obligations and financial commitments through the next twelve months, excluding the redemption of our preferred stock that was required during the fourth quarter of 2006. If our financial results are not as anticipated, we may be required to seek to sell certain assets, raise funds through the offering of additional debt and equity securities or refinance or restructure the terms of our debt in order to meet our liquidity needs, including

for the purchase of the television stations discussed below. We can provide no assurance that we would be successful in selling assets, raising additional funds or otherwise completing any type of refinancing or restructuring transaction.

 

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. The owner of these stations has the right to require us to purchase these stations at any time after January 1, 2007 through December 31, 2008, at the same price. On January 19, 2007, the owner of the station serving the New Orleans market exercised its right to require us to purchase this station at a purchase price of $18 million. We have been in discussions with the station owner regarding the timing and other terms and conditions of our purchase of the station. The value of this station has been adversely affected by developments in the New Orleans television market related to the effects of Hurricane Katrina, and there can be no assurance that the current value of this station equals or exceeds the price at which we are obligated to purchase the station.

 

We were required to redeem our 141/4% Junior Exchangeable preferred stock and 93/4% Series A convertible preferred stock for cash by November 15, 2006 and December 31, 2006, respectively. The redemption prices of these securities at their mandatory redemption dates, which reflects the aggregate liquidation preference plus accumulated and unpaid dividends, were approximately $609.9 million and $171.0 million, respectively. We were unable to redeem these securities at the required redemption dates and we do not anticipate having sufficient financial resources to redeem these securities at any time in the foreseeable future. The terms of our outstanding debt limit the amount of these securities that we are permitted to redeem, and dividends continue to accrue on these securities based on their current aggregate liquidation preference. As their sole and exclusive remedy for our failure to redeem the preferred stock as required, the holders of each series have the right, each voting separately and as one class, to elect two additional members to our board of directors.

 

On December 30, 2005, we refinanced all of our outstanding senior secured and senior subordinated debt by borrowing $325 million of new term loans and issuing $400 million of first lien senior secured floating rate notes and $405 million of second lien senior secured floating rate notes. The term loans and the first lien notes bear interest at a rate of three-month LIBOR plus 3.25%, are secured by first priority liens on substantially all of our and our subsidiaries’ assets and mature on January 15, 2012. The second lien notes bear interest at a rate of three-month LIBOR plus 6.25% and mature on January 15, 2013. Most of our obligations under the second lien notes are secured by second priority liens on substantially all of our and our subsidiaries’ assets. All three tranches require quarterly interest payments in January, April, July and October of each year. For any interest period ending prior to January 15, 2010, we have the option to pay interest on the second lien notes either (i) entirely in cash or (ii) in kind through the issuance of additional second lien notes or by increasing the principal amount of the outstanding second lien notes. If we elect to pay interest in kind on the second lien notes, the interest rate for the corresponding interest period will increase to LIBOR plus 7.25%. We used the net proceeds from the issuance of these debt securities to retire our previously outstanding indebtedness, including the payment of $41.7 million of early redemption premiums. We made a cash interest payment, net of the effect of the interest rate swaps discussed below, of $27.2 million on January 16, 2007. To date, we have elected to pay all of our interest on the second lien notes in cash, including the interest payment due April 16, 2007.

 

On February 22, 2006, we entered into two floating to fixed interest rate swap arrangements which fixed the interest rates through maturity at 8.355% for the term loans and first lien notes and 11.36% for the second lien notes (assuming interest thereon is paid in cash). Thus, if we continue to elect to pay cash interest on our second lien notes beyond April 16, 2007, our cash interest obligations in 2007 with respect to our $1.13 billion of secured debt would be approximately $107.8 million. If we elect to pay interest in kind on the second lien notes for the remaining two interest payments scheduled in 2007, our cash interest obligations in 2007 would be approximately $84.5 million.

 

The term loan facility and the indentures governing our first lien notes and second lien notes contain covenants which, among other things, limit our and our subsidiaries’ ability to incur more debt, pay dividends on or redeem our outstanding capital stock, make certain investments, enter into transactions with affiliates, create additional liens on our assets, sell assets and merge with any other person or transfer substantially all of our assets. Subject to limitations, we may incur up to $650 million of additional subordinated debt, which we may use to retire other subordinated obligations, including preferred stock, or for other corporate purposes not prohibited by the applicable

covenants. We will be required to make an offer to purchase the outstanding notes and repay the term loans with the proceeds of any sale of our stations serving the New York, Los Angeles and Chicago markets and with the proceeds of other asset sales that we do not reinvest in our business. We will be required to make an offer to purchase a portion of the outstanding notes and repay a portion of the outstanding term loans within 270 days after any quarterly determination date as of which the ratio of the appraised value of our television stations to the aggregate outstanding principal amount of the term loans and the notes (excluding any second lien notes we may issue in payment of interest on the second lien notes) is less than 1.5 to 1.0. The holders of the outstanding notes and the lenders of the term loans have the right to require us to repurchase these obligations following the occurrence of certain changes in the control of our company.

 

Events of default under the notes and the term loans 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 failure to pay a monetary judgment against us in an aggregate amount greater than $10.0 million, the failure to perform any covenant or agreement which continues for 60 days after we receive notice of default from the indenture trustee or holders of at least 25% of the outstanding debt, and the occurrence of certain bankruptcy events. We are currently in compliance with all of our debt covenants.

 

On November 6, 2005, Lowell W. Paxson resigned as our Chairman of the Board and director, and on November 7, 2005 he entered into a consulting and noncompetition agreement with us and NBCU, pursuant to which he has agreed, for a period commencing on November 7, 2005 and continuing until five years after the later of the closing of the acquisition of the shares of our common stock held by his affiliates through exercise of NBCU’s call right or the closing of our purchase of these shares, should NBCU’s call right not be exercised, to provide certain consulting services to us and to refrain from engaging in certain activities in competition with us. We paid Mr. Paxson $250,000 on signing in respect of the first year’s consulting services, and paid Mr. Paxson $750,000 in May of 2006 in respect of Mr. Paxson’s agreement to refrain from engaging in certain competitive activities. In accordance with this agreement, we paid Mr. Paxson $1 million on November 7, 2006 and are obligated to pay Mr. Paxson three additional annual payments of $1 million each on November 7, 2007, 2008 and 2009. These payments are to be allocated between consulting services and the non-compete agreement in the same ratio as the first two payments made under this agreement.

 

On October 17, 2006, we entered into a separation agreement with Dean M. Goodman, our former president and chief operating officer. In accordance with the terms of the separation agreement, we paid Mr. Goodman $3 million on October 25, 2006 and all equity awards that had previously been granted to him immediately vested.

 

In addition to the above, as of December 31, 2006, we were obligated under the terms of our outstanding debt, programming contracts, cable distribution agreements, operating lease agreements and employment agreements to make future payments as follows (in thousands):

 

 

In addition to the amounts noted above, the employment agreement with our chief executive officer may, under certain circumstances, require us to make separation payments aggregating up to $7.5 million ($5.0 million after May 7, 2007) during the period ending November 7, 2009.

 

Cash used in operating activities was approximately $13.1 million for the year ended December 31, 2006, compared with cash provided by operating activities of $3.0 million for the year ended December 31, 2005. Cash

interest payments in 2006 were $30.8 million higher in 2006 than in 2005, and we received $16.8 million of cash in 2005 from the insurance settlement discussed above. These amounts were largely offset by a $36.7 million decrease in program rights payments in 2006.

 

Cash used in investing activities was approximately $17.7 million in 2006, as compared to cash provided by investing activities of approximately $8.8 million in 2005. In late 2004, we pre-funded $24.6 million of outstanding letters of credit to support our obligation to pay for certain original programming. These obligations were settled and the deposits were refunded in 2005. We also had $6.0 million of short-term investments mature during 2005. Capital expenditures, which consist primarily of the costs of converting our stations to digital broadcasting as required by the FCC and purchases of broadcast equipment for our television stations, were approximately $13.1 million and $15.3 million for the years ended December 31, 2006 and 2005, respectively. We currently own or operate 52 stations broadcasting in digital (in addition to broadcasting in analog). With respect to our remaining stations, we have received a construction permit from the FCC and expect to complete the build-out on one station during 2007, we are awaiting construction permits from the FCC with respect to six stations and one of our stations has not received a digital channel allocation and therefore will not be converted until the end of the digital transition. We expect our total capital expenditures in 2007 will be approximately $12.0 million, including approximately $5.0 million 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 and cash from operations. In August of 2006, we formed a joint venture with NBCU and three other parties for the launch of a children’s programming service. We invested $2.4 million in this new venture during 2006, and expect to invest an additional $2.4 million during 2007.

 

Cash used in financing activities was $1.6 million and $3.0 million for the years ended December 31, 2006 and 2005, respectively. These amounts include principal repayments, proceeds from new borrowings and payment of loan origination costs. Cash used in financing activities in 2006 is comprised primarily of loan origination costs in connection with the December 30, 2005 refinancing transaction.

 

New Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This Statement permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Statement is effective at the beginning of an entity’s first fiscal year that begins after November 15, 2007. We have not determined the effect that this standard will have on our financial position or results of operations.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires a sponsor of defined benefit plans to, among other things, recognize the funded status of a benefit plan in its statement of operations and recognize in other comprehensive income certain gains and losses that arise during the period but are deferred under pension accounting rules. It also modifies the timing of reporting and adds certain disclosures. The recognition and disclosure elements of SFAS No. 158 are effective for fiscal years ending after December 15, 2006 and the measurement elements are effective for fiscal years ending after December 15, 2008. As we do not sponsor any defined benefit plans, SFAS No. 158 will not have an effect on our financial position or results of operations.

 

Also in September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement provides a uniform definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements, but does not expand the areas in which fair value measurements are required. The Statement is effective for fiscal years beginning after November 15, 2007. We have not determined the effect that SFAS No. 157 will have on our financial position or results of operations.

 

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial

Statements (“SAB 108”).” SAB 108 requires that in evaluating the effects of prior year errors on current year financial statements, SEC registrants must consider the effect of the errors on the current year statement of operations as well as the magnitude of the errors on the current year balance sheet. As a result, SAB 108 could require prior year financial statements to be corrected for errors that had previously been deemed immaterial. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108 did not affect our financial position or results of operations.

 

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the effect that this Interpretation will have on our financial position and results of operations.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” This Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under certain circumstances. The Statement also requires separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and also requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the Statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. The Statement is effective for fiscal years beginning after September 15, 2006. We do not believe this standard will have a material effect on its financial position or results of operations.

 

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity (SPE) may hold. The statement is effective for fiscal years beginning after September 15, 2006. We do not expect this standard to have a material effect on its financial position or results of operations.

 

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that (1) a voluntary change in accounting principle be applied retroactively with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so, and (2) correction of errors in previously issued financial statements be termed a “restatement.” SFAS No. 154 also carries forward the provisions of APB No. 20 providing that changes in accounting estimates are not to be applied retrospectively but in the current period and prospectively only. The new standard became effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005 and did not have a material effect on our financial position or results of operations.

 

We have $1.13 billion in outstanding floating rate debt under which we pay interest at the prevailing LIBOR plus an agreed margin. We use interest rate swaps to manage our interest rate exposures, based upon market conditions. We do not use derivative financial instruments or other market risk sensitive instruments for trading or speculative purposes. In February 2006 we entered into two floating to fixed interest rate swap arrangements with a combined notional amount of $1.13 billion for periods through the maturity dates of our outstanding floating rate debt. Under the terms of these arrangements, we are required to pay a fixed interest rate of 8.355% on a notional amount of $725 million while receiving a variable interest rate of three month LIBOR plus 3.25% (which is the interest rate we are required to pay to the holders of our first lien notes and term loans), and are required to pay a fixed interest rate of 11.36% on a notional amount of $405 million while receiving a variable interest rate equal to

three month LIBOR plus 6.25% (which is the interest rate we are required to pay to the holders of our second lien notes, assuming we elect to pay interest on these obligations in cash). These interest rate swaps effectively fixed the interest rates on our $1.13 billion of floating rate debt. As a result, changes in LIBOR do not result in changes to our aggregate debt service requirements. Consequently, as of December 31, 2006, we did not have material market risk exposure. We monitor the credit ratings of our swap counterparties and believe that the credit risk related to our interest rate swap agreements is minimal.

 

The response to this item is submitted in a separate section of this report.

 

None.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of December 31, 2006 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. 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. Based upon our evaluation, our management concluded that as of December 31, 2006, our disclosure controls and procedures were effective. 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 achieving its stated goals under all potential future conditions, regardless of how remote.

 

Changes in Internal Control over Financial Reporting

 

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.

 

Not applicable.

 

PART III

 

Board of Directors

 

Our Board of Directors is divided into three classes. A class of directors is elected each year to serve for a three-year term and until their successors are elected and qualified. The terms of the Class I directors (Messrs. Brandon and Burgess) expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2007. The terms of the Class II directors (Messrs. Patrick and Rajewski) expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2008. The terms of the Class III

directors (Messrs. Smith and Roskin and Ms. Salhany) expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2009.

 

The size of our Board of Directors is established pursuant to our By-laws, by resolution of the Board. We presently have a nine member Board with two vacancies. Our By-laws provide that any vacancy on our Board of Directors may be filled by a majority of the remaining members of the Board and, in such event, the new director will serve for the remainder of the unexpired term of the class of directors to which he or she is assigned. The term of any Class I director who may be appointed by the Board of Directors to fill any of these vacancies will expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2007. The term of any Class II director who may be appointed by the Board of Directors to fill any of these vacancies will expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2008. We expect that, from time to time, our Board of Directors will consider qualified candidates to fill these vacancies as any such candidates may be identified.

 

Biographical and other information concerning our directors is set forth below.

 

Class I Directors in Office (Term to Expire at the Annual Meeting in 2007)

 

Class II Directors in Office (Term to Expire at the Annual Meeting in 2008)

 

 

Class III Directors in Office (Term to Expire at the Annual Meeting in 2009)

 

 

 

 

Other Executive Officers

 

Stephen P. Appel, 53, has been our President of Sales and Marketing since January 1, 2004. From March 1999 through December 31, 2003, Mr. Appel served as our Senior Vice President, Director of Local and National Sales. From 1991 to 1999, Mr. Appel was Vice President, Director of Sales for Seltel Television Sales, a television representative firm.

 

Richard Garcia, 44, has been our Senior Vice President and Chief Financial Officer since April 2004 and served as our Vice President, Controller and Chief Accounting Officer from September 2003 until April 2004. From May 2002 to September 2003, Mr. Garcia was Controller of DirectTV Latin America, LLC. From August 1998 to May 2002, Mr. Garcia was Controller and Chief Accounting Officer of Claxson Interactive Group, an owner of television and radio broadcasting assets.

 

Adam K. Weinstein, 43, has been our Senior Vice President, Secretary and Chief Legal Officer since January 1, 2005. From August 2000 through December 31, 2004, Mr. Weinstein served as our Assistant General Counsel, Vice President and Assistant Secretary. From 1995 to 2000, Mr. Weinstein was Assistant General Counsel of Oxbow Corporation, a privately owned power development and petroleum products trading company.

 

Curtis L. Brandon, 45, has been our Vice President — Controller since August 2006. Prior to that appointment, Mr. Brandon was our Vice President of Accounting from June 2004 to July 2006 and held other positions in our accounting department from November 1995 to June 2004. Mr. Brandon is not related to Henry J. Brandon, one of our directors.

 

Emma Cordoba, 50, has been our Vice President, Director of Human Resources since May 1999. From October 1996 through April 1999 she served as our Director of Human Resources.

 

The Board of Directors and its Committees

 

The Board of Directors has determined that directors Patrick, Brandon, Rajewski, Smith, Roskin and Salhany are “independent,” as that term is defined under the rules of the American Stock Exchange. During 2006, the Board of Directors held 12 meetings. Each incumbent director attended at least 75% of the total number of Board meetings

and meetings of committees of which the director is a member. In addition, the Board of Directors took action seven times during 2006 by unanimous written consent in lieu of a meeting, as permitted by applicable state law.

 

All of our directors are encouraged to attend our annual meeting of stockholders. Five of our directors attended our annual meeting of stockholders in June 2006. Directors Roskin and Salhany have been appointed to the Board since the June 2006 annual meeting.

 

The Compensation Committee currently consists of directors Roskin, Patrick and Rajewski, all of whom are independent. Mr. Roskin was appointed chairman of the Compensation Committee on July 1, 2006, succeeding Mr. Patrick, who had served as chairman of the Committee since June 10, 2005. The Compensation Committee operates under a written charter adopted by the Board of Directors. The Compensation Committee reviews and approves base salary and bonus compensation for our officers. The Compensation Committee establishes the annual performance goals under our Executive Bonus Program and is responsible for the administration of our stock-based compensation plans. See “Compensation Committee Report on Executive Compensation.” During 2006, the Compensation Committee met five times.

 

The Audit Committee currently consists of directors Brandon, Patrick, Rajewski, Smith, Roskin and Salhany, all of whom are independent. Mr. Brandon serves as Chairman of the Audit Committee. The Audit Committee operates under a written charter adopted by the Board of Directors. The Board of Directors has determined that Mr. Brandon is our “audit committee financial expert”, as defined in the rules of the SEC. Each member of the Audit Committee is able to read and understand fundamental financial statements and is “financially sophisticated” as that term is defined under applicable American Stock Exchange rules. The Audit Committee held seven meetings during 2006. The Audit Committee is primarily concerned with the accuracy and effectiveness of the audits of our financial statements by our independent registered certified public accountants. The duties of the Audit Committee include:

 

 

The Nominating Committee currently consists of directors Rajewski, Brandon and Salhany, all of whom are independent. Mr. Rajewski serves as chairman of the Nominating Committee. The Nominating Committee is responsible for identifying qualified candidates to serve as directors and for making recommendations to the Board of Directors with respect to the nomination of candidates to stand for election as directors and for appointment to fill any vacancies on the Board. The criteria for selecting nominees for election to the Board of Directors reflect the requirements of applicable law and listing standards, as well as the Committee’s assessment of a candidate’s judgment, business experience, specific areas of expertise, industry knowledge, and ability and willingness to devote time to our business. The Nominating Committee does not have a charter. During 2006, the Nominating Committee held four meetings.

 

As part of our agreements with NBCU on November 7, 2005, we agreed to use our reasonable best efforts to increase the number of our directors to nine, not fewer than seven of whom shall be independent. We also agreed to engage a national executive search firm to assist us in identifying qualified candidates for director. In December 2005, the Nominating Committee engaged a national executive search firm for this purpose. Using criteria supplied by the Nominating Committee, as described above, this firm has worked to identify potentially qualified director candidates for consideration by the Nominating Committee.

 

Upon recommendation of the Nominating Committee, on June 23, 2006 the Board of Directors appointed Mr. Roskin and Ms. Salhany as Class III directors. Following these appointments, the Nominating Committee ceased using the services of the executive search firm referred to in the preceding paragraph.

 

In June 2006, the Board of Directors formed a Special Committee to explore potential strategic transactions and pursue third party expressions of interest in our company. The Special Committee currently consists of directors

Patrick, Smith, Rajewski and Salhany, all of whom are independent. Mr. Patrick is the chairman and Mr. Smith is the vice chairman of the Special Committee.

 

Lead Independent Director

 

In May 2004, our Board of Directors created the position of lead independent director. The Lead Independent Director is responsible for coordinating the activities of the other independent directors and performing various other duties. The general authority and responsibilities of the lead independent director are established in resolutions adopted by our Board of Directors. Mr. Patrick has served as our lead independent director since November 10, 2005.

 

Communication with the Board of Directors

 

Our Board of Directors believes that it is important for our stockholders to be able to communicate with the Board. Accordingly, stockholders who wish to communicate with the Board of Directors or a particular director may do so by sending a letter to our Secretary at 601 Clearwater Park Road, West Palm Beach, Florida 33401. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication” or “Stockholder-Director Communication.” All such letters must identify the author as a stockholder and clearly state whether the intended recipients are the full Board of Directors or certain specified individual directors. The Secretary will make copies of all such letters and circulate them to the appropriate director or directors.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and officers and persons who own more than ten percent of our common stock to file initial reports of ownership and reports of changes in ownership of common stock and our other equity securities with the SEC and to furnish us with copies of all Section 16 (a) reports they file. Based on our review of the copies of such reports received by us and written representations from certain of these persons, we believe that during 2006, all required reports were filed on a timely basis.

 

Code of Ethics

 

We have adopted a code of ethics applicable to our officers, who include our principal executive officer, principal financial officer and principal accounting officer. A copy of our code of ethics has been filed with the Securities and Exchange Commission. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests for such copy should be made in writing to us at our principal office, which is set forth on the first page of our Form 10-K, attention Corporate Secretary.

 

Compensation Discussion and Analysis

 

The Compensation Committee (for purposes of this analysis, the “Committee”) of the Board of Directors is currently comprised of William A. Roskin, who joined our board in 2006, Raymond S. Rajewski and W. Lawrence Patrick, each of whom, in the opinion of our Board of Directors, is independent. Mr. Roskin serves as chairman of the Committee. The Committee operates under a written charter adopted by our Board of Directors.

 

The Committee reviews and approves the compensation of our executive officers and all operating managers who report directly to the Chief Executive Officer. Our executive officers are those persons whose job responsibilities and policy-making authority are the broadest in our company, and include our Chief Executive Officer and President. The Committee is also responsible for administering our Executive Bonus Program and Stock Incentive Plans, and for reviewing other compensation plans and making recommendations to the Board of Directors.

 

Compensation Philosophy and Objectives

 

The Committee’s executive compensation philosophy is to establish a framework for compensation that is consistent with our company’s size and scope of operations and that enables us to attract and retain highly qualified

executives who are compensated in a manner that aligns their interests with those of our stockholders. This philosophy is based upon the following core principles:

 

 

The Committee seeks to recommend compensation levels for our executives which are competitive with the compensation offered to executives performing similar functions by other companies in the broadcasting industry, and to link a significant portion of an executive’s total potential cash compensation to the achievement of overall company financial performance goals and individual performance criteria.

 

During 2006, the Committee reviewed summary sheets for each Named Executive Officer (other than the Chief Executive Officer) which set forth dollar amounts for each of the principal components of the Named Executive Officers’ 2006 compensation, including base salary, annual incentive bonus, and retention incentive bonus, as well as the prior year’s total compensation. The Committee also considered the value of perquisites and potential change-in-control and other severance payments. Further, the Committee considered the recommendations of the Chief Executive Officer regarding each other Named Executive Officer’s entitlement to the individual performance component of such officer’s annual incentive bonus.

 

In arriving at its compensation decisions, the Committee principally considered market factors affecting our ability to retain the services of our Named Executive Officers, as well as the terms of our existing employment agreements with our Named Executive Officers and management’s recommendations. It did not use an outside compensation consultant during 2006, nor did it use compensation benchmarks expressed as a percentile of compensation paid by a peer group of companies in making its decisions with respect to executive compensation.

 

Elements of Executive Compensation

 

For the fiscal year ended December 31, 2006, the executive compensation program consisted of the following elements:

 

 

Base Salary

 

The 2006 base salaries of the Named Executive Officers were established pursuant to employment agreements entered into between us and each such officer. Each Named Executive Officer’s base salary is subject to review by the Committee on an annual basis and to increase based on the Committee’s evaluation and management’s recommendations. In making this evaluation, the Committee takes into account the following factors:

 

 

Each of our Named Executive Officers, other than Mr. Burgess and Mr. Goodman, received a 5% increase in base salary effective January 1, 2006. There has been no increase in base salary for any Named Executive Officer for 2007, pending completion of merit reviews and possible salary adjustments at a later date in 2007.

 

Annual Incentive Bonus

 

During 2006, the Committee’s principal compensation tool for linking executive pay with company performance factors that influence stakeholder value was the Executive Bonus Program. Under this Program, members of our senior management approved by the Compensation Committee may earn an annual cash incentive bonus based upon the achievement of financial performance goals and individual performance criteria. The terms of our Executive Bonus Program are set forth by contract with each member of our senior management. The bonus criteria are established on an annual basis by the Committee, and generally consist of a set of financial performance goals which we must meet and individualized performance criteria and bonus levels for each participant (generally expressed as a percentage of the participant’s base salary).

 

Under the terms of their employment agreements, during 2006 each of our Named Executive Officers had the opportunity to earn an annual incentive bonus of up to 100% of base salary (50% for Ms. Cordoba), 50% to 65% of which would be earned if we met the financial performance goals established by the Committee and 35% to 50% of which would be earned if, in the opinion of the respective responsible corporate officer, with the concurrence of our Chief Executive Officer and the Committee, the officer satisfactorily performed the tasks associated with his or her position. Bonuses awarded with respect to a fiscal year are paid during the following year. In the case of Mr. Burgess, our Chief Executive Officer, pursuant to his employment agreement 35% of his annual bonus is to be determined based upon achievement of company performance objectives or such other criteria as are mutually agreed by him and the Committee.

 

For the 2006 fiscal year, the Committee established target levels of adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) as the financial performance goals to be used to determine that portion of the annual incentive bonus under the Executive Bonus Program which was dependent upon our performance results. The EBITDA targets established by the Committee were based upon the annual budget approved by the Board of Directors, with the participants being entitled to receive 100% of their full bonus opportunity if our EBITDA results for 2006 met budget, and declining percentages at various levels of EBITDA below budget. Based upon our actual adjusted EBITDA for the 2006 fiscal year, each of the Named Executive Officers was entitled to receive incentive bonus compensation equal to 100% of the maximum bonus amount the executive could earn based upon our performance (i.e., 100% of 65% (50% in the case of Mr. Appel and Ms. Cordoba) of the executive’s total annual incentive bonus opportunity).

 

For the 2006 fiscal year, the Committee concurred with the determinations of Mr. Burgess that each Named Executive Officer (other than Mr. Goodman) was entitled to receive the full amount of incentive bonus compensation the executive could earn based upon his individual performance (i.e., 100% of 35% (50% in the case of Mr. Appel and Ms. Cordoba) of the executive’s total bonus opportunity). The portion of the annual incentive bonus for the 2006 fiscal year that was determined by individual performance was paid in January 2007, and the portion that was determined on the basis of company performance goals was paid in March 2007.

 

Because our company has a substantial amount of senior secured indebtedness that requires quarterly cash interest payments, our continued ability to pay required debt service amounts is critical to our company’s prospects. In light of this fact, the Committee has determined, consistent with management’s recommendation, that for the 2007 fiscal year, the financial performance goals to be used in determining the company performance component of the annual incentive bonus will be target amounts of operating cash flow, which is defined as cash received from operations minus capital expenditures.

 

Executive Retention Bonus Plan

 

In September 2005, the Committee approved a proposed executive retention bonus plan under which 20 members of our management could receive additional cash bonus compensation equal to a percentage of their annual base salary at the time that ranged from 50% to 100% (250% for Mr. Goodman to be based on his $800,000 base salary as provided in his November 2005 employment agreement). The purpose of the executive retention bonus plan was to provide additional incentives for these members of management to remain employed by us through the period of transition in our business plan away from an audience ratings driven model and through the uncertainty caused by our exploration of strategic alternatives and our negotiations with NBCU that ultimately

concluded with the transactions announced on November 7, 2005. The executive retention bonus plan was approved by our Board of Directors in October 2005.

 

Under the plan, participating executives were assigned a target retention bonus equal to a stated percentage of their annual base salary at the date the plan was implemented. Payments under the plan were to be made in three stages: (i) a first payment of 20% of the target amount would be paid on December 31, 2005; (ii) a second payment of 35% of the target amount would be paid on June 30, 2006; and (iii) the final payment of 45% of the target amount would be paid on December 31, 2006. Participants’ rights to receive payments under the plan were contingent upon the participant remaining in our employment on the relevant payment date and our company achieving its budgeted cash flow results, in accordance with the annual budgets approved by our Board of Directors. Participants would be entitled to receive their full target amount, on the originally scheduled payment dates, if their employment was terminated by us without cause. Any participant who voluntarily resigned employment with us would be ineligible to receive any future payments under the plan. The Board retained the right to revise and adjust the plan from time to time.

 

We made the first payments under this plan on December 31, 2005, aggregating $0.9 million, and the second payments on June 30, 2006, aggregating $1.7 million. In July 2006, the Committee terminated the executive retention plan. Mr. Burgess did not participate in this plan.

 

In December 2006, upon the recommendation of the Chief Executive Officer, the Committee authorized payment of additional bonus compensation to members of our senior management, including all then current Named Executive Officers other than the Chief Executive Officer, in recognition of the cancellation of the executive retention bonus plan and as either a signing bonus in connection with an employee’s execution of a new employment agreement, or otherwise as determined by the Chief Executive Officer in his discretion. Under this program, Mr. Appel was paid a signing bonus of $225,000 in December 2006 in connection with his entry into a new employment agreement and Messrs. Garcia and Weinstein and Ms. Cordoba received bonus payments of between $25,000 and $70,000 in December 2006.

 

Stock-Based Awards

 

The objectives of our Stock Incentive Plans are to help us attract and retain outstanding employees, and to promote the growth and success of our business by aligning the financial interests of our employees with those of our other stockholders. The Committee has historically granted options under the Stock Incentive Plans at a discount to market price in order to increase the value to executives of stock-based compensation, seeking thereby to further align the executives’ interests with those of our other stockholders. Further, by granting discounted options which either vest over time, or are exercisable immediately for unvested shares which then vest over time, the Committee has sought to use stock-based compensation as a means of retaining our executives and other employees.

 

We did not grant any awards of stock-based compensation during 2006, other than formula-based awards made to our non-employee directors as part of our compensation for these directors, as discussed below under “Director Compensation.”

 

Retirement Benefits, Executive Perquisites and Other Benefits

 

Our Named Executive Officers are eligible to participate to the same extent as other employees in our health and welfare benefit plans. We maintain a tax-qualified 401(k) profit sharing plan, which provides for broad-based employee participation, with a maximum matching contribution of $1,000 payable in shares of our Class A common stock. Our employees are also eligible to attend local concert events on a first come, first served space available basis, and, during 2006, were able to attend certain local sporting events on the same basis.

 

In addition to generally available employee benefits, we provide Mr. Burgess with a $2 million term life insurance policy.

 

Chief Executive Officer Compensation

 

R. Brandon Burgess became our Chief Executive Officer on November 7, 2005. Following Mr. Goodman’s separation from service in October 2006, Mr. Burgess was elected to the additional position of President. The

Compensation Committee, in consultation with the Board of Directors, is responsible for evaluating the performance of our Chief Executive Officer. Mr. Burgess’ compensation is established pursuant to the negotiated terms of his employment agreement entered into in November 2005. Mr. Burgess receives a base salary of $1,000,000, which may be increased but not decreased by the Board of Directors, and is eligible for an annual performance bonus of up to 100% of his base salary, commencing with our 2006 fiscal year, 65% of which is to be based on our company’s achievement of financial targets established by the Committee, and 35% of which is to be based upon achievement of other company performance objectives or criteria as are mutually agreed to by Mr. Burgess and the Committee. Although Mr. Burgess and the Committee did not specifically identify any such other company performance objectives or criteria, based on its evaluation of Mr. Burgess’ performance in 2006, the Committee determined to award Mr. Burgess 100% of this portion of Mr. Burgess’ annual incentive bonus opportunity. This award, in the amount of $350,000 (35% of Mr. Burgess’ annual base salary) was paid to Mr. Burgess in January 2007. In support of its strongly positive evaluation of Mr. Burgess’ performance in 2006, the Committee noted that Mr. Burgess had been indefatigable in working to improve our operating results, cash flow and positioning in the broadcast community. The Committee believes that Mr. Burgess has taken decisive action to set a new direction for our company through both internal reorganizations and external strategic focus.

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. While the Committee will continue to give due consideration to the deductibility of compensation payments under future compensation arrangements with our executive officers, the Committee has not adopted a policy requiring all compensation to be deductible. We have in the past, and may in the future, enter into compensation arrangements under which payments are not fully deductible under Section 162(m) of the Code. The Committee will make its compensation decisions based upon what it believes to be in our best interests, giving due consideration to all relevant factors.

 

Nonqualified Deferred Compensation

 

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not become effective yet, the Company believes it is operating in good faith compliance with the statutory provisions which were effective January 1, 2005.

 

Accounting for Stock-Based Compensation

 

Beginning on January 1, 2006, the Company began accounting for stock-based payments in accordance with the requirements of FASB Statement 123(R).

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers served on the compensation committee or board of directors of any company that employed any member of the Committee or our Board of Directors.

COMPENSATION COMMITTEE REPORT

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

 

The Committee has reviewed and discussed with management the foregoing Compensation Discussion and Analysis and, based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

 

THE COMPENSATION COMMITTEE

 

William A. Roskin, Chairman

W. Lawrence Patrick

Raymond S. Rajewski

 

SUMMARY COMPENSATION TABLE

 

The table below summarizes the total compensation paid or earned by each of the Named Executive Officers for the fiscal year ended December 31, 2006.

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table shows all plan-based awards granted to the Named Executive Officers during fiscal 2006, which ended on December 31, 2006. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at Fiscal 2006 Year-End Table on the following page.

 

GRANTS OF PLAN BASED AWARDS