PAXSON COMMUNICATIONS CORP - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004

FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-13452

PAXSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 59-3212788
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)

601 CLEARWATER PARK ROAD, WEST PALM BEACH, FLORIDA 33401
(Address of principal executive offices) (Zip Code)

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

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

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. [X]

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. [ ]

The aggregate market value of common stock held by non-affiliates of the
registrant as of March 1, 2002 is $375,901,000 computed by reference to the
closing price for such shares on the American Stock Exchange.

The number of shares outstanding of each of the registrant's classes of
common stock, as of March 1, 2002 was: 56,423,527 shares of Class A Common
Stock, $0.001 par value, and 8,311,639 shares of Class B Common Stock, $0.001
par value.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders to be held on May 3, 2002.

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TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

GENERAL

We are a network television broadcasting company which owns and operates
the largest broadcast television station group in the United States, as measured
by the number of television households in the markets our stations serve. We
currently own and operate 65 full power broadcast television stations (including
three stations we operate under time brokerage agreements), 64 of which carry
PAX TV, including stations reaching all of the top 20 U.S. markets, and 41 of
the top 50 U.S. markets. We operate PAX TV, a network that provides family
oriented entertainment programming seven days per week between the hours of 1:00
p.m. and midnight, Monday through Friday, and 5:00 p.m. and midnight Saturday
and Sunday. PAX TV's programming consists of shows originally developed by us
and shows that have appeared previously on other broadcast networks which we
have purchased the right to air. PAX TV reaches approximately 85% of prime time
television households in the U.S. through our broadcast television station
group, and pursuant to distribution agreements with cable and satellite systems
and affiliates. PAX TV reaches approximately 64% of U.S. television households
through our broadcast television station group. We have agreements with cable
television system owners and satellite television providers to carry PAX TV,
through which we reach an additional 16% of U.S. television households in
markets not served by our owned and operated stations. We reach an additional 5%
of U.S. television households through affiliation agreements with 63
independently owned PAX TV affiliated stations. We have obtained audience
ratings and share, market rank and television household data set forth in this
report from the most recent information available from Nielsen Media Research.
We do not assume responsibility for the accuracy or completeness of this data.

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

- Network Spot Advertising. We sell commercial air time to advertisers who
want to reach the entire nationwide PAX TV viewing audience with a single
advertisement. Most of our network advertising is sold under advance, or
"upfront," commitments to purchase advertising time which are obtained
before the beginning of our PAX TV programming season. The National
Broadcasting Company, Inc. ("NBC") serves as our exclusive sales
representative to sell most of our network advertising. Any remaining
inventory which is not sold by NBC is sold by us as direct response
advertising. Our network advertising sales represented approximately 33%
of our revenue during the year ended December 31, 2001.

- Network Long Form Paid Programming. We sell air time for long form paid
programming, consisting primarily of infomercials, during broadcasting
hours when we are not airing PAX TV. Infomercials are shows produced by
others, at no cost to us, principally to promote and sell products or
services through viewer direct response. Our network long form paid
programming represented approximately 33% of our revenue during the year
ended December 31, 2001.

- Station Advertising. We sell commercial air time to advertisers who want
to reach the viewing audience in specific geographic markets in which our
stations operate. These advertisers may be local businesses or regional
or national advertisers who want to target their advertising in these
markets. NBC provides national advertising sales services for a majority
of our stations. In markets in which our stations are operating under
joint sales agreements, or JSAs, our JSA partner serves as our exclusive
sales representative to sell our local station advertising. For stations
for which NBC does not provide national account representation, our JSA
partner performs this function. Our local sales forces sell this
advertising in markets without JSAs. Our station advertising sales
represented approximately 34% of our revenue during the year ended
December 31, 2001 (including 16% of our revenue during such year which
was derived from local and national long form paid programming).

We believe that our business model benefits from many of the favorable
attributes 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. We own and operate most of our distribution system and,
therefore, we receive advertising revenue from the entire

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broadcast day (consisting of both PAX TV and long form paid programming), unlike
traditional networks, which receive advertising revenue only from commercials
aired during network programming hours. In addition, due to the size and
centralized operations of our station group, we are able to achieve economies of
scale with respect to our programming, promotional, research, engineering,
accounting and administrative expenses which we believe enable us to have lower
per station expenses than those of a typical network-affiliated station.

BUSINESS STRATEGY

The principal components of our strategy are set forth below:

- Provide Quality Family Programming. We believe there is significant
demand, including from adult demographic groups which are attractive to
advertisers, for quality family oriented programming which is free of
excessive violence, explicit sexual themes and foul language. We are
attracting viewers and establishing a nationally recognized brand by
offering quality family programming. As our PAX TV brand recognition
grows, we believe that PAX TV will increasingly be a "destination
channel" to which viewers turn regularly for family programming, and that
PAX TV will continue to attract advertisers who want to reach the viewer
demographics attracted by our programming. We are expanding the amount of
original programming we air as we believe this will further improve our
viewer demographics and our positive ratings trends by employing cost
efficient development and production techniques. We have developed
original entertainment programming for PAX TV at lower costs than those
typically incurred by other broadcast networks for original entertainment
programming.

- Benefit from a Centralized, Efficient Operating Structure. We centralize
many of the functions of our owned and operated stations, including
promotions, advertising, research, engineering, accounting and sales
traffic. Our stations average fewer than ten employees compared to an
average of 90 employees at network-affiliated stations, and an average of
60 employees at independent stations in markets of similar size to ours.
We promote PAX TV and each of our television stations by utilizing a
centralized advertising and promotional program. We also employ a
centralized programming strategy, which we believe enables us to keep our
programming costs per station significantly lower than those of
comparable stations. We provide programming for all of our stations and,
except for local news and syndicated programming provided by JSA
partners, each station offers substantially the same programming
schedule.

- Improve Local Television Station Operations by Implementing Joint Sales
Agreements. In order to improve the operations of our local stations, we
have entered into JSAs with respect to 55 of our stations, including JSAs
between 48 of our stations and NBC owned or affiliated stations.
Substantially all of those stations are currently operating under the
terms of the JSAs. Generally, JSAs are for ten year terms. Substantially
all JSA partners have the right to terminate the JSA upon a sale by the
JSA partner of its station that is the subject of the JSA. Each JSA
typically provides the following:

- The JSA partner serves as our exclusive sales representative to sell
our station advertising, enabling our station to benefit from the
strength of the JSA partner's sales organization and existing
advertiser relationships;

- We integrate and co-locate many of our station operations with those
of the JSA partner, reducing our costs through operating efficiencies
and economies of scale, including the elimination of redundant owned
and leased facilities and staffing; and

- The JSA partner may provide local news and syndicated programming,
supplementing and enhancing our station's programming lineup.

- Expand and Improve PAX TV Distribution. We intend to continue to expand
our television distribution system through the addition of affiliated
broadcast television stations and cable systems. We intend to expand our
distribution to reach as many U.S. television households as possible in a
cost efficient manner. We continue to improve the channel positioning of
our broadcast television stations on local cable systems across the
country, as we believe the ability to view our programming on one of
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the lower numbered channel positions (generally below channel 30) on a
cable system improves the likelihood that viewers will watch our
programming.

- Develop Our Broadcast Station Group's Digital Television Platform. Our
owned and operated station group gives us a significant platform for
digital broadcasting. We have commenced construction of our digital
broadcast facilities and intend to explore the most effective use of
digital broadcast technology for each of our stations. Upon completion of
the construction of our digital facilities, we believe that we will be
able to provide a significant broadband platform on which to broadcast
digital television, including multiple additional television networks.
While future applications of this technology and the time frame within
which digital broadcasting will commence are uncertain, we believe that
our existing broadcast stations make us well positioned to take advantage
of future digital broadcasting opportunities.

DISTRIBUTION

We distribute PAX TV through a television distribution system comprised of
our owned and operated broadcast television stations, cable television systems
in various markets not served by a PAX TV station, satellite television
providers and independently owned PAX TV affiliated broadcast stations.
According to Nielsen our programming currently reaches 85% of U.S. television
households.

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 FCC rules
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
65 full power broadcast television stations (including three stations we operate
under time brokerage agreements, or TBAs), 64 of which carry PAX TV, including
stations reaching all of the top 20 U.S. markets and 41 of the top 50 U.S.
markets. Our owned and operated station group reaches approximately 64% of U.S.
prime time television households, according to Nielsen. Our ownership of the
stations providing most of our television distribution enables us to receive
advertising revenue from each station's entire broadcast day and to achieve
operating efficiencies typically not enjoyed by network affiliated television
stations. As nearly all of our owned and operated stations operate in the "ultra
high frequency," or UHF, portion of the broadcast spectrum, only half of the
number of television households they reach are counted against the national
ownership cap under the Communications Act. By exercising our rights under the
Communications Act to require cable television system operators to carry the
broadcast signals of our owned and operated stations, we reach many more
television households in each station's designated market area, or DMA, than we
would if our stations were limited to transmitting their broadcast signals over
the airwaves.

We operate an additional 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 PAX TV programming and retain the
advertising revenues from the sale of advertising time during PAX TV programming
hours. We have options to acquire two of these stations (WPXL and WPXX) and a
right of first refusal to acquire the third (WBNA). 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, 2003 through December 31, 2005. We
may enter into additional TBAs to operate stations that we intend to acquire or
to enable us to operate additional stations that we might not be able to own
under the current ownership restrictions of the Communications Act.

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The table below provides information about our owned and operated stations,
stations we operate pursuant to TBAs, and stations subject to pending
acquisition transactions. Upon completion of the pending acquisition
transactions and construction projects noted in the table, we will own 66
stations, 65 of which will carry PAX TV, including stations reaching all of the
top 20 U.S. markets and 41 of the top 50 markets.

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(1) Market rank is based on the number of television households in the
television market or Designated Market Area, or "DMA," as used by
Nielsen, effective as of September 2001.

(2) Refers to the number of television households in the DMA as estimated by
Nielsen, effective as of September 2001.

(3) Indicates the company with which we have entered into a JSA for the
station.

(4) Currently carries the home shopping programming of ValueVision
International, Inc.

(5) JSA is scheduled to terminate August 13, 2002.

(6) Station is independently owned and is operated by us under a time
brokerage agreement.

(7) We have the option to acquire the station and the current owner has the
right to require us to purchase the station at anytime after January 1,
2003 through December 31, 2005.

(8) We have a right of first refusal to acquire the station.

(9) The station has been constructed but is not yet operational.

Cable and Satellite Distribution. In order to increase the distribution of
our programming, we have entered into carriage agreements with the nation's
largest cable multiple system operators, as well as with other cable system
operators and satellite television providers. These cable and satellite system
operators carry our programming on a designated channel of their service. These
carriage agreements enable us to reach television households in markets not
served by our owned or affiliated stations. Our carriage agreements with cable
system operators generally require us to pay an amount based upon the number of
additional television households reached. Our carriage agreements with satellite
television providers allow the satellite provider to sell and retain the
advertising revenue from a portion of the non-network advertising time during
PAX TV programming hours. Some of our carriage agreements with cable operators
also provide this form of compensation to the cable operator. We do not pay
compensation for reaching households in DMAs already served by our broadcast
stations, even though the cable operator may provide our programming to these
households because we have exercised our "must carry" rights under the
Communications Act. We believe that the ability to view our programming on one
of the lower numbered channel positions (generally below channel 30) on a cable
system improves the likelihood that viewers will watch our programming, and we
have successfully 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 16%
of U.S. prime time television households in DMAs not already served by a PAX TV
station.

Our PAX TV Affiliated Stations. To increase the distribution of PAX TV, we
have entered into affiliation agreements with stations in markets where we do
not otherwise own or operate a broadcast station. These stations include full
power and low power television stations. Each affiliation agreement gives the
particular station the right to broadcast PAX TV programming, or portions of it,
in the station's market. Although the majority of the affiliation agreements
provide for the distribution of PAX TV prime time programming, some affiliates
do not carry all of our PAX TV programming. In addition, some affiliates do not
air PAX TV programming in the exact time patterns that the programming is
broadcast on our network because of issues related to their specific markets.
Our affiliation agreements provide us with additional distribution of our PAX TV
programming without the expense of acquiring a station or paying compensation to
cable system operators in the markets reached. Under our affiliation agreements,
we are not required to pay

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cash compensation to the affiliate, and the affiliate is entitled to sell and
retain the revenue from all or a portion of the non-network advertising time
during the PAX TV programming hours. We have affiliation agreements with respect
to 63 television stations which reach approximately 5% of U.S. prime time
television households.

PROGRAMMING

During our PAX TV network hours, which are between 1:00 p.m. and midnight,
Monday through Friday, and 5:00 p.m. and midnight Saturday and Sunday, we offer
family entertainment programs that are free of excessive violence, explicit
sexual themes and foul language. We produce original shows to air during PAX
TV's prime time hours. The balance of our PAX TV lineup consists of syndicated
programs and a limited amount of entertainment and sports programming provided
by NBC under cross programming agreements with us. We began PAX TV with a lineup
of syndicated programming that had experienced successful first runs in terms of
audience ratings, giving us the ability to offer a full programming schedule
immediately upon the launch of PAX TV. Since our launch, we have sought to
develop and increase our original PAX TV programming, as our operating
experience with PAX TV has shown that quality original programs can generate
higher ratings and deliver a greater return to us, in terms of advertising
revenues, than syndicated programs of comparable cost.

We have developed original entertainment programming for PAX TV at lower
costs than those typically incurred by other broadcast networks for original
entertainment programming. We have done this by employing cost efficient
development and production techniques, such as the development of program
concepts without the use of pilots, and by entering into production arrangements
with foreign production companies through which we are able to share production
costs, gain access to lower cost production labor and participate in tax
incentives. In addition, we generally pre-sell the foreign and other
distribution rights to our original PAX TV programming and thereby are able to
recover a significant portion of the program's production costs, while retaining
all of the domestic exploitation rights. Our agreements for syndicated
programming generally entitle us to exclusive nationwide distribution rights
over our entire television distribution system for a fixed cost, without regard
to the number of households that receive our programming. As our syndicated
programming licenses expire, we intend to replace that programming with less
costly original programming.

During non-network hours, our stations broadcast long form paid
programming, consisting primarily of infomercials, which are shows produced at
no cost to us to market and sell products and services through viewer direct
response, and paid religious programming. Pursuant to an agreement with The
Christian Network, Inc., or CNI, our broadcast stations carry CNI's programming
during the hours of 1:00 a.m. and 6:00 a.m., seven days per week. For additional
details on our relationship with CNI, see "Certain Relationships and Related
Transactions."

Under many of our JSAs, the JSA partner provides our station with late
evening local news broadcasts, which we believe enhances our station's appeal to
viewers and advertisers. This news programming may be a rebroadcast of the JSA
partner's news in a different time slot or a news broadcast produced for PAX TV.

RATINGS

The advertising revenues from our PAX TV operations are largely dependent
upon the popularity of our programming, in terms of audience ratings, and the
attractiveness of our PAX TV viewing audience to advertisers. Higher ratings
generally will enable us to charge higher rates to advertisers. Nielsen, one of
the leading providers of national audience measuring services, has grouped all
television stations in the country into approximately 210 DMAs that are ranked
in size according to the number of television households, and periodically
publishes data on estimated audiences for the television stations in the various
DMAs. The estimates are expressed in terms of the percentage of the total
potential audience in the market viewing a station (the station's "Rating") and
of the percentage of the audience actually watching television (the station's
"Share"). Nielsen provides this data on the basis of total television households
and selected demographic groupings in the DMA.

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Some viewer demographic groups are more attractive to advertisers than
others, such as adults of working age who typically have greater purchasing
power than other viewer demographic groups. Many products and services are
targeted to consumers with specific demographic characteristics, and a viewer
demographic group containing a concentration of these types of consumers
generally will be more attractive to advertisers. Based on our experiences with
PAX TV, advertisers often will pay higher rates to advertise during programming
that reaches demographic groups that are targeted by that advertiser. In
general, we believe that advertisers for many products and services, consider
adults from ages 25-54 to be one of the most desirable viewer demographic
groups. A significant component of our original programming strategy is to
develop and air programming that will increase PAX TV's ratings among the
demographic groups that are most attractive to advertisers.

ADVERTISING

We sell commercial air time to advertisers who want to reach the entire
nationwide PAX TV viewing audience with a single advertisement. Most of our
network advertising is sold under advance, or "upfront," commitments to purchase
advertising time, which are obtained before the beginning of our PAX TV
programming season. NBC serves as our exclusive sales representative to sell
most of our network advertising. Network advertising represented approximately
33% of our revenue during the year ended December 31, 2001. The central
programming signal through which we supply PAX TV and other programming to our
stations and to cable and satellite viewers includes advertising, generally of a
direct response nature, which reaches our cable and satellite viewers (during
both PAX TV and other viewing hours) in markets not served by our stations
during time that is otherwise allocated to station spot advertising, and which
reaches viewers in local markets during unsold station spot advertising time. We
include the revenue from this advertising in our network advertising revenues.

We also sell commercial air time to advertisers who want to reach the
viewing audience in specific geographic markets in which we operate. These
advertisers may be local businesses or regional or national advertisers who want
to target their advertising in these markets. NBC provides national advertising
sales services for a majority of our stations. In markets in which our stations
are operating under JSAs, our JSA partner serves as our exclusive sales
representative to sell our local station advertising. For stations for which NBC
does not provide national account representation, our JSA partner performs this
function. Our local sales force sells this advertising in markets without JSAs.
Our station spot advertising represented approximately 34% of our revenue during
the year ended December 31, 2001 (including 16% of our revenue during such year
which was derived from local and national long form paid programming).

Our advertising rates are based upon:

- the size of the market in which a station operates;

- the ratings of the show during which the advertising will appear;

- the number of advertisers competing for a time slot; and

- the demographic composition of the market served by the station.

We offer advertisers the opportunity to reach PAX TV's nationwide viewing
audience with a single commercial and to target their advertising to the
demographic groups with which our programming is most popular.

We also sell long form paid programming, consisting primarily of
infomercials. This programming may appear on our entire television distribution
system or it may be aired only in specific markets. Network and regional paid
programming time is sold by our national long form sales team. Local paid
programming may be sold by our national sales team or by the local sales team at
each station.

NBC RELATIONSHIP

On September 15, 1999, we entered into an investment agreement with NBC
under which wholly-owned subsidiaries of NBC purchased shares of our Series B
preferred stock and warrants to purchase shares of our
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common stock for an aggregate purchase price of $415 million. At the same time,
a wholly-owned subsidiary of NBC entered into an agreement with Mr. Paxson and
entities controlled by Mr. Paxson, under which the NBC subsidiary was granted
the right to purchase all, but not less than all, of the 8,311,639 shares of our
Class B common stock beneficially owned by Mr. Paxson. This right is exercisable
through September 15, 2009. These shares of Class B common stock are entitled to
ten votes per share on all matters submitted to a vote of our stockholders and
are convertible into an equal number of shares of Class A common stock. The
purchase price per share of Class B common stock is equal to the higher of:

- the average of the closing sale prices of the Class A common stock for
the 45 consecutive trading days ending on the trading day immediately
preceding the exercise of NBC's call right, provided that the average
price shall not be more than 17.5% higher or 17.5% lower than the six
month trailing average closing sale prices; and

- $22.50 per share for any shares purchased on or before September 15,
2002, and $20.00 per share for shares purchased after that date.

The owners of the shares that are subject to the call right have agreed not
to transfer those shares before September 15, 2005, and not to convert those
shares into any of our other securities, including shares of Class A common
stock. NBC's exercise of the call right is subject to compliance with applicable
provisions of the Communications Act and the rules and regulations of the FCC.

Under the investment agreement, a wholly-owned subsidiary of NBC acquired
$415 million aggregate liquidation preference of our Series B preferred stock,
which accrues cumulative dividends at an annual rate of 8% and is convertible,
subject to adjustment under the terms of the Series B preferred stock, into
31,896,032 shares of our Class A common stock at an initial conversion price of
$13.01 per share ($15.40 per share as of December 31, 2001). The Series B
preferred stock is exchangeable at the option of the holder at any time, subject
to various conditions, into our 8% exchange debentures. A wholly-owned
subsidiary of NBC also acquired a warrant ("Warrant A") to purchase up to
13,065,507 shares of Class A common stock at an exercise price of $12.60 per
share, and a warrant ("Warrant B") to purchase up to 18,966,620 shares of Class
A common stock at an exercise price equal to the average of the closing sale
prices of the Class A common stock for the 45 consecutive trading days ending on
the trading day immediately preceding the warrant exercise date, provided that
the average price shall not be more than 17.5% higher or 17.5% lower than the
six month trailing average closing sale price, subject to a minimum exercise
price during the three years ending September 15, 2002, of $22.50 per share. The
warrants are exercisable until September 2009 subject to various conditions and
limitations. In addition:

- Warrant B may not be exercised before the exercise in full of Warrant A;
and

- Warrant B may not be exercised to the extent that, after giving effect to
the exercise, Mr. Paxson would no longer constitute our "single majority
stockholder" unless Warrant B is exercised in full and at the same time
NBC exercises its right to purchase all the shares of our Class B common
stock held by Mr. Paxson.

NBC has the right, at any time that the FCC renders a final decision that
NBC's investment in us is "attributable" to NBC (as that term is defined under
applicable rules of the FCC), or for a period of 60 days beginning on September
15, 2002 and on each September 15 thereafter, to demand that we redeem, or
arrange for a third party to acquire, any shares of our Series B preferred stock
then held by NBC (an "Involuntary Redemption"). If NBC exercises this right, we
will have up to one year to consummate the redemption, except that if at any
time during the one year period, the terms of our outstanding debt and preferred
stock do not prohibit the redemption and we have sufficient funds on hand to
consummate the redemption, we must consummate the redemption at that time. NBC
may not exercise Warrant A, Warrant B or its right to purchase shares of Class B
common stock beneficially owned by Mr. Paxson during the one year redemption
period.

NBC also has the right to require that we redeem any Series B preferred
stock and Class A common stock issued upon conversion of the Series B preferred
stock then held by NBC upon the occurrence of various events of default (a
"Default Redemption"). If NBC exercises this right, we will have up to 180 days
to
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consummate the redemption, except that if at any time during the 180 day period,
the terms of our outstanding debt and preferred stock do not prohibit the
redemption and we have sufficient funds on hand to consummate the redemption, we
must consummate the redemption at that time. NBC may not exercise Warrant A,
Warrant B or its right to purchase shares of Class B common stock beneficially
owned by Mr. Paxson during the 180 day redemption period.

Our ability to effect any redemption is restricted by the terms of our
outstanding debt and preferred stock. Were NBC to exercise its right to demand
that we redeem its Series B preferred stock, in order to be able to do so we
would need to not only raise sufficient cash to fund payment of the redemption
price, but would also need to obtain the consents of the holders of our
outstanding debt and preferred stock or repay, redeem or refinance these
securities in a manner that obviated the need to obtain the consents of the
holders. Alternatively, we would need to identify a third party willing to
purchase NBC's Series B preferred stock directly from NBC or to enter into a
merger, acquisition or other transaction with us as a result of which NBC's
Series B preferred stock would be redeemed or acquired at the stated redemption
price.

Should we fail to effect an Involuntary Redemption within one year after
NBC has exercised its right to demand that we redeem its securities, NBC will
again be permitted to exercise Warrant A and Warrant B and its right to acquire
Mr. Paxson's Class B common stock, and generally will be permitted to transfer,
without restriction, any of our securities acquired by it, its right to acquire
Mr. Paxson's Class B common stock, the contractual rights described below, and
its other rights under the related transaction agreements, provided that Warrant
A, Warrant B and the right to acquire Mr. Paxson's Class B common stock shall
expire, to the extent unexercised, 30 days after any such transfer.

Should we fail to effect a Default Redemption within 180 days after NBC has
exercised its right to require us to redeem its securities, NBC will have 180
days within which to exercise Warrant A and Warrant B and its right to acquire
Mr. Paxson's Class B common stock, and generally will be permitted to transfer,
without restriction, any of our securities acquired by it, its right to acquire
Mr. Paxson's Class B common stock, the contractual rights described below, and
its other rights under the related transaction agreements, provided that Warrant
A, Warrant B and the right to acquire Mr. Paxson's Class B common stock shall
expire, to the extent unexercised, 30 days after any such transfer. If NBC does
not effect any of these transactions within the 180 day period, we will have the
right, for 30 days, to redeem NBC's securities. If we do not effect a redemption
during this period, NBC will have the right to require us to effect, at our
option, either a public sale or a liquidation of our company and may participate
as a bidder in any such transaction. If the highest bid in any public sale of
our company would be insufficient to pay NBC the redemption price of its
securities, NBC will have a right of first refusal to purchase our company for
the highest bid amount. NBC will not be permitted to exercise Warrant A, Warrant
B or its right to acquire Mr. Paxson's Class B common stock during the public
sale or liquidation process.

The investment agreement also provides that we must obtain the consent of
NBC for various actions, including:

- approval of annual budgets;

- expenditures materially in excess of budgeted amounts;

- material acquisitions of programming;

- material amendments to our certificate of incorporation or bylaws;

- material asset sales or purchases, including, in some cases, sales of our
television stations;

- business combinations where we would not be the surviving corporation or
as a result of which we would experience a change of control;

- issuances or sales of any capital stock, with some exceptions;

- stock splits or recombinations;

9

- any increase in the size of our board of directors other than any
increase resulting from provisions of our outstanding preferred stock of
up to two additional directors; and

- joint sales, joint services, time brokerage, local marketing or similar
agreements as a result of which our stations with national household
coverage of 20% or more would be subject to those agreements.

In connection with its investment in us, we also granted NBC various rights
with respect to our broadcast television operations, including:

- the right to require the conversion of our television stations to NBC
network affiliates, subject to various conditions;

- a right of first refusal on proposed sales of television stations; and

- the right to require our television stations to carry NBC network
programming that is preempted by NBC network affiliates.

We also entered into a stockholders agreement with NBC, Mr. Paxson and
entities controlled by Mr. Paxson under which we are permitted (but not
required) to nominate persons named by NBC for election to our board of
directors upon request by NBC if NBC determines that its nominees are permitted
under the Communications Act and FCC rules to serve on our board. Mr. Paxson and
his affiliates agreed to vote their shares of common stock in favor of the
election of those persons as our directors. The stockholders agreement further
provides that we will not, without the prior written consent of NBC, enter into
certain agreements or adopt certain plans which would be breached or violated
upon the acquisition of our securities by NBC or its affiliates or would
otherwise restrict or impede the ability of NBC or its affiliates to acquire
additional shares of our capital stock.

We also granted NBC demand and piggyback registration rights with respect
to the shares of Class A common stock issuable upon:

- conversion of the Series B preferred stock;

- conversion of the debentures for which the Series B preferred stock is
exchangeable;

- exercise of the warrants; or

- conversion of the Class B common stock.

In connection with these transactions, we entered into a number of business
arrangements with NBC that were intended to strengthen our operations. As part
of these arrangements and our relationship with NBC:

- NBC provides network advertising sales, marketing and network research
services for PAX TV;

- NBC provides national advertising sales services for a majority of our
stations;

- NBC provides some of its programming, including movies and sporting
events, for broadcast on PAX TV; and

- We have entered into JSAs with NBC with respect to 13 of our stations
serving 11 markets also served by an NBC owned and operated station, and
with 35 independently owned NBC affiliated stations serving our markets.
Under the JSAs, the NBC stations sell all non-network advertising of our
stations and receive commission compensation for those sales, and each of
our stations may carry one hour per day of NBC syndicated programming,
subject to compliance with our family programming content standards.

In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We have asserted that
NBC's proposed acquisition of Telemundo Communications Group, Inc. ("Telemundo
Group") violates the terms of the agreements governing the investment and
partnership between us and NBC. We also made two filings with the FCC, one of
which requests a declaratory ruling as to whether conduct by NBC, including
NBC's influence and apparent control over certain members of our board

10

of directors selected by NBC (all of whom have since resigned from our board),
has caused NBC to have an attributable interest in us in violation of FCC rules
or has infringed upon our rights as an FCC license holder. The second FCC filing
seeks to deny FCC approval of NBC's acquisition of the Telemundo Group's
television stations. In addition, in January 2002, we filed a petition to deny
with the FCC arguing that NBC was ineligible under FCC regulations to acquire
control of television station KNTV-TV, San Jose, California from Granite
Broadcasting Corp. due to NBC's attributable interest in the Company.

The initiation of these proceedings by us casts significant uncertainty
over the future direction of our relationship with NBC. The hearing in the
arbitration proceeding is currently scheduled to occur in April 2002, and we
expect that, under the applicable arbitration rules, the arbitrator will render
a decision by the end of May 2002. If we do not prevail in the arbitration
proceeding, and our position expressed in the FCC filings is not accepted by the
FCC, NBC could consummate the acquisition of the Telemundo Group and thereby
render it highly unlikely that NBC would be able to acquire control of our
company under the terms of the existing agreement, while at the same time
retaining its investment in us and its ability to exercise a significant
influence over our operations.

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, which has a direct effect on advertising rates.
Our PAX TV programming competes for audience share in all of our markets with
the programming offered by other broadcast networks, and competes for audience
share in our stations' respective market areas with the programming offered by
non-network affiliated television stations. Our other programming also competes
for audience share in our stations' respective market areas principally with the
non-network programming offered by other 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 30) 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. Television broadcast advertising rates are based upon:

- the size of the market in which the station operates;

- a program's popularity among the viewers that an advertiser wishes to
attract;

- the number of advertisers competing for the available time;

- the demographic makeup of the market served by the station;

- the availability of alternative advertising media in the market area; and

- development of projects, features and programs that tie advertiser
messages to programming.

PAX TV competes for advertising revenues principally with other television
broadcast networks and to some degree with other nationally distributed
advertising media, such as print publications. During the annual "up front"
process, broadcast networks seek to obtain advance commitments from advertisers
to purchase network commercial air time, and competition occurs principally on
the basis of the advertisers' perception of the anticipated popularity (i.e.,
ratings) of a network's programming for the upcoming broadcast season and the
demographic groups to which the programming is expected to appeal.

11

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. Generally, a television
station in one market does not compete with stations in other market areas.

FEDERAL REGULATION OF BROADCASTING

The FCC regulates television broadcast stations under the Communications
Act. The following is a brief summary of certain provisions of the
Communications Act and the rules of the FCC.

License Issuance and Renewal. The Communications Act provides that a
broadcast station license may be granted to an applicant if the public interest,
convenience and necessity will be served thereby, subject to certain
limitations. Television broadcast licenses generally are granted and renewed for
a period of eight years. Interested parties including members of the public may
file petitions to deny a license renewal application but competing applications
for the license will not be accepted unless the current licensee's renewal
application is denied. The FCC is required to grant a license renewal
application if it finds that the licensee (1) has served the public interest,
convenience and necessity; (2) has committed no serious violations of the
Communications Act or the FCC's rules; and (3) has committed no other violations
of the Communications Act or the FCC's rules which would constitute a pattern of
abuse. Our licenses are subject to renewal at various times between 2004 and
2007.

General Ownership Matters. The Communications Act requires the prior
approval of the FCC for the assignment of a broadcast license or the transfer of
control of a corporation or other entity holding a license. In determining
whether to approve such an assignment or transfer of control, the FCC considers,
among other things, the financial and legal qualifications of the prospective
assignee or transferee, including compliance with rules limiting the common
ownership of certain attributable interests in broadcast, cable and newspaper
properties.

The FCC's multiple ownership rules may limit the acquisitions and
investments that we may make or the investments that others may make in us. The
FCC generally applies its ownership limits to attributable interests held by an
individual, corporation, partnership or other association or entity. In the case
of corporations holding or controlling broadcast licenses, the interests of
officers, directors and those who, directly or indirectly, have the right to
vote five percent or more of the corporation's stock are generally attributable.
The FCC treats all partnership and limited liability company interests as
attributable, except for those interests that are insulated under FCC rules and
policies. For insurance companies, certain regulated investment companies and
bank trust departments that hold stock for investment purposes only, stock
interests become attributable with the ownership of 20% or more of the voting
stock of the corporation holding or controlling broadcast licenses.

In December 2000, the FCC eliminated its "single majority shareholder"
exception to its attribution rules prospectively. Under that exception, the FCC
generally did not treat any minority voting shareholder as attributable if one
person or entity (such as Mr. Paxson in the case of our company) held more than
50% of the combined voting power of the common stock of a company holding or
controlling broadcast licenses. Under the FCC's new rule, a person who acquired
a minority voting interest in a company holding or controlling broadcast
licenses before December 14, 2000, will not have that interest treated as
attributable for purposes of the FCC's ownership rules so long as a majority
shareholder of the corporation (such as Mr. Paxson in the case of our company)
continues to hold more than 50% of the combined voting power of the corporation.
This exception for a minority interest acquired before December 14, 2000, will
be permanent until the interest is transferred or assigned. We filed with the
FCC a petition for reconsideration of the decision, and in March 2001, the U.S.
Court of Appeals for the D.C. Circuit reversed and remanded a decision by the
FCC to eliminate the single majority shareholder exception as it applies to the
ownership of cable systems. On December 14, 2001, the FCC suspended the repeal
of the single majority shareholder exception for broadcast attribution rules
pending resolution of certain ownership issues being considered in a separate
rulemaking

12

proceeding. We cannot predict at this time the rules the FCC may adopt or how
they will affect the single majority shareholder exception as it applies to the
ownership of broadcast stations.

The FCC treats as attributable debt and equity interests which combined
exceed 33% of a station licensee's total assets, 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, cable
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. Under FCC rules, no individual or
entity may have an attributable interest in television stations reaching more
than 35% of the national television viewing audience. The FCC applies a 50%
discount for purposes of calculating a UHF station's audience reach. If a
broadcast licensee has an attributable interest in a second television station
in any of its markets, the audience for that market will not be counted twice
for the purposes of determining compliance with the national cap. The
constitutionality of the television national ownership rule was challenged in
federal court and in February 2002, the U.S. Court of Appeals for the District
of Columbia Circuit held that the reasons the FCC gave for deciding not to
repeal or modify its national ownership cap rule as part of its biennial rules
review were inadequate and therefore not in compliance with a provision of the
Communications Act that requires the FCC to review its rules every two years and
to repeal or modify any that are no longer in the public interest. The court did
not find the rule to be unconstitutional, but instructed the FCC to consider
what further action it should take with respect to the 35% cap and what reasons
it will provide to support its decision.

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
of the stations is located in a separate designated market area, or DMA. A party
may own two television stations in the same DMA so long as (1) at least eight
independently owned and operating full-power commercial and non-commercial
television stations remain in the market at the time of acquisition and (2) at
least one of the two stations is not among the four top-ranked stations in the
market based on audience share. Without regard to numbers of independently owned
television stations, 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. The FCC's
television duopoly rule has been challenged by another broadcasting company in a
proceeding currently pending in the U.S. Court of Appeals for the District of
Columbia Circuit.

Television Time Brokerage and Joint Sales Agreements. Over the past few
years, a number of television stations, including certain of our television
stations, have entered into agreements commonly referred to as time brokerage
agreements and joint sales agreements. Under these agreements, separately owned
and licensed stations agree to function cooperatively subject to the
requirements of antitrust laws and compliance with the FCC's rules and policies,
including the requirement that each party maintain independent control over the
programming and operations of its own station. The FCC's attribution and
television duopoly rules apply to time brokerage agreements in which one station
brokers more than 15% of the broadcast time per week of another station with an
overlapping Grade B contour. Time brokerage agreements that were in effect on
August 5, 1999, are exempt from the television duopoly rule for a limited period
of time of either two or five years, depending on the date of the time brokerage
agreement.

Alien Ownership. Under the Communications Act, no FCC broadcast license
may be held by a corporation of which more than one-fifth of its capital stock
is owned or voted by aliens or their representatives or by a foreign government
or its representative, or by any corporation organized under the laws of a
foreign country (collectively "Aliens"). Furthermore, the Communications Act
provides that no FCC broadcast license may be granted to any corporation
controlled by any other corporation of which more than one-fourth of its capital
stock is owned of record or voted by Aliens if the FCC should find that the
public interest would be served by the refusal of the license.

13

Cross Ownership Rules. The FCC's rules prohibit a party from holding
attributable interests in (1) a television station and a cable television
system, or (2) a television or radio station and a daily newspaper, in each
case, in the same local market. The FCC rules also limit the number of commonly
owned radio and television stations in the same market depending upon the number
of independently owned media voices in that market. In February 2002, the U.S.
Court of Appeals for the District of Columbia Circuit held that there was no
basis for the FCC's refusal to repeal or modify the rule prohibiting local cross
ownership of television stations and cable television systems. The court's
decision vacating the rule will take effect on April 5, 2002, unless any party
files a petition for rehearing by that date, in which case the effectiveness of
the decision is likely to be postponed pending the outcome of the petition for
rehearing. While the FCC will be free to undertake a rulemaking proceeding to
adopt a new version of the rule, unless and until it does adopt a new rule,
there will be no prohibition on television station and cable television system
cross ownership in local markets. The FCC has issued a notice that it intends to
consider proposing new rules modifying the prohibition on broadcast station and
daily newspaper cross ownership. We are unable to predict the outcome of the
foregoing or the effect, if any, changes would have upon our business.

Dual Network Rule. FCC rules permit any of the four major networks (ABC,
CBS, Fox or NBC) to acquire the UPN or WB networks. Nothing in the rules
presently prohibits one of the four major networks from establishing a new
network or from purchasing a network ranking below the top six networks. The
dual network rule continues to prohibit a merger between any two or more of the
top four networks.

Biennial Review of Broadcast Ownership Rules. The Communications Act
requires the FCC to undertake a biennial review of its broadcast ownership
rules. In the review completed in June 2000, the FCC declined to amend the
national television ownership and the local television station and cable
television system cross ownership rules, but stated it would begin rule making
proceedings to relax the standards for waiving the daily newspaper/broadcast
cross ownership rule. In February 2002, the U.S. Court of Appeals for the
District of Columbia Circuit held that the reasons the FCC gave for declining to
amend the national ownership cap rule and its failure to repeal or modify the
rule prohibiting local television station and cable television system cross
ownership were not in compliance with the biennial review provisions of the
Communications Act. The court vacated the local television station and cable
television system cross ownership prohibition and instructed the FCC to consider
what further action it should take with respect to the 35% national ownership
cap. The FCC has issued a notice of proposed rule making to determine whether
and to what extent the daily newspaper/broadcast cross ownership rules should be
revised. Our expansion of our broadcast operations on both a local and national
level and the level of competition we face will continue to be subject to the
FCC's ownership rules and any changes that may be adopted. We cannot predict the
ultimate outcome of the FCC's ownership proceedings or the effect of these or
other changes on our business operations.

Programming and Operation. The Communications Act requires broadcasters to
present programming that responds to community problems, needs and interests and
to maintain certain records demonstrating its responsiveness. Stations also must
follow various 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.

The FCC's rules limit the amount of advertising in television programming
designed for children 12 years of age and under and require that television
broadcast stations air specified amounts of programming during specified time
periods to serve the educational and informational needs of children 16 years of
age and under.

The Communications Act and FCC rules also regulate the broadcasting of
political advertisements by television stations. Stations must provide
"reasonable access" for the purchase of time by legally qualified candidates for
federal office and "equal opportunities" for the purchase of equivalent amounts
of comparable broadcast time by opposing candidates for the same elective
office. Before primary and general elections, legally qualified candidates for
elective office may be charged no more than the station's "lowest unit charge"
for the same class of advertisement, length of advertisement and daypart.

The U.S. Congress presently is considering amending the political
advertising law by changing the statutory definition of "lowest unit charge" in
a manner which would require television stations to sell time to

14

federal political candidates at lower rates. We are unable to predict whether
changes to the law will be enacted or the effect, if any, such changes would
have upon our business.

Equal Employment Opportunity Requirements. In early 2000, the FCC adopted
revised rules requiring broadcast licensees to develop and implement programs
designed to promote equal employment opportunities and submit reports on these
matters to the FCC. The United States Court of Appeals for the District of
Columbia Circuit has struck down the recruitment, outreach and reporting
portions of these rules as unconstitutional and the FCC has suspended the
enforcement of the rules pending further developments. In December 2001, the FCC
issued a rulemaking notice proposing new equal employment opportunity rules
requiring broadcast licensees to affirmatively recruit minorities and imposing
certain record-keeping and reporting requirements. The general prohibition
against discrimination in employment remains in effect.

"Must Carry"/Retransmission Consent Regulations. Under the Communications
Act, every local commercial television broadcast stations must elect once every
three years to require a cable system to carry the station subject to certain
exceptions, or to negotiate for retransmission consent to carry the station.
Stations' "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 a
broadcast station and the signal quality of the station at the cable system's
headend. Alternatively, if a broadcaster chooses to exercise retransmission
consent rights, it can prohibit cable systems from carrying its signal or grant
the cable system consent to retransmit the broadcast signal for a fee or other
consideration. Our television stations have generally elected the "must carry"
alternative. Our elections of retransmission or "must carry" status will
continue until the next election period, which commences on January 1, 2003.

In an ongoing rulemaking proceeding, the FCC is considering rules to govern
the obligations of cable television systems to carry the analog and digital
television, or DTV, signals of local television stations or to obtain
retransmission consent to carry those signals during and following the
transition from analog to DTV broadcasting. In an initial order in the
proceeding, the FCC tentatively concluded that broadcasters would not be
entitled to mandatory carriage of both their analog and DTV signals and that
broadcasters with multiple DTV video programming streams would be required to
designate a single, primary video stream eligible for mandatory carriage.
Alternatively, television licensees may negotiate with cable television systems
for carriage of their DTV signal in addition to their analog signal under
retransmission consent.

Under retransmission consent agreements, our television stations are also
carried as distant signals on cable systems which are located outside of the
stations' markets. Cable systems must remit a compulsory license royalty fee to
the United States Copyright Office to carry our stations in these 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, which we refer to as SHVIA, a satellite carrier
must obtain retransmission consent before carrying a television station, and
beginning January 1, 2002, a satellite carrier delivering the signal of any
local television station will be required to carry all stations licensed to the
carried station's local market. The FCC recently adopted rules implementing
SHVIA that are similar to the must-carry and retransmission consent rules that
apply to cable television systems. Under the new rules, stations may elect
either mandatory carriage or negotiation for retransmission consent. The first
election period is four years, with subsequent election periods set at three
years to coincide with the cable election period. We have elected, effective
January 1, 2002, mandatory carriage with respect to our stations. Two satellite
television providers and a satellite broadcasting trade association have
instituted litigation challenging the constitutionality of the statutory
satellite "must carry" requirements. In June 2001 a federal district court
upheld the constitutionality of the federal law and in December 2001 the U.S.
Court of Appeals for the Fourth Circuit affirmed this decision. The proponents
of this litigation have petitioned the U.S. Supreme Court for review of this
decision.

15

Digital Television Service. The FCC has adopted rules for the
implementation of DTV service, a technology which is intended to improve the
quality of television broadcast signals. Each (i) full service television
licensee, (ii) permittee authorized as of October 24, 1991 and (iii) entity
awarded a license for a station for which an application for a construction
permit was on file as of October 24, 1991 was allotted a second channel for its
DTV operations. Each such licensee and permittee must return one of its two
channels at the end of the DTV transition period currently scheduled to end on
December 31, 2006. The transition period could be extended in certain areas
depending generally on the level of DTV market penetration or if the FCC or
Congress changes the schedule. Except for stations operating analog facilities
in the 700 MHz spectrum band and those stations 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. Each of our stations applied for a DTV construction
permit before November 1, 1999. In November 2001 the FCC modified its digital
television transition rules to provide that a station would be in compliance
with its build-out requirement, without constructing the full authorized
facilities, so long as, by May 1, 2002, it constructed digital facilities
capable of serving its community of license with a signal of requisite strength.
The date by which digital facilities replicating a station's analog service area
must be constructed will be set by the FCC at a later date. The FCC, by order
released September 17, 2001, authorized analog stations operating in the 700 MHz
spectrum band to operate their analog signal on the channel assigned for digital
service and to delay the institution of digital service until December 31, 2005,
or later than December 31, 2005 if it can be demonstrated that less than 70% of
the television households in the station's market are capable of receiving
digital broadcast signals. Broadcasters given a digital channel allocation
within the 700 MHz band may forego the use of that channel for digital service
until December 31, 2005, or later than December 31, 2005 if it can be
demonstrated that less than 70% of the television households in the station's
market are capable of receiving digital broadcast signals. Broadcasters left
with a single-channel allotment as a result of clearing the 700 MHz spectrum
band will retain the interference protection associated with their digital
television channel allotment for a period of 31 months after beginning to
transmit in digital.

The FCC has adopted rules permitting DTV licensees to offer "ancillary or
supplementary services" on their DTV channels, so long as such services are
consistent with the FCC's DTV standards, do not derogate required DTV services,
and are regulated in the same manner as similar non-DTV services. The FCC's
rules require that DTV licensees pay a fee (based on revenues) for any
subscription-based services that are provided.

The FCC also 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.

Class A Television. In November 1999, Congress passed the Community
Broadcasters Protection Act of 1999, which directs the FCC to offer a new Class
A status to qualifying low power television stations. The FCC's rules grant
Class A stations a measure of interference protection against full power and
other low power television stations. The protected status of Class A stations
could limit our ability to modify our television facilities in the future and
could affect any pending applications for new or modified facilities to the
extent that changes proposed by us would create interference to qualifying Class
A stations. Class A stations will not be protected from interference from DTV
stations proposing to maximize their DTV service, provided the DTV stations
notified the FCC of their intent to maximize facilities no later than December
31, 1999, and filed a maximization application by May 1, 2000.

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 our 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 impact, if any, the implementation of any of these
proposals or changes might have on our business.
16

EMPLOYEES

As of December 31, 2001, we had 609 full-time employees and 63 part-time
employees. The substantial majority of our employees are not 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
commercial advertising time in the second and fourth calendar quarters and spend
relatively less during the first calendar quarter of each year.

TRADEMARKS AND SERVICE MARKS

We have 14 registered trademarks and service marks and pending applications
for registration of another 52 trademarks and service marks. We do not own any
patents or have any pending patent applications.

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.

High Level of Indebtedness; Restrictions Imposed by Terms of Indebtedness and
Preferred Stock

We are highly leveraged. At December 31, 2001, we had $529.2 million of
total debt and redeemable securities with an aggregate liquidation preference of
approximately $1,195.8 million. We may incur additional indebtedness to finance
capital expenditures and for certain other corporate purposes. Our ability to
incur indebtedness is subject to restrictions in the terms of our senior credit
facility and the indentures governing our senior subordinated notes, as well as
the terms of our outstanding preferred stock.

The level of our indebtedness and redeemable preferred stock could have
important consequences to us, including that: (i) a significant amount of our
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) our ability to obtain additional financing
may be limited; (iii) our leveraged position and covenants contained in our
senior credit facility, the indentures and the terms of our preferred stock (or
any replacements thereof) could limit our ability to expand and make capital
expenditures and acquisitions; and (iv) our level of indebtedness could make us
more vulnerable to economic downturns, limit our ability to withstand
competitive pressures and limit our flexibility in reacting to changes in our
industry and economic conditions generally. Many of our competitors currently
operate on a less leveraged basis and may have significantly greater operating
and financing flexibility than us.

The senior credit facility, the indentures and the preferred stock contain
covenants that restrict, among other things, our ability to incur additional
indebtedness, incur liens, make investments, pay dividends or make other
restricted payments, consummate asset sales, consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. Currently, these covenants prevent us from
incurring additional indebtedness other than limited amounts of certain types of
permitted indebtedness (e.g., purchase money indebtedness), although refinancing
of existing debt is not prohibited. If we default under the senior credit
facility, our lenders may terminate their lending commitments and declare the
17

indebtedness under the senior credit facility immediately due and payable. If
this were to occur, there is no assurance that we would have sufficient assets
to pay indebtedness then outstanding. If we are unable to service our
indebtedness or satisfy our dividend or redemption obligations with respect to
our outstanding preferred stock, 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 effected on satisfactory terms, if at all.

We have a history of operating losses and negative cash flow and we may not
become profitable in the future.

We have incurred losses from continuing operations in each fiscal year
since our inception. As a result of these net losses, for the years ended
December 31, 2001, 2000 and 1999, our earnings were insufficient to cover
combined fixed charges and preferred stock dividend requirements by
approximately $340.4 million, $390.7 million and $369.6 million, respectively.
These amounts include non-cash preferred stock dividends of $75.1 million and
$65.5 million in 2000 and 1999, respectively, which resulted from our issuance
of convertible preferred stock to NBC with a conversion price per share of Class
A common stock that was less than the public trading price of the Class A common
stock on the closing date of the preferred stock sale. We expect to continue to
experience net losses in the foreseeable future, principally due to interest
charges on outstanding debt (and the debentures into which our outstanding
preferred stock can be exchanged, if issued), dividends on outstanding preferred
stock, and non-cash charges for depreciation and amortization expense related to
fixed assets and intangible assets relating to acquisitions. Future net losses
could be greater than those we have experienced in the past.

Our adjusted EBITDA has been insufficient to cover our operating expenses,
debt service requirements and other cash commitments in each of the years ended
December 31, 2001, 2000 and 1999. Our adjusted EBITDA for these periods was
$18.1 million, negative $4.9 million and negative $45.8 million, respectively.
We have financed our operating cash requirements, as well as our capital needs,
during these periods with the proceeds of financing activities, including the
issuance of preferred stock and additional borrowings. We cannot assure you that
we will generate sufficient operating cash flow in the future to pay our debt
service requirements on the notes or that we will be able to obtain sufficient
additional financing to meet our debt service requirements on terms acceptable
to us, or at all.

We cannot predict whether PAX TV will be successful.

We launched PAX TV on August 31, 1998, and have a relatively limited
history of operating PAX TV. The experiences of other new 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. The network television industry has been dominated for many years
by ABC, NBC and CBS, and only recently have additional broadcast networks
entered the market. Although we believe that our approach is unique among
broadcast television networks, in that we own and operate the stations reaching
most of the television households reached by PAX TV, our business model is
unproven. We cannot assure you that PAX TV will gain sufficient market
acceptance to be profitable or otherwise be successful.

If our television programming does not attract sufficient numbers of viewers in
desirable demographic groups, our advertising revenue could decrease.

Our success depends upon our ability to generate advertising revenues,
which constitute substantially all of our operating revenues. Our ability to
generate advertising revenues in turn largely depends upon our ability to
provide programming which attracts sufficient numbers of viewers in desirable
demographic groups to generate audience ratings that advertisers will find
attractive. While PAX TV audience ratings and our advertising revenues generally
have been increasing since the launch of PAX TV on August 31, 1998, we cannot
assure you that our programming will attract sufficient targeted viewership or
that, whether or not it
18

achieves favorable ratings, we will be able to generate enough advertising
revenues to achieve profitability. Our ratings depend partly upon unpredictable
volatile factors beyond our control, such as viewer preferences, competing
programming and the availability of other entertainment activities. A shift in
viewer preferences could cause our programming not to gain popularity or to
decline in popularity, which could adversely impact our advertising revenues. We
may not be able to anticipate and react effectively to shifts in viewer tastes
and interests in our markets or to generate sufficient demand and market
acceptance for our programming. Further, we acquire rights to our syndicated
programming under multi-year commitments, and it is difficult to accurately
predict how a program will perform in relation to its cost. In some instances,
we must replace programs before their costs have been fully amortized, resulting
in write-offs that increase our operating costs. We cannot assure you that our
programming costs will not increase to a degree which may materially adversely
affect our operating results. In addition, we incur production, talent and other
ancillary costs to produce original programs for PAX TV. We cannot assure you
that our original programming will generate advertising revenues in excess of
our programming costs.

Our joint sales agreements may not improve the operations of our television
stations, and this could materially increase our costs to operate those
stations or materially reduce the revenues we receive from those stations.

While we believe that each of our stations which operates under a JSA
should experience an improvement in overall operating performance through a
combination of improved revenues and operating cost reductions, we cannot assure
you that we will realize any overall operating improvements. The achievement of
operating improvements at our stations operating under JSAs depends to a
substantial degree on the performance of our JSA partners, over which we have no
control. In addition, if we elect to terminate a JSA in a particular market, we
may incur significant costs to transfer the JSA to another broadcast television
station operator or to resume operating the station ourselves.

If advertisers have to pay higher residual payments to the members of the
actors guilds that they use in spot advertisements on our network, advertisers
may reduce or discontinue their advertising on our network.

Approximately 33% of our 2001 revenues were derived from network commercial
spot advertisements aired on PAX TV. We believe substantially all of our network
spot advertisements were produced by advertisers or their advertising agencies
using performers who are members of the Screen Actors Guild and the American
Federation of Television and Radio Artists. When commercials are aired on
broadcast and cable television networks, the performers are entitled to residual
payments from the advertisers, which are determined under collective bargaining
agreements between the guilds and the advertising community. In the fall of
2000, after the expiration of the then effective guild agreements and a
prolonged strike by performers, the guilds and the advertising community entered
into new guild agreements. Under both the old guild agreements and the current
guild agreements, the residual payments required to be paid by advertisers in
connection with advertisements aired on cable networks are substantially lower
than the residuals required to be paid in connection with advertising aired on
broadcast networks. To date, we believe that a substantial portion of the
network spot advertising time on PAX TV was purchased by advertisers under the
assumption that the residual payment obligations the advertising community
incurred in connection with airing these spots were to be calculated under the
rates applicable to cable networks, not those applicable to other broadcast
networks. Although the old guild agreements did not specify how residual
payments were to be calculated for advertisements aired on PAX TV, the current
guild agreements include provisions establishing residual rates that are
applicable to network advertisements aired on PAX TV and that are substantially
lower than the rates applicable to broadcast networks but still higher, in most
circumstances, than the rates applicable to cable networks. As a result of this
development, some advertisers have informed us that our network advertising
spots are no longer as attractive as those of cable networks because of the
relatively higher residual payments applicable to PAX TV under the current guild
agreements. Because of these higher residual payments, some advertisers may be
unwilling to purchase advertising time on PAX TV unless we lower our rates or
otherwise provide financial compensation to them. We are unable to predict the
magnitude of the effect of this development on our network spot advertising
revenues.
19

Change of Control

A "change of control" (as defined in our senior credit facility)
constitutes an event of default under the senior credit facility. In the event
of a "change of control" (as defined in the indentures governing our outstanding
senior subordinated notes), we will be required to offer to purchase all of the
outstanding notes at a price equal to 101% of the principal amount or accreted
value, as the case may be, thereof. In the event of a "change of control" (as
defined with respect to our outstanding preferred stock), we will be required to
offer to purchase all of the shares of these preferred stocks then outstanding
at 101% (100% for the Series A preferred stock) of the then effective
liquidation preference thereof, plus accumulated and unpaid dividends.
Generally, under these instruments a change of control will be deemed to have
occurred if any person, other than Mr. Paxson and his affiliates or, with
respect to the senior credit facility and our outstanding senior subordinated
notes, NBC and its affiliates, acquires control of a majority of the voting
power of our outstanding capital stock or acquires more than one-third of the
outstanding voting power and possesses voting power in excess of that possessed
by Mr. Paxson and his affiliates (or, with respect to the senior credit facility
and our outstanding senior subordinated notes, NBC and its affiliates), or there
is a merger and we are not the surviving corporation and our stockholders do not
own at least a majority of the outstanding common stock of the surviving
corporation. Our repurchase of our outstanding senior subordinated notes or the
redemption of any of our preferred stock upon a change of control could also
cause a default under the senior credit facility. We can provide no assurance
that in the event of a change of control, we will have access to sufficient
funds or will be contractually permitted under the terms of our outstanding debt
to repay our debt under the senior credit facility, repay our outstanding senior
subordinated notes or pay the required purchase price for any shares of
preferred stock tendered by holders. Were this to occur, we could be required to
seek third party financing to the extent we did not have sufficient available
funds to meet our purchase obligations, and we can provide no assurance that we
would be able to obtain this financing on favorable terms or at all.

NBC's exercise of its rights to exert significant influence upon our operations
could adversely affect our business.

In September 1999, we entered into a series of agreements with NBC under
which it invested $415 million in our company. The agreements with NBC provided,
among other things, that we must obtain NBC's consent for:

- approval of annual budgets;

- expenditures materially in excess of budgeted amounts;

- material acquisitions of programming;

- material amendments to our certificate of incorporation or bylaws;

- material asset sales or purchases, including, in some cases, sales of our
television stations;

- business combinations where we would not be the surviving corporation or
as a result of which we would experience a change of control;

- issuances or sales of any capital stock, with some exceptions;

- stock splits or recombinations;

- any increase in the size of our board of directors other than an increase
resulting from provisions of our outstanding preferred stock of up to two
additional directors; and

- joint sales, joint services, time brokerage, local marketing or similar
agreements as a result of which our stations with national household
coverage of 20% or more would be subject to those agreements.

As a result of our agreements with NBC, NBC is in a position to exert
significant influence over our management and policies and to prevent us from
taking actions which our management may otherwise desire to take. NBC may have
interests that differ from those of our other stockholders and debtholders.

20

In connection with its investment in us, NBC acquired rights to purchase
more of our securities from us and the right, subject to various conditions, to
purchase all of the shares of our Class B common stock owned by Mr. Paxson. The
exercise of these rights would result in NBC acquiring control of our company.

The outcome of our arbitration proceeding against NBC and our FCC filings with
respect to NBC could adversely affect our business.

In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We have asserted that
NBC's proposed acquisition of the Telemundo Group violates the terms of the
agreements governing the investment and partnership between us and NBC. We also
made two filings with the FCC, one of which requests a declaratory ruling as to
whether conduct by NBC, including NBC's influence and apparent control over
certain members of our board of directors selected by NBC (all of whom have
since resigned from our board), has caused NBC to have an attributable interest
in us in violation of FCC rules or has infringed upon our rights as an FCC
license holder. The second FCC filing seeks to deny FCC approval of NBC's
acquisition of the Telemundo Group's television stations. In addition, in
January 2002, we filed a petition to deny with the FCC arguing that NBC was
ineligible under FCC regulations to acquire control of television station
KNTV-TV, San Jose, California from Granite Broadcasting Corp. due to NBC's
attributable interest in the Company.

NBC's acquisition of the Telemundo Group's television stations would create
serious additional regulatory obstacles to NBC's ability to acquire control of
us. Should NBC complete its acquisition of the Telemundo Group, it is highly
unlikely that NBC would be able to obtain regulatory approval of its acquisition
of control of us without significant changes in FCC rules and our agreement to
divest some of our most significant television station assets, which in turn
could have a material adverse effect upon the value of our company. These
factors may substantially reduce the likelihood of NBC acquiring more of our
shares and control of our company. Should the FCC find that NBC has an
attributable interest in our television stations, the FCC may require NBC to
divest its investment in us, and NBC will have the right to demand that we
redeem its investment and if we cannot do so within one year, NBC will be free
to transfer its investment and its related rights to a third party selected by
NBC in its discretion. The hearing in the arbitration proceeding is currently
scheduled to occur in April 2002, and we expect the arbitrator to render a
decision by the end of May 2002. We cannot provide assurance that the outcome of
the proceeding will be favorable to us or that either of our FCC filings will be
resolved favorably to us. Should the arbitration and FCC proceedings be
protracted, our senior management will be required to divert significant time
and attention to these proceedings and we may incur significant legal and other
expenses, which could have a material adverse effect upon us. Further, we cannot
predict the effect that the outcome of these proceedings will have upon our
business.

We have significant operating relationships with NBC which have been
developed since NBC's investment in us in September 1999. NBC serves as our
exclusive sales representative to sell most of our PAX TV network advertising
and is the exclusive national sales representative for most of our stations. We
have entered into JSAs with NBC owned or NBC affiliated stations with respect to
48 of our television stations. Each JSA typically provides for our JSA partner
to serve as our exclusive sales representative to sell our local station
advertising and for many of our station's operations to be integrated and
co-located with those of the JSA partner. Should the outcome of our arbitration
proceeding against NBC or our FCC filing seeking a declaratory ruling as to
whether NBC has an attributable interest in our stations require the unwinding
or termination of some or all of these operating relationships, or should NBC or
the NBC affiliates elect not to renew the agreements under which these operating
relationships have been implemented, we could be required to incur significant
costs to resume performing the advertising sales and other operating functions
currently performed by NBC and our JSA partners, including the expense of
re-establishing office and studio facilities separate from those of the JSA
partners, or to transfer performance of these functions to another broadcast
television station operator. Our network and station revenues could also be
adversely affected due to the disruption of our advertising sales efforts that
could result from the unwinding of the JSAs. The unwinding or termination of
some or all of our JSAs could have a materially adverse effect upon us.

21

We may not be able to redeem our securities held by NBC were NBC to demand that
we do so and this could have adverse consequences for us.

NBC has the right, at any time that the FCC renders a final decision that
NBC's investment in us is "attributable" to NBC (as that term is defined under
applicable rules of the FCC), or for a period of 60 days beginning on September
15, 2002 and on each September 15 after 2002, to demand that we redeem, or
arrange for a third party to acquire, any shares of our Series B preferred stock
then held by NBC. In connection with the FCC filings described above under "The
outcome of our arbitration proceeding against NBC and our FCC filings with
respect to NBC could adversely affect our business", we have requested a
declaratory ruling from the FCC as to whether NBC has an interest in us that is
"attributable" to NBC. Our ability to effect any redemption is restricted by the
terms of our outstanding debt and preferred stock. NBC also has the right to
demand that we redeem any Series B preferred stock and Class A common stock
issued upon conversion of the Series B preferred stock then held by NBC upon the
occurrence of various events of default. Should we fail to effect a redemption
within prescribed time periods, NBC generally will be permitted to transfer,
without restriction, any of our securities acquired by it, its right to acquire
Mr. Paxson's Class B common stock, the contractual rights described above, and
its other rights under the related transaction agreements. Should we fail to
effect a redemption triggered by an event of default on our part within 180 days
after demand, NBC will have the right to exercise in full its existing warrants
to purchase shares of our Class A common stock and its right to acquire Mr.
Paxson's Class B common stock at reduced prices. If NBC does not exercise these
rights, we will have another 30 day period to effect a redemption. If we then
fail to effect a redemption, NBC may require us to conduct, at our option, a
public sale or liquidation of our assets, after which time NBC will not be
permitted to exercise its rights to acquire more of our securities.

Should NBC exercise any of its redemption rights, we may not have
sufficient funds to pay the redemption price for the securities to be redeemed
and may not be able to identify another party willing to purchase those
securities at the required redemption prices. If we are unable to complete a
redemption, we will be unable to prevent NBC from transferring a controlling
interest in our company to a third party selected by NBC in its discretion or,
in the case of a default by us, requiring us to effect a public sale or
liquidation of our assets. The occurrence of any of these events could have a
material adverse effect upon us.

We could be subject to a material tax liability if the IRS successfully
challenges our position regarding the 1997 disposition of our radio division.

We structured the disposition of our radio division in 1997 in a manner
that management believes will permit us to defer recognizing for income tax
purposes up to approximately $333 million of gain (before deferred taxes). The
IRS could, however, contest our position. Based on the advice of our legal
counsel, our management believes that, were the IRS to challenge our tax
position, it is more likely than not that we would prevail. Should the IRS
successfully challenge our position on these matters, we could be subject to a
material current tax liability. At December 31, 2001, we had net operating loss
carryforwards of approximately $640 million.

We are required by the FCC to abandon the analog broadcast service of 24 of our
full power stations occupying the 700 MHz spectrum and may suffer adverse
consequences if we are unable to secure alternative distribution on reasonable
terms.

Twenty-four of our full power stations are licensed to broadcast by using
either an analog or digital signal on channels 52-69, a portion of the frequency
within the 700 MHz band of broadcast spectrum currently allocated to television
broadcasters by the FCC. As part of the nationwide transition from analog to
digital broadcasting, current FCC rules require that, after December 31, 2006,
provided that 85% of television households in a television market are capable of
receiving digital services, broadcasters give up their analog signal occupying
the 700 MHz spectrum 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. We recently lobbied
Congress and the FCC to delay enforcement of these rules to allow us to develop
and implement strategies to vacate our 700 MHz spectrum and secure alternative
distribution. The FCC, by order released September 17, 2001, authorized analog
stations operating in the 700 MHz band to
22

operate 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 area 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. We cannot predict when we will
abandon, by private agreement or as required by law, the broadcast service of
each of our 24 stations occupying the 700 MHz spectrum. We could suffer adverse
consequences if we are unable to secure alternative simultaneous distribution of
both the analog and digital signals of those stations on reasonable terms and
conditions. We cannot now predict the impact, if any, on our business of the
abandonment of our broadcast television service in the 700 MHz spectrum.

We cannot assure you that we will successfully develop our broadcast station
group's digital television platform.

We have commenced construction of our digital broadcasting facilities and
intend to explore the most effective use of digital broadcast technology for
each of our stations. We cannot assure you, however, that we will derive
commercial benefits from the development 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, including Mr. Paxson and Jeffrey
Sagansky, our Chief Executive Officer. We cannot assure you that we will be able
to retain the services of any of our key executives. If any of these executive
officers were to leave us, our operating results could be adversely affected.

We operate in a very competitive business environment.

We compete for audience share and advertising revenues with other providers
of television programming. Our PAX TV programming competes for audience share
and advertising revenues with the programming offered by other broadcast and
cable networks, and also competes for audience share and advertising revenues in
our stations' respective market areas with the programming offered by
non-network affiliated television stations. Our ability to compete successfully
for audience share and advertising revenues depends upon the popularity of our
programming with viewing audiences in demographic groups that advertisers desire
to reach. Our ability to provide popular programming depends upon many factors,
including our ability to correctly gauge audience tastes and accurately predict
which programs will appeal to viewing audiences, to produce original programs
and purchase the right to air syndicated programs at costs which are not
excessive in relation to the advertising revenue generated by the programming,
and to fund marketing and promotion of our programming to generate sufficient
viewer interest. Many of our competitors have greater financial and operational
resources than we do which may enable them to compete more effectively for
audience share and advertising revenues. All of the existing television
broadcast networks and most of the cable networks have been operating for a
longer period than we have been operating PAX TV, and therefore have more
experience in network television operations than we have which may enable them
to compete more effectively.

Our television stations also compete for audience share with other forms of
entertainment programming, including home entertainment systems and direct
broadcast satellite video distribution services which transmit programming
directly to homes equipped with special receiving antennas and tuners. Further
advances in technology may increase competition for household audiences. Our
stations also compete for advertising revenues with other television stations in
their respective markets, as well as with other advertising media,
23

such as newspapers, radio stations, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems. We
cannot assure you that our stations will be able to compete successfully for
audience share or that we will be able to obtain or maintain significant
advertising revenue.

The television broadcasting industry faces continual technological change
and innovation, the possible rise in popularity of competing entertainment and
communications media, and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade Commission, any of
which could have a material effect on our operations.

Our television stations could be adversely affected by changes in the
television broadcasting industry or a recession in the broader U.S. economy.

The profitability of our television stations is subject to various factors
that influence the television broadcasting industry as a whole, including:

- changes in audience tastes;

- changes in priorities of advertisers;

- new laws and governmental regulations and policies;

- changes in broadcast technical requirements;

- technological changes;

- proposals to eliminate the tax deductibility of expenses incurred by
advertisers;

- changes in the law governing advertising by candidates for political
office; and

- changes in the willingness of financial institutions and other lenders to
finance television station acquisitions and operations.

We cannot predict which, if any, of these or other factors might have a
significant impact on the television broadcasting industry in the future, nor
can we predict what impact, if any, the occurrence of these or other events
might have on our operations. Generally, advertising expenditures tend to
decline during economic recession or downturn. Consequently, our revenues are
likely to be adversely affected by a recession or downturn in the U.S. economy
or other events or circumstances that adversely affect advertising activity. Our
operating results in individual geographic markets also could be adversely
affected by local regional economic downturns. Seasonal revenue fluctuations are
common in the television broadcasting industry and result primarily from
fluctuations in advertising expenditures by local retailers.

Our business is subject to extensive and changing regulation that could
increase our costs, expose us to greater competition, or otherwise adversely
affect the ownership and operation of our stations or our business strategies.

Our television operations are subject to significant regulation by the FCC
under the Communications Act of 1934. A television station may not operate
without the authorization of the FCC. Approval of the FCC is required for the
issuance, renewal and transfer of station operating licenses. In particular, our
business depends upon our ability to continue to hold television broadcasting
licenses from the FCC. FCC licenses generally have a term of eight years. Our
station licenses are subject to renewal at various times between 2004 and 2007.
Third parties may challenge our license renewal applications. Although we have
no reason to believe that our licenses will not be renewed in the ordinary
course, we cannot assure you that our licenses or the licenses owned by the
owner-operators of the stations with which we have JSAs will be renewed. The
non-renewal or revocation of one or more of our primary FCC licenses could have
a material adverse effect on our operations.

24

The Communications Act of 1934 empowers the FCC to regulate other aspects
of our business, in addition to imposing licensing requirements. For example,
the FCC has the authority to:

- determine the frequencies, location and power of our broadcast stations,

- regulate the equipment used by our stations,

- adopt and implement regulations and policies concerning the ownership and
operation of our television stations, and

- impose penalties on us for violations of the Communications Act of 1934
or FCC regulations.

Our failure to observe FCC or other rules and policies can result in the
imposition of various sanctions, including monetary forfeitures or the
revocation of a license.

Congress and the FCC currently have under consideration, and may in the
future adopt, new laws, regulations, and policies regarding a wide variety of
matters that could, directly or indirectly, affect the operation and ownership
of our broadcast properties. Relaxation and proposed relaxation of existing
cable ownership rules and broadcast multiple ownership and cross-ownership rules
and policies by the FCC and other changes in the FCC's rules following passage
of the Telecommunications Act of 1996 have affected and may continue to affect
the competitive landscape in ways that could increase the competition we face,
including competition from larger media, entertainment and telecommunications
companies, which may have greater access to capital and resources. We are unable
to predict the impact that any such laws, regulations or policies may have on
our operations.

We believe that the success of our television operations depends to a
significant extent upon access to households served by cable television
systems. If the law requiring cable system operators to carry our signal were
to change, we might lose access to cable television households, which could
adversely affect our operations.

Under the 1992 Cable Act, each broadcast station is required to elect,
every three years, to either require cable television system operators in their
local market to carry their signals, which we refer to as "must carry" rights,
or to prohibit cable carriage or condition it upon payment of a fee or other
consideration. By electing the "must carry" rights, a broadcaster can demand
carriage on a specified channel on cable systems within its market. These "must
carry" rights are not absolute, and under some circumstances, a cable system may
decline to carry a given station. Our television stations elected "must carry"
on local cable systems for the three year election period which commenced
January 1, 2000. The required election date for the next three year election
period commencing January 1, 2003 will be October 1, 2002. If the law were
changed to eliminate or materially alter "must carry" rights, our business could
be adversely affected.

The FCC is developing 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 tentatively concluded
that a television broadcast station would not be entitled to mandatory carriage
of both the station's analog signal and its digital signal, and would not be
entitled to mandatory carriage of its digital signal unless it first gives up
its analog signal. Furthermore, the FCC tentatively concluded that a broadcaster
with multiple digital programming streams would be required to designate the
primary video stream eligible for mandatory carriage. If the FCC maintains its
current position, mandatory carriage rights for digital signals would be
accorded only to those television stations operating solely with a digital
signal. Broadcasters operating with both analog and digital signals nevertheless
could negotiate with cable television systems for carriage of their digital
signal. We cannot predict what final rules the FCC ultimately will adopt or what
effect those rules will have on our business.

25

If a court were to determine that recently enacted federal legislation
requiring satellite television service providers to carry broadcast television
signals is unconstitutional, our rights to have our television broadcast
signals carried on satellite service providers could be adversely affected.

Under recently enacted federal law, satellite television providers have an
obligation to deliver local broadcast signals to customers residing in a
broadcast television station's local market. Satellite carriers must obtain
consent from the broadcast television station before carrying its signal, and
television stations must negotiate for retransmission consent in good faith. A
satellite carrier delivering the signal of any local television station is
required to carry all stations licensed in the carried station's local market.
To implement this law, the FCC recently adopted rules similar to the "must
carry" obligations that apply to cable television systems. Under the new rules,
stations may elect either mandatory carriage or negotiate for retransmission
consent. Two satellite television providers and a satellite broadcasting trade
association have instituted litigation challenging the constitutionality of the
statutory satellite "must carry" requirements. In June 2001 a federal district
court upheld the constitutionality of the federal law, and in December 2001 a
federal appellate court affirmed the district court's ruling. The proponents of
this litigation have petitioned the U.S. Supreme Court for review of this
decision. Our PAX TV signal currently is carried on satellite systems under
agreements we negotiated with the satellite television providers, which allow
the satellite provider to sell and retain the advertising revenues from a
portion of the non-network advertising time during PAX TV programming hours. We
cannot predict the final outcome of the litigation challenging the
constitutionality of satellite "must carry" requirements or the effect, if any,
that the failure to implement satellite "must carry" would have on our business.

We may be adversely affected by a general deterioration in economic conditions.

The risks associated with our business become more acute in periods of a
slowing economy or recession, which may be accompanied by a decrease in
television advertising. A decline in the level of business activity of our
advertisers could have an adverse effect on our revenues and profit margins.
Because of the recent economic slowdown in the United States, many advertisers
are reducing advertising expenditures. The impact of this slowdown on our
business is difficult to predict, but it may result in further reductions in
purchases of advertising. If the current economic slowdown continues or worsens,
our results of operations may be adversely affected.

The occurrence of extraordinary events, such as the attacks on the World Trade
Center and the Pentagon, may substantially decrease the use of and demand for
advertising, which may decrease our revenues.

On September 11, 2001, terrorists attacked the World Trade Center in New
York City and the Pentagon outside of Washington, D.C. In addition to the tragic
loss of life and suffering occasioned by these attacks, there has been
infrastructure damage and a nationwide disruption of commercial and leisure
activities. Following the terrorist attacks, the already weak advertising market
worsened, resulting in lower advertising sales revenues for television network
and cable programming businesses nationwide. The occurrence of future terrorist
attacks cannot be predicted, and their occurrence can be expected to further
negatively affect the United States economy generally, and specifically the
market for television advertising.

ITEM 2. PROPERTIES AND FACILITIES

Our corporate headquarters is located in West Palm Beach, Florida. We have
a satellite up-link facility through which we supply our central programming
feed, including PAX TV, to satellite transmitters which relay the signal to our
stations. Our satellite up-link facility is located on leased property in
Clearwater, Florida.

Each of our stations has a facility in the market in which it operates at
which the central programming feed is received and retransmitted in its market.
Each of our stations broadcasts its signal from a transmission tower or antenna
situated on a transmitter site. Each station also has an office and studio and
related broadcasting equipment. For those stations with respect to which we have
entered into JSA's, we have vacated

26

or expect to vacate the leased studio and office facilities of our stations as
we co-locate our operations with those of our JSA partner. We generally lease
our broadcast transmission towers and own substantially all of the equipment
used in our broadcasting operations. Our tower leases have expiration dates that
range generally from two to twenty years. We do not anticipate any difficulties
in renewing those leases that expire within the next several years or in leasing
other space, if required.

Our antenna, transmitter and other broadcast equipment for our New York
television station (WPXN) were destroyed upon the collapse of the World Trade
Center on September 11, 2001. We are currently broadcasting from towers outside
of Manhattan at substantially lower height and power. We are evaluating several
alternatives to improve our signal through transmission from other locations,
however we expect it could take several years to replace the signal we enjoyed
at the World Trade Center location with a comparable signal. We have property
and business interruption insurance coverage to mitigate the losses sustained.

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

ITEM 3. LEGAL PROCEEDINGS

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.

In October, November and December 1999, complaints were filed in the 15th
Judicial Circuit Court in Palm Beach County, Florida, in the Court of Chancery
of the State of Delaware and in Superior Court of the State of California
against certain of our officers and directors by alleged stockholders of our
company alleging breach of fiduciary duty by the directors in approving the
September 1999 transactions with NBC. The complaints asserted nearly identical
purported class and derivative claims and generally alleged that the directors
rejected a takeover offer and instead completed the NBC transactions, thereby
precluding the plaintiffs from obtaining a premium price for their shares. The
complaints sought to rescind the NBC transactions, to require us to pursue other
acquisition offers and to recover damages. In July 2001, the four actions in
Delaware were dismissed by the court. In August 2001, the Florida action was
voluntarily dismissed. In January 2002, the California action was voluntarily
dismissed.

In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We have asserted that
NBC's proposed acquisition of Telemundo Group violates the terms of the
agreements governing the investment and partnership between us and NBC. We also
made two filings with the FCC, one of which requests a declaratory ruling as to
whether conduct by NBC, including NBC's influence and apparent control over
certain members of our board of directors selected by NBC (all of whom have
since resigned from our board), has caused NBC to have an attributable interest
in us in violation of FCC rules or has infringed upon our rights as an FCC
license holder. The second FCC filing seeks to deny FCC approval of NBC's
acquisition of the Telemundo Group's television stations.

The initiation of these proceedings by us casts significant uncertainty
over the future direction of our relationship with NBC. The hearing in the
arbitration proceeding is currently scheduled to occur in April 2002, and we
expect that, under the applicable arbitration rules, the arbitrator will render
a decision by the end of May 2002. If we do not prevail in the arbitration
proceeding, and our position expressed in the FCC filings is not accepted by the
FCC, NBC could consummate the acquisition of the Telemundo Group and thereby
render it highly unlikely that NBC would be able to acquire control of our
company, while at the same time retaining its investment in us and its ability
to exercise a significant influence over our operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

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

27

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Class A common stock is listed on the American Stock Exchange under the
symbol PAX. The following table sets forth, for the periods indicated, the high
and low last sales price per share for our Class A common stock.

On March 1, 2002, the closing sale price of our Class A common stock on the
American Stock Exchange was $10.50 per share. As of that date, there were
approximately 434 holders of record of the Class A common stock.

We have not paid cash dividends and do not intend for the foreseeable
future to declare or pay any cash dividends on any classes of common stock and
intend to retain earnings, if any, for the future operation and expansion of our
business. Any determination to declare or pay dividends will be at the
discretion of our board of directors and will depend upon our future earnings,
results of operations, financial condition, capital requirements, contractual
restrictions under our debt instruments, considerations imposed by applicable
law and other factors deemed relevant by our board of directors. In addition,
the terms of our senior credit facility, the indentures governing our
outstanding subordinated notes and our outstanding preferred stock contain
restrictions on the declaration of dividends with respect to our common stock.

As of December 31, 2001, the following shares of Class A common stock were
authorized for issuance under equity compensation plans:

28

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data as of
and for each of the years in the five year period ended December 31, 2001. 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, 2001 and 2000, and the
related consolidated statements of operations and of cash flows for the three
years ended December 31, 2001, and notes thereto appearing elsewhere herein. See
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters"
for a discussion of our dividend policy.

- ---------------

(a) Includes gains on the 1997 disposal of our former Network-Affiliated
Television and Paxson Radio segments of $1.2 million and $254.7 million in
1998 and 1997, respectively, net of applicable income taxes.
(b) Extraordinary charge related to early extinguishment of debt.
(c) Includes dividends and accretion on redeemable preferred stock.
(d) Due to losses from continuing operations, the effect of stock options and
warrants is antidilutive. Accordingly, our presentation of diluted earnings
per share is the same as that of basic earnings per share.
(e) "Adjusted EBITDA" is defined as operating loss plus depreciation,
amortization, stock-based compensation, programming net realizable value
adjustments, restructuring and other one-time charges, and time brokerage
and affiliation fees. Adjusted EBITDA does not purport to represent cash
provided by operating activities as reflected in the consolidated statements
of cash flows, is not a measure of financial performance under generally
accepted accounting principles, and should not be considered in isolation.
Management believes the presentation of adjusted EBITDA is relevant and
useful because adjusted EBITDA is a measurement industry analysts utilize
when evaluating our operating performance. We also believe adjusted EBITDA
enhances an investor's understanding of our financial condition, results of
operations and cash flows because it measures our operating performance and
cash flows, exclusive of interest and other non-operating and non-recurring
items as well as non-cash charges for depreciation, amortization and stock
compensation. In evaluating adjusted EBITDA, investors should consider
various factors including its relationship to our reported operating losses
and cash flows from operating activities. We believe our adjusted EBITDA
trends reflect year over year improvements in our operating performance and
cash flows since launching the PAX TV network. Investors should be aware
that adjusted EBITDA may not be comparable to similarly titled measures
presented by other companies and could be misleading unless all companies
and analysts calculate such measures in the same manner. The funds depicted
by adjusted EBITDA are not available for our discretionary use because of
other commitments including but not limited to debt service under our debt
facilities.

29

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

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 65 broadcast television stations (including three stations we
operate under time brokerage agreements), which reach all of the top 20 U.S.
markets and 41 of the top 50 U.S. markets. We operate PAX TV, a network that
provides family entertainment programming seven days per week and reaches
approximately 85% of prime time television households in the U.S. through our
broadcast television station group, and pursuant to distribution arrangements
with cable and satellite distribution systems and our affiliates.

We were founded in 1991 by Mr. Paxson, who remains our Chairman and
controlling stockholder. We began by purchasing radio and television stations,
and grew to become Florida's largest radio station group, while also owning two
network-affiliated television stations and other television stations that
carried principally infomercials and other paid programming. In 1997, we sold
our radio station group and our network-affiliated television stations to
concentrate on building our owned and operated television station group. We used
the proceeds from the sale of our radio station group and network-affiliated
television stations to acquire television stations and build the PAX TV network.
Since commencing our television operations in 1994, we have established the
largest owned and operated broadcast television station group in the U.S., as
measured by the number of television households in the markets our stations
serve. We launched PAX TV on August 31, 1998, and are now in our fourth network
programming season.

In September 1999, NBC invested $415 million in our company. We have also
entered into a number of agreements with NBC that are intended to strengthen our
business. Under these agreements, NBC sells our network spot advertising and
performs our network research and sales marketing functions. We have also
entered into JSAs with NBC with respect to all of our stations serving markets
also served by an NBC owned and operated station, and with many independently
owned NBC affiliated stations serving markets also served by our stations.
During the year ended December 31, 2001, we paid or accrued amounts due to NBC
totaling approximately $19.1 million for commission compensation and cost
reimbursements incurred under our agreements with NBC.

In December 2001, we commenced a binding arbitration proceeding against NBC
in which we asserted that NBC has breached its agreements with us and has
breached its fiduciary duty to us and to our shareholders. We also made two
filings with the FCC, one of which requests a declaratory ruling as to whether
conduct by NBC, including NBC's influence and apparent control over certain
members of our board of directors selected by NBC (all of whom have since
resigned from our board), has caused NBC to have an attributable interest in us
in violation of FCC rules or has infringed upon our rights as an FCC license
holder. The second FCC filing seeks to deny FCC approval of NBC's acquisition of
the Telemundo Group's television stations. The hearing in the arbitration
proceeding is currently scheduled to occur in April 2002, and we expect the
arbitrator to render a decision by the end of May 2002. Should the outcome of
our arbitration proceeding against NBC or our FCC filing seeking a declaratory
ruling as to whether NBC has an attributable interest in our stations require
the unwinding or termination of some or all of these operating relationships, or
should NBC or the NBC affiliates elect not to renew the agreements under which
these operating relationships have been implemented, we could be required to
incur significant costs to resume performing the advertising sales and other
operating functions currently performed by NBC and our JSA partners or to
transfer performance of these functions to another broadcast television station
operator, which could have a material adverse effect upon us.

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

- Network Spot Advertising Revenue. We sell commercial air time to
advertisers who want to reach the entire nationwide PAX TV viewing
audience with a single advertisement. Most of our network advertising is
sold under advance, or "upfront," commitments to purchase advertising
time, which are

30

obtained before the beginning of our PAX TV programming season. Network
advertising rates are significantly affected by audience ratings and our
ability to reach audience demographics that are desirable to advertisers.
Higher ratings generally will enable us to charge higher rates to
advertisers. We pay commissions of up to 15% of gross revenue to
advertising agencies for network advertising. Our network advertising
sales represented approximately 33% of our revenue during the year ended
December 31, 2001.

- Network Long Form Paid Programming. We sell air time for long form paid
programming, consisting primarily of infomercials, during broadcasting
hours when we are not airing PAX TV. We pay commissions of up to 15% of
gross revenue to advertising agencies for long form paid programming. Our
network long form paid programming represented approximately 33% of our
revenue during the year ended December 31, 2001.

- Station Advertising Revenue. We sell commercial air time to advertisers
who want to reach the viewing audience in specific geographic markets in
which our stations operate. These advertisers may be local businesses or
regional or national advertisers who want to target their advertising in
these markets. Station advertising rates are affected by ratings and
local market conditions. We pay commissions of up to 15% of gross revenue
to advertising agencies for station advertising sales. Our station
advertising sales represented approximately 34% of our revenue during the
year ended December 31, 2001. Included in station advertising revenue is
long form paid programming sold locally or nationally which represented
approximately 16% of our revenue during the year ended December 31, 2001.

Our revenue mix has changed since we launched PAX TV in 1998. The
percentage mix of our long form paid programming has declined from more than 90%
in 1997 to 49% (combined network and station long form) in the year ended
December 31, 2001 due to the increase in spot advertising sales following the
launch of PAX TV. Long-form paid programming, however, continues to represent a
significant portion of our revenues.

Starting in the fourth quarter of 1999, we began entering into JSAs with
owners of broadcast stations in markets served by our stations. After
implementation of a JSA, we no longer employ our own on-site station sales
staff. The JSA partner provides station spot advertising sales management and
representation for our stations and we integrate and co-locate our station
operations with those of our JSA partners. To date, we have entered into JSAs
for 55 of our television stations.

Our primary operating expenses include selling, general and administrative
expenses, depreciation and amortization expenses, programming expenses, employee
compensation and costs associated with cable and satellite distribution, ratings
services and promotional advertising. Programming amortization is a significant
expense and is affected significantly by several factors, including the mix of
syndicated versus lower cost original programming as well as the frequency with
which programs are aired. As we acquire a more complete library of lower cost
original programming to replace our syndicated programming, our programming
amortization expense should decline.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. We believe the most
significant estimates involved in preparing our financial statements include
estimates related to the net realizable value of our programming rights, barter
revenue recognition, estimates used in accounting for leases and estimates
related to the impairment of long-lived assets, FCC licenses and goodwill. We
base our estimates on historical experience and various other assumptions we
believe are reasonable. Actual results could differ from those estimates.

31

We consider the accounting policies described below to be critical since
they have the greatest impact 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 periodically evaluate the net
realizable value of our program rights based on anticipated future usage of
programming and the anticipated future ratings and related advertising revenues.
We evaluate the net realizable value of our programming rights by aggregating
the program costs and related estimated future revenues for each programming
daypart. If estimated future revenues are insufficient to recover the
unamortized cost of the programming assets in each daypart, we record an
adjustment to write-down the value of our assets to net realizable value. We
also evaluate whether future revenues will be sufficient to recover the cost of
programs we are committed to purchase in the future, and if estimated future
revenues are insufficient, we accrue a loss related to our programming
commitments. Our estimates of future advertising revenues are based upon our
actual revenues generated currently, adjusted for estimated revenue growth
assumptions. If market conditions were to deteriorate, we may not achieve our
estimated future revenues, which could result in future write-downs to net
realizable value and accrued losses on programming commitments.

We have entered into agreements with satellite television providers and
certain cable operators for carriage on their systems in exchange for
advertising spots on our network. We have recorded satellite and cable
distribution rights related to these agreements based on the estimated value of
the advertising credits at prevailing unit rates. The satellite and cable assets
are amortized over the terms of the agreements. Deferred revenue under these
barter arrangements is recognized when the spots are aired on our network. Had
we used other estimates, our revenues recognized under these agreements may have
been different.

We have made judgments and estimates in connection with some of our leasing
transactions regarding the estimated useful lives of the assets subject to lease
as well as the discount rates used to estimate the present value of future lease
payments. These judgments and estimates have led us to conclude that these
leases should be accounted for as operating leases. Had we used different
judgments and estimates, these leases may have been classified as capital
leases. The terms of our senior credit facility, senior subordinated note
indentures and outstanding preferred stock restrict our ability to incur
indebtedness, including our ability to enter into capital leases.

We review our long-lived assets, FCC licenses and goodwill for possible
impairment whenever events or changes in circumstances indicate that, based on
estimated undiscounted future cash flows, the carrying amount of the assets may
not be fully recoverable. If our analysis indicates that a possible impairment
exists, we are required to then estimate the fair value of the asset determined
either by third party appraisal or estimated discounted future cash flows. As
described below under "New Accounting Pronouncements", effective January 1,
2002, we are required at least annually to test for impairment of our FCC
licenses and goodwill. We believe that we have made reasonable estimates and
judgments in determining whether our long-lived assets, FCC licenses and
goodwill have been impaired. If, however, there were a material change in our
determination of fair values or if there were a material change in the
conditions or circumstances influencing fair value, we could be required to
recognize an impairment charge. In addition, it is possible that the estimated
life of certain long-lived assets will be reduced significantly in the near term
due to the anticipated industry migration from analog to digital broadcasting.
If and when we become aware of such a reduction of useful lives, depreciation
expense will be adjusted prospectively to ensure assets are fully depreciated
upon migration.

32

RESULTS OF 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:

- ---------------

(1) "Adjusted EBITDA" is defined as operating loss plus depreciation,
amortization, stock-based compensation, programming net realizable value
adjustments, restructuring and other one-time charges, and time brokerage
and affiliation fees. Adjusted EBITDA does not purport to represent cash
provided by operating activities as reflected in the consolidated statements
of cash flows, is not a measure of financial performance under generally
accepted accounting principles, and should not be considered in isolation.
We believe the presentation of adjusted EBITDA is relevant and useful
because adjusted EBITDA is a measurement industry analysts use when
evaluating our operating performance. We also believe adjusted EBITDA
enhances an investor's understanding of our financial condition, results of
operations and cash flows because it measures our operating performance and
cash flows, exclusive of interest and other non-operating and non-recurring
items as well as non-cash charges for depreciation, amortization and stock
compensation. In evaluating adjusted EBITDA, investors should consider
various factors including its relationship to our reported operating losses
and cash flows from operating activities. We believe our adjusted EBITDA
trends reflect year over year improvements in our operating performance and
cash flows since launching the PAX TV network. Investors should be aware
that adjusted EBITDA may not be comparable to similarly titled measures
presented by other companies and could be misleading unless all companies
and analysts calculate such measures in the same manner. The funds depicted
by adjusted EBITDA are not available for our discretionary use because of
other commitments including but not limited to debt service under our debt
facilities.

Years Ended December 31, 2001 and 2000

Net revenues decreased 2.4% to $265.3 million for the year ended December
31, 2001 from $271.9 million for 2000. This decrease is primarily attributable
to lower station revenues offset in part by higher advertising revenues from the
PAX TV network. The decrease in television station revenues is primarily due to
reduced television spot advertising revenues in our local markets. The increase
in PAX TV network advertising revenues resulted from increases in ratings and
distribution of PAX TV and favorable results from our network sales agreement
with NBC. On an overall basis, network spot revenues increased approximately

33

11% in 2001 resulting from a strong upfront market for the 2000/2001 broadcast
season, which ended in August 2001. However, due to a weaker upfront market for
the 2001/2002 broadcast season, network spot revenues declined approximately 8%
in the fourth quarter and we expect this trend to continue through the end of
the third quarter of 2002.

Our revenues during the year ended December 31, 2001 were negatively
affected by the temporary loss of the broadcast signal of our New York
television station when our antenna, transmitter and other broadcast equipment
were destroyed upon the collapse of the World Trade Center on September 11,
2001. We are currently broadcasting from towers outside of Manhattan at
substantially lower height and power. We are evaluating several alternatives to
improve our signal through transmission from other locations, however we expect
it could take several years to replace the signal we enjoyed at the World Trade
Center location with a comparable signal. We believe the loss of a significant
portion of our over-the-air viewership in the New York market has had a negative
effect on our revenues as a result of lower ratings for the PAX TV network and
our station serving the New York market. We have property and business
interruption insurance coverage to mitigate the losses sustained. Insurance
recoveries will be recognized in the period they become probable of collection
and can be reasonably estimated. Due to the preliminary stages of our insurance
claim, we did not recognize any insurance recoveries in 2001 and are unable at
this point to estimate the amount of insurance proceeds we will receive.

Programming and broadcast operations expenses were $42.5 million during the
year ended December 31, 2001 compared with $38.6 million in 2000. This increase
is primarily due to a one-time payment to terminate a tower lease and tower rent
expense from the sale of certain of our broadcast towers in the fourth quarter
of 2001 described below. Program rights amortization expense was $84.8 million
during the year ended December 31, 2001 compared with $100.3 million for 2000.
The decrease is due to syndicated programming changes and a greater mix of lower
cost original programming as compared with last year. Selling, general and
administrative expenses were $120.0 million during the year ended December 31,
2001 compared with $137.8 million for 2000. The decrease is primarily due to
lower selling costs and other cost cutting measures. Time brokerage and
affiliation fees were $3.6 million during the year ended December 31, 2001
compared with $5.3 million for 2000. This decrease is due to the completion of
acquisitions of stations we previously operated under time brokerage agreements.
Stock-based compensation expense was $10.2 million during the year ended
December 31, 2001 compared with $13.9 million for 2000. This decrease is due to
a reduction in options vesting in the year ended December 31, 2001 compared with
2000. The programming rights adjustment to net realizable value described below
was $67.0 million during the year ended December 31, 2001 compared with $24.4
million for 2000. Depreciation and amortization expense was $96.2 million during
the year ended December 31, 2001, which was comparable with $96.9 million for
2000. We expect our amortization expense to decrease in 2002 by approximately
$40.0 million as a result of adoption of SFAS 142 as further described below.

We have issued options to purchase shares of Class A common stock to
certain members of management and employees under our stock compensation plans.
As of December 31, 2001, there were 9,452,436 options outstanding under these
plans. In addition to these options, we have granted options to purchase
3,200,000 shares of Class A common stock to members of senior management and
others. In connection with option grants, we recognized stock-based compensation
expense of approximately $10.2 million, $13.9 million and $16.8 million in 2001,
2000 and 1999, respectively, and expect that approximately $6.5 million of
additional compensation expense will be recognized over the remaining vesting
period of the outstanding options. In October 1999, we amended the terms of
substantially all of our outstanding employee stock options to provide for
accelerated vesting of the options in the event of termination of employment as
a result of the consolidation of our operations or functions with those of NBC
or within six months preceding or three years following a change in control of
our company. If any of these events occur, we could be required to recognize
stock-based compensation expense at earlier dates than currently expected.

In furtherance of our strategy to increase audience ratings through the
development of PAX TV original programming, in the third quarter of 2001, we
decided to gradually phase the syndicated program TOUCHED BY AN ANGEL out of
primetime and into the daytime period. This program will be replaced in
primetime with original programming. Based on this change, we adjusted our
estimate of the anticipated future usage of
34

TOUCHED BY AN ANGEL and certain other syndicated programs and the related
advertising revenues expected to be generated and recognized a charge of
approximately $67.0 million related to the net realizable value of these
programming assets and related programming commitments. The charge includes a
$22.2 million accrued loss related to programming commitments for the 2001/2002
season of TOUCHED BY AN ANGEL currently airing on CBS. We are contractually
obligated to license future seasons of TOUCHED BY AN ANGEL if the series is
renewed by CBS. Additional programming losses, if any, will be recorded at the
time we become committed to license future seasons of this program.

Interest expense for the year ended December 31, 2001 increased 3.6% to
$49.7 million from $48.0 million in 2000. The increase is primarily due to a
greater level of debt in 2001 resulting from our July refinancing of our 12%
preferred stock and 11 5/8% senior subordinated notes and borrowings to fund
capital expenditures. At December 31, 2001, total long-term debt and senior
subordinated notes were $529.2 million compared with $405.5 million as of
December 31, 2000. Although the July 2001 refinancing and the January 2002
refinancing described below reduced our overall cost of capital, the
refinancings increased our debt and reduced our preferred stock, and as a result
we expect our interest expense to increase in 2002. Interest income for the year
ended December 31, 2001 decreased to $4.5 million from $14.0 million in 2000.
The decrease is due to lower cash and investment balances and lower interest
rates.

During the year ended December 31, 2001, we sold five television stations
for aggregate consideration of $31.9 million and realized pre-tax gains of
approximately $12.3 million.

Years Ended December 31, 2000 and 1999

Net revenues increased to $271.9 million for 2000 from $214.2 million for
1999, an increase of 26.9%. The increase in net revenues in 2000 was due to
increases in advertising revenues from PAX TV and our television stations. The
increase in PAX TV network advertising revenues resulted from increased ratings
and distribution of PAX TV and the favorable effect of our network sales
agreement with NBC. The increase in station advertising revenues resulted from
an increase in ratings and television station acquisitions. Our net revenues for
2000 were also favorably affected by increases in our long form programming
rates.

Programming and broadcast operations expenses were $38.6 million in 2000
compared with $33.1 million in 1999. The increase was primarily due to
completion of acquisitions of stations we previously operated under TBAs.
Program rights amortization expense was $100.3 million in 2000 compared with
$91.8 million in 1999. The increase reflects the increased cost of new
programming and greater usage of certain programs compared with last year.
Selling, general and administrative expenses were $137.8 million in 2000
compared with $135.1 million in 1999. The increase was primarily due to
commissions paid pursuant to JSAs entered into during 2000. Time brokerage and
affiliation fees were $5.3 million in 2000 compared with $14.3 million in 1999.
The decrease was due to the completion of acquisitions of stations we previously
operated under TBAs. In 2000, we recorded a programming rights adjustment to net
realizable value of $24.4 million compared with $70.5 million in 1999 resulting
from changes in our estimated future usage of certain programming. Depreciation
and amortization expense was $96.9 million in 2000 compared with $77.9 million
in 1999. The increase was due primarily to acquisitions and accelerated
depreciation on assets to be disposed of in connection with the JSA
restructuring plan described below.

Interest expense for 2000 decreased 4.6% to $48.0 million from $50.3
million in 1999. The decrease was due to repayment in the fourth quarter of 1999
of debt of DP Media, Inc., a corporation formerly owned by family members of Mr.
Paxson that we acquired in June 2000 and whose financial results were
consolidated with ours since September 30, 1999. At December 31, 2000, we had
total long term debt and senior subordinated notes of $405.5 million compared
with $388.4 million as of December 31, 1999. Interest income for 2000 increased
63.6% to $14.0 million from $8.6 million in 1999. The increase was due primarily
to the investment of the cash proceeds from the September 1999 $415 million
investment by NBC.

During 2000, we recognized a $10.2 million gain from the modification of
program rights obligations primarily resulting from our return of certain fully
amortized programming rights in exchange for cash of

35

$4.9 million and the cancellation of our remaining payment obligations. During
1999, we recognized an approximately $59.5 million pre-tax gain on the sale of
our 30% interest in the Travel Channel LLC and television stations. This gain
consisted of a $17.0 million pre-tax gain on the sale of our interest in the
Travel Channel, a $23.8 million pre-tax gain on the transfer of our interest in
station KWOK serving the San Francisco market during the first quarter of 1999
and pre-tax gains of $18.7 million on the sale of four television stations
during the second quarter of 1999.

The Series B preferred stock issued in conjunction with the NBC transaction
was issued with a conversion price per share that was less than the closing
price of the Class A common stock on the date of issuance. As a result, we
recognized a beneficial conversion feature in connection with the issuance of
the stock equal to the amount of the discount multiplied by the number of shares
into which the Series B preferred stock is convertible. The beneficial
conversion feature calculated for 1999, totaling approximately $65.5 million,
was reflected in our statement of operations as a preferred stock dividend
during 1999 and was allocated to additional paid-in capital because the
preferred stock was immediately convertible. In November 2000, the Emerging
Issues Task Force of the Financial Accounting Standards Board reached a
consensus regarding the accounting for beneficial conversion features which
required us to recalculate the beneficial conversion feature utilizing the
accounting conversion price rather than the stated conversion price used for
1999. This change resulted in a cumulative catch-up adjustment totaling
approximately $75.1 million, which was recorded as a preferred stock dividend in
the fourth quarter of 2000.

RESTRUCTURING ACTIVITIES

During the fourth quarter of 2000, we approved a plan to restructure our
television station operations by entering into JSAs with owners of broadcast
stations in markets in which our stations were not already operating under JSAs.
Our restructuring plan included two major components: (1) termination of 226
station sales and administrative employees and (2) the closing of our leased
studio and sales office facilities at each of our stations. These restructuring
activities resulted in a charge of approximately $5.8 million in the fourth
quarter of 2000, consisting of $2.7 million of termination benefits and $3.1
million of costs associated with the closing of our studios and sales offices
that will no longer be utilized upon implementation of the JSAs. Through
December 31, 2001, we paid termination benefits to 76 employees totaling
approximately $1.5 million and paid lease termination costs of approximately
$0.9 million, which were charged against the restructuring reserve. We have made
substantial progress in executing our restructuring plan, however due to events
outside our control, including the events of September 11, 2001, we were unable
to fully complete the plan in 2001. Although we have completed the integration
of our sales function at most of the JSA locations, we were unable to complete
the integration of our master control operations at certain JSA stations in
2001. We now expect to substantially complete the JSA restructuring by the end
of the third quarter of 2002, except for contractual lease obligations for
closed locations, which continue through 2008.

To date we have been unable to reach an agreement with a JSA partner for
four of the stations included in our restructuring plan. Although we intend to
continue pursuing JSAs for these stations, we are currently unable to determine
the ultimate timing of these JSAs. Accordingly, in the fourth quarter of 2001,
we reversed approximately $1.2 million of restructuring reserves primarily
related to these four stations and certain other reserves which were no longer
required.

Upon full implementation of JSAs, we expect to reduce our annual station
operating expenses by approximately $20 million consisting primarily of salary
and occupancy costs. These savings will be partially offset by commissions paid
to our JSA partners which, based on 2001 actual station net revenues, would
total approximately $9 million. Actual commissions will vary based on actual
revenues realized.

LIQUIDITY AND CAPITAL RESOURCES

Our primary capital requirements are to fund capital expenditures for our
television properties, programming rights payments and debt service payments.
Our primary sources of liquidity are our net working capital, availability under
the Term A portion of our senior credit facility and proceeds from the planned
sale of certain non-core assets. Proceeds from the sale of these assets are
expected to generate approximately

36

$40 million to $45 million and include our second television station serving the
Boston market and the securitization of our accounts receivable. We expect to
receive the proceeds related to these asset sales during 2002. We believe that
cash provided by future operations, net working capital, available funding under
the Term A portion of our senior credit facility and the proceeds from the
planned asset sales will provide the liquidity necessary to meet our obligations
and financial commitments for at least the next twelve months. If we are unable
to sell the identified assets on acceptable terms or our financial results are
not as anticipated, we may be required to seek to sell additional assets or
raise additional funds through the offering of equity securities in order to
generate sufficient cash to meet our liquidity needs. We cannot assure you that
we would be successful in selling assets or raising additional funds if this
were to occur.

As of December 31, 2001, we had $96.0 million in cash and short-term
investments and working capital of approximately $57.9 million. During the year
ended December 31, 2001, our working capital decreased by approximately $16.4
million due primarily to the use of $40.0 million to pay interest, $34.5 million
to fund operations including programming and cable payments partially offset by
$34.0 million in proceeds from the sale of certain of our towers and $25.0
million in borrowings under our revolving credit facility.

Cash used in operating activities was approximately $60.8 million, $76.0
million and $181.8 million for 2001, 2000 and 1999, respectively. These amounts
primarily reflect payments for interest on our debt and the operating costs
incurred in connection with the operation of PAX TV and the related cable
distribution rights and programming rights payments.

Cash provided by (used in) investing activities was approximately $48.5
million, ($12.8) million and ($160.5) million for 2001, 2000 and 1999,
respectively. These amounts include acquisitions of broadcast properties,
capital expenditures, short-term investment transactions, proceeds from the sale
of television stations and our broadcast towers and other transactions. As of
December 31, 2001, we had agreements to purchase significant assets of broadcast
properties totaling approximately $36.0 million, net of deposits. We do not
anticipate spending any significant amounts to satisfy these commitments until
2003 or thereafter.

In December 2001, we completed the sale and leaseback of certain of our
tower assets for aggregate proceeds of $34.0 million. This transaction resulted
in a gain of approximately $5.2 million which has been deferred and will be
recognized over the lease term as a reduction of rent expense. As part of the
transaction, we entered into operating leases related to both our analog and
digital antennas at these facilities for terms of up to 20 years. Annual rent
expense over the lease term will be approximately $4.0 million. For certain
tower assets with a net book value of approximately $9.1 million, we were
temporarily unable to transfer title or assign leases to the buyer at closing.
We expect to complete such transfers in 2002. In the interim, at closing we
entered into management agreements with the buyer on terms consistent with the
operating leases. Included in the $34.0 million proceeds was approximately $12.1
million of deferred consideration for the managed sites which is included in
other liabilities in the accompanying December 31, 2001 consolidated balance
sheet.

During 2001, we acquired the assets of three television stations for total
consideration of $30.8 million, of which $16.1 million was paid in prior years,
and we paid $1.0 million to acquire the minority interest in a station acquired
in 1998. During 2000, in addition to the acquisition of DP Media described
below, we acquired the assets of four television stations for total
consideration of approximately $68.7 million, of which $10.9 million was paid in
prior years, and we paid approximately $8.9 million of additional consideration
in respect of an acquisition completed in February 1999. During 1999, we
acquired the assets of five television stations for total consideration of
approximately $65.6 million. In February 1999, we also completed the acquisition
of WCPX in Chicago by transferring our interest in KWOK serving the San
Francisco market as partial consideration for WCPX. In connection with the
transfer of ownership of KWOK, we recognized a pre-tax gain of approximately
$23.8 million.

In June 2000, we completed the acquisition of DP Media, Inc. Before the
acquisition, DP Media was beneficially owned by family members of Mr. Paxson. We
acquired DP Media for aggregate consideration of $113.5 million, $106 million of
which we had previously advanced during 1999. DP Media's assets included a 32%
equity interest in a limited liability company that owns television station WWDP
in Norwell, Massachusetts and is controlled by the former stockholders of DP
Media. We allocated the aggregate
37

purchase price of DP Media to the assets acquired and liabilities assumed based
on their relative fair market values. During the third quarter of 1999, we
advanced funds to DP Media to fund operating cash flow needs. As a result of our
significant operating relationships with DP Media and our funding of DP Media's
operating cash flow needs, the assets and liabilities of DP Media, together with
their results of operations, have been included in our consolidated financial
statements since September 30, 1999.

During 2001, we sold our interests in five television stations for
aggregate consideration of $31.9 million and realized pre-tax gains of
approximately $12.3 million. During 2000, we sold our interests in four stations
for aggregate consideration of approximately $14.5 million and realized pre-tax
gains of approximately $1.3 million on these sales. During 1999, we sold our
interests in four stations for aggregate consideration of approximately $61
million and realized pre-tax gains of approximately $18.7 million on these
sales. In addition, in February 1999, we sold a 30% interest in the Travel
Channel for aggregate consideration of approximately $55 million and realized a
pre-tax gain of approximately $17 million. The results of operations of the
Travel Channel have been included in our 1999 consolidated statement of
operations using the equity method of accounting through the date of sale.

Capital expenditures, which consist primarily of digital conversion costs
and purchases of broadcasting equipment for our station operations, were
approximately $35.2 million in 2001, $25.1 million in 2000 and $34.6 million in
1999. Except for television stations presently operating analog television
service in the 700 MHz band and stations given a digital channel allocation
within that band, the FCC has mandated that each licensee of a full power
broadcast television station, that was allotted a second digital television
channel in addition to the current analog channel, complete the construction of
digital facilities capable of serving its community of license with a signal of
requisite strength by May 2002, and complete the build-out of the balance of its
full authorized facilities by a later date to be established by the FCC. For
those stations now operating in the 700 MHz band or allotted a digital channel
within that band, the institution of digital television service may be delayed
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 television signals. Despite the current
uncertainty that exists in the broadcasting industry with respect to standards
for digital broadcast services, planned formats and usage, we intend to comply
with the FCC's timing requirements for the broadcast of digital television. We
have commenced migration to digital broadcasting in certain of our markets and
will continue to do so throughout the required time period. Because of the
uncertainty as to standards, formats and usage, however, we cannot currently
predict with reasonable certainty the amount or timing of the expenditures we
will likely have to make to complete the digital conversion of our stations, but
we currently anticipate spending at least $70 million, of which we have spent
approximately $18 million to date. We will likely fund our digital conversion
from availability under the $50 million Term A facility entered into as part of
our July 2001 refinancing, as well as cash on hand, the sale of assets and from
other financing arrangements.

Cash provided by financing activities was $44.8 million in 2001, $15.0
million in 2000 and $418.1 million in 1999. These amounts include the proceeds
from the July 2001 refinancing described below, as well as the related principal
repayments, redemption premium, preferred stock redemption and refinancing
costs. Also included are proceeds from borrowings to fund capital expenditures,
proceeds from preferred stock issuances and proceeds from stock option
exercises, net of principal repayments and preferred stock dividends.

In January 2002, we completed an offering of senior subordinated discount
notes due in 2009. Gross proceeds of the offering totaled approximately $308
million and were used to refinance our 12 1/2% exchange debentures due 2006,
which were issued in exchange for the outstanding shares of our 12 1/2%
exchangeable preferred stock on January 14, 2002, and to pay costs related to
the offering. The notes were sold at a discount of 62.132%, which represents a
yield to maturity of 12 1/4%. Interest on the notes will be payable
semi-annually beginning on July 15, 2006. The senior subordinated discount notes
are guaranteed by our subsidiaries. In the first quarter of 2002, we will
recognize an extraordinary loss totaling approximately $18 million resulting
primarily from the redemption premium associated with the redemption of the
12 1/2% exchange debentures.

On July 12, 2001, we completed a $560 million financing consisting of a
$360 million senior credit facility and $200 million of 10 3/4% senior
subordinated notes due 2008. Proceeds from the initial funding under the

38

senior credit facility and the 10 3/4% senior subordinated notes offering were
used to repay all of our indebtedness and obligations under our previously
existing credit facilities, which were scheduled to mature in June 2002, to
redeem our 11 5/8% senior subordinated notes and our 12% redeemable preferred
stock and to pay redemption premiums, fees and expenses in connection with the
refinancing. In 2001, we recognized an extraordinary loss related to early
extinguishment of debt totaling approximately $9.9 million resulting primarily
from the write-off of unamortized debt costs related to the refinanced
indebtedness and the redemption premium and costs associated with the repayment
of the 11 5/8% senior subordinated notes.

The $360 million senior credit facility consists of a fully drawn $25
million revolving credit facility maturing June 2006, a $50 million delayed draw
Term A facility maturing December 2005, of which $20.0 million was outstanding
at December 31, 2001, and a $285 million fully drawn Term B facility maturing
June 2006. The revolving credit facility is available for general corporate
purposes and the Term A facility is available to fund capital expenditures. We
intend to use the Term A portion of the facility to fund the majority of our
capital expenditures through the end of 2002. The interest rate under the bank
facility is LIBOR plus 3.0% or Base Rate (as defined) plus 2.0% at the Company's
option. The 10 3/4% senior subordinated notes are due in 2008 and interest on
the notes is payable on January 15 and July 15 of each year. We have entered
into a variable to fixed interest rate swap in the notional amount of $144.0
million to hedge the impact of interest rate changes on a portion of our
variable rate indebtedness. The fixed rate under the swap is 3.64% and variable
rates are indexed to LIBOR. Including the impact of the swap, the weighted
average interest rate of our indebtedness at December 31, 2001 was 8.16%.

The terms of the indentures governing our senior subordinated notes contain
covenants limiting our ability to incur additional indebtedness except for
specified indebtedness related to the funding of capital expenditures and
refinancing indebtedness. In addition, our senior credit facility also contains
covenants restricting our ability and the ability of our subsidiaries to incur
additional indebtedness, dispose of assets, pay dividends, repurchase or redeem
capital stock and indebtedness, create liens, make capital expenditures, make
certain investments or acquisitions and enter into transactions with affiliates
and otherwise restricting our activities. Our senior credit facility also
contains the following financial covenants: (1) twelve-month trailing minimum
net revenue and minimum EBITDA (as defined in the senior credit facility) for
each of the fiscal quarters ended June 30, 2001 through December 31, 2003, and
(2) maximum ratio of total senior debt to EBITDA, maximum ratio of total debt to
EBITDA, minimum permitted interest coverage ratio and minimum permitted fixed
charge coverage ratio, each beginning for each of the fiscal quarters ending on
or after June 30, 2004. Our twelve-month trailing minimum net revenue and EBITDA
covenants for 2002 are as follows (in thousands):

Our ability to meet these financial covenants is influenced by several
factors, the most significant of which include the effect on our revenues of
overall conditions in the television advertising marketplace, our network and
station ratings and the success of our JSA strategy. Although we currently
expect to meet these covenants over the next twelve months, adverse developments
with respect to these or other factors could result in our failing to meet one
or more of these covenants. If we were to violate any of these covenants, we
would be required to seek a waiver from our lenders under our senior credit
facility and possibly seek an amendment to our senior credit facility. Although
we believe, based on discussions with our lenders, that we would be able to
obtain waivers or amendments to our senior credit facility relating to these
covenants, we can provide no assurance that our lenders under our senior credit
facility would grant us any waiver or amendment which might become necessary. If
we failed to meet any of our financial covenants and our lenders did not grant a
waiver or amend our facility, they would have the right to declare an event of
default and seek remedies including acceleration of all outstanding amounts due
under the senior credit facility. Should an event of default be declared under
the senior credit facility, this would cause a cross default to occur under the
senior

39

subordinated note and senior subordinated discount note indentures, thus giving
each trustee the right to accelerate repayment. We cannot assure you that we
would be successful in obtaining alternative sources of funding to repay these
obligations should these events occur.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We are obligated under the terms of our debt facilities, programming
contracts, cable distribution agreements and operating lease agreements and
employment contracts as of December 31, 2001 to make future payments as follows
(in thousands):

- ---------------

(1) Includes imputed interest of $154,000

In addition, under the terms of our programming contracts, as of December
31, 2001 we have committed to pay for certain programs for which we currently do
not have airing rights as follows (in thousands):

2002........................................................ $10,803
2003........................................................ 9,218
2004........................................................ 10,085
2005........................................................ 9,635
2006........................................................ 3,345
-------
$43,086
=======

We are also committed to purchase at similar terms additional future series
episodes of our licensed programs should they be made available.

See Note 14 in the accompanying consolidated financial statements for a
summary of the redemption features of our mandatorily redeemable preferred
stock.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for business combinations and
requires all business combinations to be accounted for using the purchase method
of accounting. SFAS 141 is effective for all business combinations initiated
after June 30, 2001. We do not believe adoption of SFAS 141 will have a material
effect on our financial position, results of operations or cash flows.

SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. We will adopt SFAS 142 effective January 1, 2002. We are
currently assessing the impact of adopting SFAS 142, however we do not believe
adoption will result in a material impairment loss, if any. Upon adoption of
SFAS 142, we will no longer amortize goodwill and FCC license intangibles (which
we believe have indefinite lives) which totaled approximately $842.7 million,
net of accumulated amortization of $140.3 million at December 31, 2001. Under
existing accounting standards, these assets are being amortized over 25 years.
Amortization

40

expense related to goodwill and FCC licenses totaled approximately $39.5 million
for the year ended December 31, 2001.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" and Accounting Principles Board Opinion ("APB") No.
30, "Reporting the Results of Operations -- Reporting the Effects of the
Disposal of a Segment Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS 144 retains the provisions of APB No. 30 for presentation
of discontinued operations in the income statement, but broadens the
presentation to include a component of an entity. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. We do not believe that the
adoption of SFAS 144 will have a material effect on our financial position or
results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The tables below provide information about our market sensitive financial
instruments and constitute "forward-looking statements." All items described are
non-trading.

Our primary market risk exposure is changing interest rates. We manage
interest rate risks through the use of a combination of fixed and floating rate
debt. We use interest rate swaps to adjust interest rate exposures when
appropriate, based upon market conditions. Interest rate swaps are entered into
with a group of financial institutions with investment-grade credit ratings,
thereby minimizing the risk of credit loss. Expected maturity dates for variable
rate debt and interest rate swaps in the tables below are based upon contractual
maturity dates. Average interest rates on variable rate debt and average
variable rates under interest rate swaps are based on implied forward rates in
the yield curve at the reporting date.

Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment. The fair value of variable rate debt approximates the carrying value
since interest rates are variable, and thus, approximate current market rates.
The fair value of interest rate swaps is determined from dealer quotations and
represents the discounted future cash flows through maturity or expiration using
current rates. The fair value is effectively the amount we would pay or receive
to terminate the agreements.

- ---------------

(1) Includes amounts outstanding at December 31, 2000 under our former bank
credit facilities that were refinanced in July 2001. See Note 10 to
consolidated financial statements.

41

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

42

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item regarding directors and officers is
incorporated by reference from the definitive Proxy Statement being filed by the
Company for the Annual Meeting of Stockholders to be held on May 3, 2002.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the
definitive Proxy Statement being filed by the Company for the Annual Meeting of
Stockholders to be held on May 3, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference from the
definitive Proxy Statement being filed by the Company for the Annual Meeting of
Stockholders to be held on May 3, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference from the
definitive Proxy Statement being filed by the Company for the Annual Meeting of
Stockholders to be held on May 3, 2002.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of the report:

1. The financial statements filed as part of this report are listed
separately in the Index to Consolidated Financial Statements and Financial
Statement Schedule on page F-1 of this report.

2. The Financial Statement Schedule filed as part of this report is
listed separately in the Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1 of this report.

3. For Exhibits see Item 14(c), below. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit hereto
is listed in Exhibits Nos. 10.27, 10.28, 10.157, 10.202, 10.207, 10.208,
10.224, 10.225 and 10.226 of Item 14(c) below.

(b) Reports on Form 8-K.

The Company filed a Form 8-K, dated December 4, 2001, under Item 5. "Other
Events" reporting that the Company has commenced an arbitration proceeding
against National Broadcasting Company, Inc. asserting contractual breaches and
breach of fiduciary duty and has made two filings with the FCC requesting a
declaratory ruling as to whether NBC's conduct had caused it to have an
attributable interest in the Company in violation of FCC rules and seeking to
deny FCC approval of NBC's acquisition of Telemundo Communications Group, Inc.

43

(c) List of Exhibits:

- ---------------

(1) Filed with the Company's Registration Statement on Form S-4, filed
September 26, 1994, Registration No. 33-84416, and incorporated herein by
reference.
(2) Filed with the Company's Annual Report on Form 10-K, dated March 31, 1995,
and incorporated herein by reference.
(3) Filed with the Company's Registration Statement on Form S-1, as amended,
filed January 26, 1996, Registration No. 333-473, and incorporated herein
by reference.
(4) Filed with the Company's Registration Statement on Form S-8, filed January
22, 1997, Registration No. 333-20163, and incorporated herein by reference.
(5) Filed with the Company's Quarterly Report on Form 10-Q, dated September 30,
1997, and incorporated herein by reference.
(6) Filed with the Company's Annual Report on Form 10-K, dated December 31,
1997, and incorporated herein by reference.
(7) Filed with the Company's Registration Statement on Form S-4, as amended,
filed July 23, 1998, Registration No. 333-59641, and incorporated herein by
reference.
(8) Filed with the Company's Quarterly Report on Form 10-Q, dated September 30,
1999, and incorporated herein by reference.
(9) Filed with the Company's Form 8-K dated September 15, 1999 and incorporated
herein by reference.
(10) Filed with the Company's Annual Report on Form 10-K, dated December 31,
1999, and incorporated herein by reference.
(11) Filed with the Company's Quarterly Report on Form 10-Q, dated March 31,
2000, and incorporated herein by reference.
(12) Filed with the Company's Quarterly Report on Form 10-Q, dated March 31,
2001, and incorporated herein by reference.
(13) Filed with the Company's Quarterly Report on Form 10-Q, dated June 30,
2001, and incorporated herein by reference.
(14) Filed with the Company's Registration Statement on Form S-4, as amended,
filed September 10, 2001, Registration No. 333-69192, and incorporated
herein by reference.

(d) The financial statement schedule filed as part of this report is
listed separately in the Index to Financial Statements beginning on
page F-1 of this report.

46

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of West Palm
Beach, State of Florida, on March 14, 2002.

PAXSON COMMUNICATIONS
CORPORATION

By: /s/ LOWELL W. PAXSON
--------------------------------------
Lowell W. Paxson
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

47

PAXSON COMMUNICATIONS CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of Paxson Communications Corporation:

In our opinion, the consolidated financial statements referred to under
Item 14(a)(1) on page 43 and listed in the accompanying index on page F-1
present fairly, in all material respects, the financial position of Paxson
Communications Corporation and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule referred to under Item 14(a)(2) on
page 43 and listed in the accompanying index on page F-1 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Miami, Florida
February 19, 2002

F-2

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)

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

F-3

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of the consolidated financial
statements.
F-4

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

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

F-5

PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

F-6

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

Paxson Communications Corporation (the "Company"), a Delaware corporation,
was organized in 1993. The Company owns and operates television stations
nationwide, and on August 31, 1998, launched PAX TV. PAX TV is the brand name
for the programming that the Company broadcasts through its owned, operated and
affiliated television stations, as well as certain cable and satellite system
affiliates.

The consolidated financial statements include the accounts of the Company
and its subsidiaries and those of DP Media, Inc. ("DP Media"), a company
acquired in June 2000. Prior to acquisition, DP Media was beneficially owned by
family members of Lowell W. Paxson ("Mr. Paxson"), the Company's Chairman and
principal shareholder. The financial position and results of operations of DP
Media have been included in the Company's consolidated financial statements
since September 1999 (see Note 4). All significant inter-company balances and
transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and are stated at cost.

SHORT-TERM INVESTMENTS

Short-term investments consist of marketable government securities with
original maturities of one year or less. All short-term investments are
classified as trading and are recorded at fair value based upon quoted market
prices.

RESTRICTED CASH AND SHORT-TERM INVESTMENTS

Restricted cash and short-term investments at December 31, 2000 consist of
cash and other liquid securities held in an escrow account for the payment of
principal and interest due in connection with the Company's former senior credit
facility (see Note 10).

PROPERTY AND EQUIPMENT

Purchases of property and equipment, including additions and improvements
and expenditures for repairs and maintenance that significantly add to
productivity or extend the economic lives of assets, are capitalized at cost and
depreciated using the straight line method over their estimated useful lives as
follows (see Note 6):

Broadcasting towers and equipment........................... 6-30 years
Office furniture and equipment.............................. 5-10 years
Buildings and building improvements......................... 15-40 years
Leasehold improvements...................................... Term of lease
Aircraft, vehicles and other................................ 5 years

Maintenance, repairs, and minor replacements are charged to expense as
incurred.

F-7

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

Intangible assets are recorded at cost and amortized using the straight
line method over their estimated useful lives as follows (see Note 7):

FCC licenses and goodwill................................... 25 years
Cable distribution rights................................... Generally 7 years
Covenants not to compete.................................... Generally 3 years
Favorable lease and other contracts......................... Contract term

As further described below under "New Accounting Pronouncements", effective
January 1, 2002, the Company will no longer amortize Federal Communications
Commission ("FCC") licenses and goodwill.

PROGRAM RIGHTS

The Company's programming consists of both originally developed programs
and syndicated programs that have previously aired on other networks. The
Company generally has unlimited exclusive domestic broadcast rights for its
original programs. For syndicated programs, the Company licenses the exclusive
domestic distribution rights for a fixed cost over the license term. Program
rights are carried at the lower of unamortized cost or estimated net realizable
value. Program rights and the related liabilities are recorded at the
contractual amounts when the programming is available to air. Original
programming generally is amortized over three years. Syndicated programming
rights are amortized over the licensing agreement term using the greater of the
straight line per run or straight line over the license term method. The
estimated costs of programming which will be amortized during the next year are
included in current assets; program rights obligations which become due within
the next year are included in current liabilities.

The Company periodically evaluates the net realizable value of its program
rights based on anticipated future usage of programming and the anticipated
future ratings and related advertising revenue to be generated on a daypart
basis. The Company also evaluates whether future revenues will be sufficient to
recover the cost of programs the Company is committed to purchase in the future
and, if estimated future revenues are insufficient, the Company accrues a loss
related to its programming commitments. As further described in Note 8, during
the years ended December 31, 2001, 2000 and 1999, the Company recorded charges
of approximately $67.0 million, $24.4 million and $70.5 million, respectively,
related to the write-down of program rights to their estimated net realizable
value and losses on programming commitments.

CABLE DISTRIBUTION RIGHTS

The Company has agreements under which it receives cable carriage of its
PAX TV programming on certain cable systems in markets not currently served by a
Company owned television station. The Company pays fees based on the number of
cable television subscribers reached and in certain instances provides local
advertising airtime during PAX TV programming. Cable distribution rights
generally are recorded at the present value of the Company's future obligation
when the Company receives affidavits of subscribers delivered. Cable
distribution rights are amortized over seven years using the straight line
method. Obligations for cable distribution rights which will be paid within the
next year are included in current liabilities.

SATELLITE DISTRIBUTION RIGHTS

The Company has entered into agreements with satellite television providers
for carriage on their systems in exchange for advertising credits. The Company
has recorded satellite distribution rights based on the estimated value of the
advertising credits at prevailing rates. Satellite distribution rights are
amortized over five to seven years using the straight line method. Obligations
for satellite distribution rights are recognized as

F-8

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

advertising revenue when advertising credits are utilized. An estimate of the
advertising credit that will be utilized within the next year is included in
current liabilities.

INVESTMENTS IN BROADCAST PROPERTIES

Investments in broadcast properties represent the Company's financing of
television station acquisitions by third party licensees, purchase options or
other investments in entities owning television broadcasting stations or
construction permits. In connection with certain of these agreements, the
Company has obtained the right to provide programming for the related stations
pursuant to time brokerage agreements ("TBAs") and has options to purchase
certain of the related station assets and FCC licenses at various amounts and
terms (see Note 17). Included in other expenses, net for 1999 is a loss of $4.5
million, reflecting the Company's estimate of advances and costs related to the
planned acquisition of a television station which were determined to be
unrecoverable due to the termination of the acquisition contract.

LONG-LIVED ASSETS

The Company reviews long-lived assets, identifiable intangibles and
goodwill and reserves for impairment whenever events or changes in circumstances
indicate that, based on estimated undiscounted future cash flows, the carrying
amount of the assets may not be fully recoverable. It is possible that the
estimated life of certain long-lived assets will be reduced significantly in the
near term due to the anticipated industry migration from analog to digital
broadcasting. If and when the Company becomes aware of such a reduction of
useful lives, depreciation expense will be adjusted prospectively to ensure
assets are fully depreciated upon migration. See "New Accounting Pronouncements"
for additional information.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivative financial instruments in accordance
with SFAS No. 133 as amended by SFAS No. 137 and SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative instrument's gains and losses to offset related
results on the hedged item in the statement of operations, to the extent
effective, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.

The Company utilizes an interest rate swap to manage the impact of interest
rate changes on the Company's senior credit facility borrowings. Under the
interest rate swap, the Company agrees with the other party to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
Income or expense under these instruments is recorded on an accrual basis as an
adjustment to the yield of the underlying exposures over the periods covered by
the contracts. If an interest rate swap is terminated early, any resulting gain
or loss is deferred and amortized as an adjustment of the cost of the underlying
exposure position over the remaining periods originally covered by the
terminated swap. If all or part of an underlying position is terminated, the
related pro-rata portion of any unrecognized gain or loss on the swap is
recognized in income at that time as part of the gain or loss on the
termination.

OTHER COMPREHENSIVE LOSS

Other comprehensive loss for the year ended December 31, 2001 includes the
unrealized loss totaling approximately $1.4 million on the Company's interest
rate swap accounted for as a cash flow hedge. No
F-9

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income tax benefit has been recorded due to uncertainty regarding realization of
the Company's deferred tax assets. No reclassification adjustments were recorded
in 2001. There were no components of other comprehensive loss in 2000 and 1999.

REVENUE RECOGNITION

Revenue is recognized as commercial spots are aired and ratings guarantees
to advertisers, as applicable, are achieved.

TIME BROKERAGE AGREEMENTS

The Company operates certain stations under TBAs whereby the Company has
agreed to provide the station with programming and sells and retains all
advertising revenue during such programming. The broadcast station licensee
retains responsibility for ultimate control of the station in accordance with
FCC policies. The Company pays a fixed fee to the station owner as well as
certain expenses of the station and performs other functions. The financial
results of TBA operated stations are included in the Company's statements of
operations from the date of commencement of the TBA.

STOCK-BASED COMPENSATION

Employee stock options are accounted for using the intrinsic value method.
Stock-based compensation to non-employees is accounted for using the fair value
method. The Company also provides disclosure of certain pro forma information as
if employee stock options were accounted for using the fair value method (see
Note 13).

INCOME TAXES

The Company records deferred income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and income tax bases of the Company's assets and liabilities. An
allowance is recorded, based upon currently available information, when it is
more likely than not that any or all of a deferred tax asset will not be
realized. The Company's income tax provision consists of taxes currently
payable, if any, and the change during the year of deferred tax assets and
liabilities.

PER SHARE DATA

Basic and diluted loss per share was computed by dividing the net loss less
dividends and accretion and the effect of beneficial conversion features on
redeemable preferred stock by the weighted average number of common shares
outstanding during the period. Because of losses, the effect of stock options
and warrants is antidilutive. Accordingly, the Company's presentation of diluted
earnings per share is the same as that of basic earnings per share.

The following securities, which could potentially dilute earnings per share
in the future, were not included in the computation of diluted earnings per
share, because to do so would have been antidilutive for the periods presented
(in thousands):

F-10

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year's financial
statements to conform with the 2001 presentation.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
addresses financial accounting and reporting for business combinations and
requires all business combinations to be accounted for using the purchase method
of accounting. SFAS 141 is effective for all business combinations initiated
after June 30, 2001. The Company does not believe adoption of SFAS 141 will have
a material impact on its financial position, results of operations or cash
flows.

SFAS 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets. Under SFAS 142, goodwill and intangible assets that
have indefinite lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Impairment losses for goodwill
and other indefinite-lived intangible assets that arise due to the initial
application of SFAS 142 are to be reported as resulting from a change in
accounting principle. The Company will adopt SFAS 142 effective January 1, 2002.
The Company is currently assessing the impact of adopting SFAS 142, however it
does not anticipate a material impairment loss, if any, resulting from adoption.
Upon adoption of SFAS 142, the Company will no longer amortize goodwill and FCC
license intangibles (which the Company believes have indefinite lives), which
totaled approximately $842.7 million, net of accumulated amortization of $140.3
million at December 31, 2001. Under existing accounting standards, these assets
are being amortized over 25 years. Amortization expense related to goodwill and
FCC licenses totaled approximately $39.5 million for the year ended December 31,
2001.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of" and Accounting Principles Board Opinion ("APB") No.
30, "Reporting the Results of Operations -- Reporting the Effects of the
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 establishes a single accounting
model for assets to be disposed of by sale whether previously held and used or
newly acquired. SFAS 144 retains the provisions of APB No. 30 for presentation
of discontinued operations in the income statement, but broadens the
presentation to include a component of an entity. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The Company does not believe
that the adoption of SFAS 144 will have a material impact on its financial
position or results of operations.

2. NBC TRANSACTION:

Effective September 15, 1999 (the "Issue Date"), the Company entered into
an Investment Agreement (the "Investment Agreement") with National Broadcasting
Company, Inc. ("NBC"), pursuant to which

F-11

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NBC purchased shares of convertible exchangeable preferred stock (the "Series B
Convertible Preferred Stock"), and common stock purchase warrants from the
Company for an aggregate purchase price of $415 million. Further, Mr. Paxson and
certain entities controlled by Mr. Paxson granted NBC the right (the "Call
Right") to purchase all (but not less than all) 8,311,639 shares of Class B
Common Stock of the Company beneficially owned by Mr. Paxson.

The common stock purchase warrants issued to NBC consist of a warrant to
purchase up to 13,065,507 shares of Class A Common Stock at an exercise price of
$12.60 per share ("Warrant A") and a warrant to purchase up to 18,966,620 shares
of Class A Common Stock ("Warrant B") at an exercise price equal to the average
of the closing sale prices of the Class A Common Stock for the 45 consecutive
trading days ending on the trading day immediately preceding the warrant
exercise date (provided that such price shall not be more than 17.5% higher or
17.5% lower than the six month trailing average closing sale price), subject to
a minimum exercise price during the first three years after the Issue Date of
$22.50 per share. The Warrants are exercisable through September 2009 subject to
certain conditions and limitations.

The Call Right has a per share exercise price equal to the higher of (i)
the average of the closing sale prices of the Class A Common Stock for the 45
consecutive trading days ending on the trading day immediately preceding the
exercise of the Call Right (provided that such price shall not be more than
17.5% higher or 17.5% lower than the six month trailing average closing sale
prices), and (ii) $22.50 for any exercise of the Call Right on or prior to the
third anniversary of the Issue Date and $20.00 for any exercise of the Call
Right thereafter. The owners of the shares which are subject to the Call Right
may not transfer such shares prior to the sixth anniversary of the Issue Date,
and may not convert such shares into any other securities of the Company
(including shares of Class A Common Stock). Exercise of the Call Right is
subject to compliance with applicable provisions of the Communications Act of
1934, as amended (the "Communications Act"), and the rules and regulations of
the FCC. The Call Right may not be exercised until Warrant A and Warrant B have
been exercised in full. The Call Right expires on the tenth anniversary of the
Issue Date, or prior thereto under certain circumstances.

The Company valued the common stock purchase warrants issued to NBC and the
Call Right at $66.7 million. The Company recorded this value along with
transaction costs as a reduction of the face value of the Series B Convertible
Preferred Stock. Such discount is being accreted as preferred stock dividends
over three years using the interest method.

The Series B Convertible Preferred Stock was issued with a conversion price
per share that was less than the closing price of the Class A Common Stock at
the Issue Date. As a result, the Company recognized a beneficial conversion
feature in connection with the issuance of the stock equal to the difference
between the closing price and the conversion price multiplied by the number of
shares issuable upon conversion of the Series B Convertible Preferred Stock. The
amount of the beneficial conversion feature calculated for the 1999 fiscal year
totaling approximately $65.5 million was reflected in the accompanying statement
of operations as a preferred stock dividend during 1999 and allocated to
additional paid-in capital in the accompanying balance sheet because the
preferred stock was immediately convertible. In November 2000, the Emerging
Issues Task Force of the Financial Accounting Standards Board reached a
consensus regarding the accounting for beneficial conversion features which
required the Company to recalculate the beneficial conversion feature utilizing
the accounting conversion price as opposed to the stated conversion price used
for 1999. This change resulted in a cumulative catch-up adjustment totaling
approximately $75.1 million which was recorded as a preferred stock dividend in
the fourth quarter of 2000.

The Investment Agreement requires the Company to obtain the consent of NBC
or its permitted transferee with respect to certain corporate actions, as set
forth in the Investment Agreement, and grants NBC certain rights with respect to
the operations of the Company. NBC was also granted certain demand and piggyback
registration rights with respect to the shares of Class A Common Stock issuable
upon conversion of

F-12

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Series B Convertible Preferred Stock (or conversion of any exchange
debentures issued in exchange therefor), exercise of the Warrants or conversion
of the Class B Common Stock subject to the Call Right.

NBC, the Company, Mr. Paxson and certain entities controlled by Mr. Paxson
also entered into a Stockholder Agreement, pursuant to which, if permitted by
the Communications Act and FCC rules and regulations, the Company may nominate
persons named by NBC for election to the Company's board of directors and Mr.
Paxson and his affiliates have agreed to vote their shares of common stock in
favor of the election of such persons as directors of the Company. Should no NBC
nominee be serving as a member of the Company's board of directors, then NBC may
appoint two observers to attend all board meetings. In December 1999 and March
2000, the Company's Board of Directors elected three NBC nominees to fill newly
created vacancies on the board. At the Company's Annual Meeting of Stockholders
in May 2000, all of the Company's directors, including the NBC nominees were
re-elected for terms of one to three years. In November and December of 2001,
the three Directors nominated by NBC resigned. The Stockholder Agreement further
provides that the Company shall not, without the prior written consent of NBC,
enter into certain agreements or adopt certain plans, as set forth in the
Stockholder Agreement, which would be breached or violated upon the acquisition
of the Company securities by NBC or its affiliates or would otherwise restrict
or impede the ability of NBC or its affiliates to acquire additional shares of
capital stock of the Company.

The Company and NBC have entered into a number of agreements affecting the
Company's business operations, including an agreement under which NBC provides
network sales, marketing and research services for the Company's PAX TV Network,
and Joint Sales Agreements ("JSA") between the Company's stations and NBC's
owned and operated stations serving the same markets. Pursuant to the terms of
the JSAs, the NBC stations sell all non-network spot advertising of the
Company's stations and receive commission compensation for such sales and the
Company's stations may agree to carry one hour per day of the NBC station's
syndicated or news programming. Certain Company station operations, including
sales operations, are integrated with the corresponding functions of the related
NBC station and the Company reimburses NBC for the cost of performing these
operations. During the years ended December 31, 2001 and 2000, the Company paid
or accrued amounts due to NBC totaling approximately $19.1 million and $17.8
million, respectively, for commission compensation and cost reimbursements
incurred in conjunction with these agreements.

In December 2001, the Company commenced a binding arbitration proceeding
against NBC. The Company also made two filings with the FCC, one of which
requests a declaratory ruling as to whether conduct by NBC has caused NBC to
have an attributable interest in the Company in violation of FCC rules or has
infringed upon the Company's rights as an FCC license holder. The second FCC
filing seeks to deny FCC approval of NBC's acquisition of Telemundo
Communications Group, Inc. (the "Telemundo Group") television stations. See Note
17 for further discussion.

3. JSA RESTRUCTURING:

In connection with the NBC strategic relationship, the Company entered into
JSAs with certain of NBC's owned and operated stations in 1999 and 2000. During
the fourth quarter of 2000, the Company approved a plan to restructure its
television station operations by entering into JSAs primarily with NBC affiliate
stations in each of the Company's remaining non-JSA markets. To date, the
Company has entered into JSAs for 55 of its television stations, 19 of which
entered into JSAs prior to adoption of the formal JSA restructuring plan. Under
the JSA structure, the Company generally terminates its station sales staff. The
JSA partner then provides local and national spot advertising sales management
and representation to the Company station and integrates and co-locates the
Company station operations. The Company's restructuring plan included two major
components: (1) termination of 226 station sales and administrative employees;
and (2) exiting Company studio and sales office leased properties. These
restructuring activities resulted in a charge of approximately $5.8 million in
the fourth quarter of 2000 consisting of $2.7 million of termination

F-13

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

benefits and $3.1 million of costs associated with exiting leased properties
which will no longer be utilized upon implementation of the JSAs. Through
December 31, 2001, the Company has paid termination benefits to 76 employees
totaling approximately $1.5 million and paid lease termination costs of
approximately $0.9 million, which were charged against the restructuring
reserve. The Company has made substantial progress in executing its
restructuring plan, however due to events outside the Company's control
including the events of September 11, 2001, the Company was unable to fully
complete the plan in 2001. Although the Company has completed the integration of
its sales function at most of the JSA locations, the Company has been unable to
complete the integration of its master control operations at certain JSA
stations in 2001. The Company now expects to substantially complete the JSA
restructuring by the end of the third quarter of 2002, except for contractual
lease obligations for closed locations, which continue through 2008.

To date the Company has been unable to reach an agreement with a JSA
partner for four of the stations included in its restructuring plan. Although
the Company intends to continue pursuing JSAs for these stations, the Company is
currently unable to determine the ultimate timing of these JSAs. Accordingly, in
the fourth quarter of 2001, the Company reversed approximately $1.2 million of
restructuring reserves primarily related to these four stations and certain
other reserves which were no longer required.

The following summarizes the activity in the Company's restructuring
reserves for the year ended December 31, 2001 (in thousands):

During 2000, the Company recognized severance and lease termination costs
related to JSAs entered into prior to management's approval of the restructuring
plan totaling approximately $942,000 which are included in selling, general and
administrative expenses.

4. CERTAIN TRANSACTIONS WITH RELATED PARTIES:

In addition to the transactions with NBC described in Note 2, the Company
has entered into certain operating and financing transactions with related
parties as described below.

DP MEDIA, INC.

In June 2000, the Company completed the acquisition of DP Media for
aggregate consideration of $113.5 million, $106.0 million of which had
previously been advanced by the Company during 1999. DP Media's assets included
a 32% equity interest in a limited liability company controlled by the former
stockholders of DP Media, which owns television station WWDP in Norwell,
Massachusetts. The Company is entitled to receive a 45% distribution of the
proceeds upon sale of the station which, pursuant to the terms of the limited
liability company agreement, must be sold by March 2003. The Company allocated
the aggregate purchase price of DP Media to the assets acquired and liabilities
assumed based on their relative fair market values. The assets, liabilities and
results of operations of WWDP are no longer consolidated within the financial
statements of the Company. The Company accounts for its equity interest in WWDP
utilizing the equity method of accounting and has recorded its equity investment
in WWDP within other assets.

During the third quarter of 1999, the Company advanced funds to DP Media
which were utilized to fund operating cash flow needs. As a result of the
Company's significant operating relationships with DP Media and its funding of
DP Media's operating cash flow needs, the assets and liabilities of DP Media,
together with their

F-14

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

results of operations were included in the Company's consolidated financial
statements since September 30, 1999. In consolidating DP Media, at December 31,
1999, the Company recorded current assets of approximately $4.3 million, current
liabilities of approximately $1.3 million, property, plant and equipment of
approximately $22.2 million, intangible assets of approximately $72.2 million
and other assets of approximately $2.6 million.

In August 1999, a subsidiary of DP Media repaid notes receivable to the
Company of $15.5 million and $15.0 million in connection with its acquisition of
WBPX in Boston and WHPX in Hartford.

Prior to the acquisition of DP Media, the Company and DP Media had entered
into various operating agreements including affiliation, services and commercial
representation and sales agreements. Subsequent to the consolidation of DP Media
in September 1999, all intercompany transactions with DP Media have been
eliminated. Prior to consolidation, the Company recorded time brokerage and
affiliation fees related to stations owned by DP Media totaling approximately
$13.6 million in 1999. Additionally, during 1999, the Company recorded
commission revenue of $404,000 under its services and commercial representation
agreements with DP Media.

THE CHRISTIAN NETWORK, INC.

The Company has entered into several agreements with The Christian Network,
Inc. and certain of its for profit subsidiaries (individually and collectively
referred to herein as "CNI"). The Christian Network, Inc. is a section 501(c)(3)
not-for-profit corporation to which Mr. Paxson, the majority stockholder of the
Company, has been a substantial contributor and of which he was a member of the
Board of Stewards through 1993.

In connection with the NBC transactions described elsewhere herein, the
Company entered into a Master Agreement for Overnight Programming, Use of
Digital Capacity and Public Interest Programming with CNI, pursuant to which the
Company granted CNI, for a term of 50 years (with automatic ten year renewals,
subject to certain limited conditions), certain rights to continue broadcasting
CNI's programming on Company stations during the hours of 1:00 a.m. to 6:00 a.m.
When digital programming begins, the Company will make a digital channel
available for CNI's use for 24 hour CNI digital programming.

License Agreement. The Company and CNI entered into a three year agreement
in March 1999 under which the Company pays license fees to CNI to broadcast
CNI's religious programming. During the years ended December 31, 2001, 2000 and
1999, the Company paid license fees in connection with this agreement of
approximately $215,000, $210,000 and $138,000, respectively.

CNI Agreement. The Company and CNI entered into an agreement in May 1994
(the "CNI Agreement") under which the Company agreed that, if the tax exempt
status of CNI were jeopardized by virtue of its relationships with the Company
and its subsidiaries, the Company would take certain actions to ensure that
CNI's tax exempt status would no longer be so jeopardized. Such steps could
include, but not be limited to, rescission of one or more transactions or
payment of additional funds by the Company. If the Company's activities with CNI
are consistent with the terms governing their relationship, the Company believes
that it will not be required to take any actions under the CNI Agreement.
However, there can be no assurance that the Company will not be required to take
any actions under the CNI Agreement at a material cost to the Company.

Worship Channel Studio. CNI and the Company have contracted for the
Company to lease CNI's television production and distribution facility, the
Worship Channel Studio. The Company utilizes this facility primarily as its
network operations center and originates the PAX TV network signal from this
location. During the years ended December 31, 2001, 2000 and 1999, the Company
incurred rental charges in connection with this agreement of $205,000, $199,000
and $195,000, respectively.

F-15

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

AIRCRAFT LEASE

During 1997, the Company entered into a three year aircraft lease with a
company which is owned by Mr. Paxson. The lease is for a Boeing 727 aircraft
with monthly payments of approximately $64,000. Effective, January 1, 2001 the
Company no longer leases the aircraft. In connection with such lease, the
Company incurred rental costs of approximately $759,000 and $763,000 during the
years ended December 31, 2000 and 1999, respectively.

STOCKHOLDERS AGREEMENT

Certain entities controlled by Mr. Paxson are parties to a stockholders
agreement whereby they were granted registration rights with respect to shares
of common stock they hold.

5. ACQUISITIONS AND DIVESTITURES:

During 2001, the Company acquired the assets of three television stations
for total consideration of approximately $30.8 million of which $16.1 million
was paid in prior years. Additionally, the Company paid approximately $1.0
million to acquire the minority interest in a station acquired in 1998. During
2000, in addition to the acquisition of DP Media described in Note 4, the
Company acquired the assets of four television stations (including construction
permits) for total consideration of approximately $68.7 million of which $10.9
million was paid in prior years. During 1999, the Company acquired the assets of
five television stations (including construction permits), for total
consideration of approximately $65.6 million. In February 1999, the Company also
completed its acquisition of WCPX in Chicago by transferring its interest in
KWOK in San Francisco as partial consideration for WCPX. In connection with the
transfer of ownership of KWOK, the Company recognized a pre-tax gain of
approximately $23.8 million.

During 2001, the Company sold interests in five stations for aggregate
consideration of approximately $31.9 million and realized pre-tax gains of
approximately $12.3 million on these sales. During 2000, the Company sold
interests in four stations for aggregate consideration of approximately $14.5
million and realized pre-tax gains of approximately $1.3 million on these sales.
During 1999, the Company sold its interests in four stations for aggregate
consideration of approximately $61 million and realized pre-tax gains of
approximately $18.7 million on these sales. In addition, in February 1999, the
Company sold its 30% interest in The Travel Channel, L.L.C. ("The Travel
Channel") for aggregate consideration of approximately $55 million and realized
a pre-tax gain of approximately $17 million. The results of operations of The
Travel Channel have been included in the Company's December 31, 1999
consolidated statement of operations using the equity method of accounting
through the date of sale.

6. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (in thousands):

F-16

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation expense aggregated approximately $37.1 million, $37.7 million
and $28.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. In connection with restructuring activities described in Note 3,
the Company identified certain leasehold improvements and office furniture and
equipment which will no longer be used in its operations upon exiting certain
leased properties. The Company has prospectively shortened the estimated
remaining useful lives through the expected disposal date of these assets
resulting in approximately $3.1 million and $2.1 million of additional
depreciation expense in 2001 and 2000, respectively.

As described in Note 10, the Company's senior credit facility is secured by
all assets of the Company, including property and equipment.

7. INTANGIBLE ASSETS:

Intangible assets consist of the following (in thousands):

Amortization expense related to intangible assets aggregated $59.1 million,
$59.2 million and $49.5 million for the years ended December 31, 2001, 2000 and
1999, respectively. As discussed in Note 1, upon adoption of SFAS 142 on January
1, 2002, the Company will no longer amortize FCC licenses and goodwill.

8. PROGRAM RIGHTS:

Program rights consist of the following (in thousands):

Program rights amortization expense aggregated $84.8 million, $100.3
million and $91.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

In furtherance of the Company's strategy to increase its audience ratings
through the development of PAX TV original programming, in the third quarter of
2001, the Company decided to gradually phase the syndicated program Touched By
An Angel ("Touched") out of primetime and into the daytime period. Touched will
be replaced in primetime with original programming. Based on this change, the
Company adjusted its estimate of the anticipated future usage of Touched and
certain other syndicated programs and the related advertising revenues expected
to be generated and recognized a charge of approximately $67.0 million related
to the net realizable value of these programming assets and related programming
commitments. The charge includes a $22.2 million accrued loss related to
programming commitments for the 2001/2002 season

F-17

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Touched currently airing on CBS which is included in other liabilities in the
accompanying December 31, 2001 balance sheet. The Company is contractually
obligated to license future seasons of Touched if the series is renewed by CBS.
Additional programming losses, if any, will be recorded at the time the Company
becomes committed to license future seasons of Touched. In addition, in 2000 and
1999, respectively, the Company adjusted the carrying value of certain of its
program rights to net realizable value resulting in an expense of approximately
$24.4 million and $70.5 million, respectively.

In March 2000, the Company gave up its rights to air certain syndicated
programming, in exchange for approximately $4.9 million in cash and forgiveness
of the remaining programming rights payments due under the original programming
agreement. This transaction resulted in a gain of approximately $9.9 million. In
September 2000, the Company assigned certain other programming rights to a third
party who assumed the Company's remaining payment obligation. In connection with
this transaction, $2.8 million of deferred gain was recorded. The deferred gain
is being amortized over the term of the third party's assumed payments as the
Company remains liable should the third party default. Approximately $932,000
and $311,000 of this deferred gain was recognized into income in 2001 and 2000,
respectively.

As of December 31, 2001, the Company's programming contracts require
collective payments by the Company of approximately $162.7 million as follows
(in thousands):

The Company has also committed to purchase at similar terms additional
future episodes of certain of these programs should they be made available.

9. OBLIGATIONS FOR CABLE DISTRIBUTION RIGHTS:

As of December 31, 2001, obligations for cable distribution rights require
collective payments by the Company of approximately $13.2 million as follows (in
thousands):

2002........................................................ $12,325
2003........................................................ 504
2004........................................................ 180
2005........................................................ 180
-------
13,189
Less: Amount representing interest.......................... (154)
-------
Present value of obligations for cable distribution
rights.................................................... $13,035
=======

F-18

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. SENIOR SUBORDINATED NOTES AND BANK FINANCING:

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

On July 12, 2001, the Company completed a $560 million financing consisting
of a $360 million senior credit facility and $200 million of 10 3/4% Senior
Subordinated Notes due 2008 (the "Notes"). Proceeds from the initial funding
under the new senior credit facility and the 10 3/4% Senior Subordinated Notes
offering were used to repay all of the Company's indebtedness and obligations
under its previously existing credit facilities which were scheduled to mature
in June 2002, to redeem its 11 5/8% Senior Subordinated Notes and its 12%
redeemable preferred stock, as well as to pay redemption premiums, fees and
expenses in connection with the refinancing. In 2001, the Company recognized an
extraordinary loss related to early extinguishment of debt totaling
approximately $9.9 million resulting primarily from the write-off of unamortized
debt costs related to the refinanced indebtedness and the redemption premium and
costs associated with the repayment of the 11 5/8% Senior Subordinated Notes. As
further described in Note 18, in January 2002 the Company issued $308.3 million
of senior subordinated discount notes due 2009.

The $360 million senior credit facility consists of a $25 million revolving
credit facility maturing June 2006, a $50 million delayed draw Term A facility
maturing December 2005 and a $285 million Term B facility maturing June 2006.
The revolving credit facility is available for general corporate purposes and
the Term A

F-19

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

facility is available to fund capital expenditures. The interest rate under the
bank facility is LIBOR plus 3.0% or Base Rate (as defined) plus 2.0% at the
Company's option. The 10 3/4 Senior Subordinated Notes are due in 2008 and
interest on the notes is payable on January 15 and July 15 of each year,
beginning on January 15, 2002. In September 2001, the Company entered into an
interest rate swap in the notional amount of $144.0 million to hedge the impact
of interest rate changes on a portion of our variable rate indebtedness. The
fixed rate under the swap is 3.64% and variable rates are indexed to LIBOR.

The Notes contain certain covenants, which, among other things, restrict
additional indebtedness, payment of dividends, stock issuance of subsidiaries,
certain investments and transfers or sales of assets, and provide for the
repurchase of the Notes in the event of a change in control of the Company. The
Notes are general unsecured obligations of the Company subordinate in right of
payment to all existing and future senior indebtedness of the Company and senior
in right to all future subordinated indebtedness of the Company.

The Notes are redeemable at the Company's option on or after July 15, 2005
at the redemption prices set forth below (expressed as a percentage of the face
value) plus accrued interest to the date of redemption:

The senior credit facility contains various covenants restricting the
Company's ability and the ability of its subsidiaries to incur additional
indebtedness, dispose of assets, pay dividends, repurchase or redeem capital
stock and indebtedness, create liens, make capital expenditures, make certain
investments or acquisitions and enter into transactions with affiliates and
otherwise restricting our activities. The senior credit facility also contains
the following financial covenants: (1) twelve-month trailing minimum net revenue
and minimum EBITDA (as defined) for each of the fiscal quarters ended June 30,
2001 through December 31, 2003 and (2) maximum ratio of total senior debt to
EBITDA, maximum ratio of total debt to EBITDA, minimum permitted interest
coverage ratio and minimum permitted fixed charge coverage ratio, each beginning
for each of the fiscal quarters ending on or after June 30, 2004. At December
31, 2001, the Company was in compliance with these covenants, as applicable. The
Company believes that it will continue to be in compliance with its debt
covenants through the end of fiscal 2002. However, there can be no assurance
that the Company will continue to be in compliance. If the Company were to
violate any of these covenants, the Company would be required to seek a waiver
from its lenders under the senior credit facility and possibly seek an amendment
to the senior credit facility. Although the Company believes, based on
discussions with its lenders, that the Company would be able to obtain waivers
or amendments to its senior credit facility relating to these covenants, there
can be no assurance that the Company's lenders under its senior credit facility
would grant the Company any waiver or amendment which might become necessary. If
the Company failed to meet any of its financial covenants and the Company's
lenders did not grant a waiver or amend the facility, the lenders would have the
right to declare an event of default and seek remedies including acceleration of
all outstanding amounts due under the senior credit facility. Should an event of
default be declared under the senior credit facility, this would cause a cross
default to occur under the senior subordinated note and senior subordinated
discount note indentures, thus giving each trustee the right to accelerate
repayment. There can be no assurance that the Company would be successful in
obtaining alternative sources of funding to repay these obligations should these
events occur.

F-20

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Aggregate maturities of senior subordinated notes and bank financing at
December 31, 2001 are as follows (in thousands):

2002........................................................ $ 2,899
2003........................................................ 3,004
2004........................................................ 3,107
2005........................................................ 22,617
2006........................................................ 297,246
Thereafter.................................................. 200,307
--------
$529,180
========

Debt issuance costs are amortized to interest expense over the term of the
indebtedness using the effective interest method.

11. DERIVATIVE FINANCIAL INSTRUMENTS:

The Company has entered into an interest rate swap with a financial
institution to manage the impact of interest rate changes on the Company's
variable rate indebtedness. This interest rate swap has an aggregate notional
amount of $144.0 million and contractually matures in 2003. The fixed rate under
the swap is 3.64% and variable rates are indexed to LIBOR.

The amounts exchanged by the counterparties to interest rate derivatives
are based upon the notional amounts and other terms, generally related to
interest rates, of the derivatives. While notional amounts of interest rate
derivatives form part of the basis for the amounts exchanged by the
counterparties, the notional amounts are not themselves exchanged and,
therefore, do not represent a measure of the Company's exposure as an end user
of derivative financial instruments.

The Company is exposed to credit related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company monitors the credit worthiness of the counterparties and presently does
not expect default by any of the counterparties. The Company does not obtain
collateral in connection with its derivative financial instruments.

The Company has accounted for the swap as a cash flow hedge pursuant to
SFAS No. 133, as amended, with changes in the fair value included as a component
of other comprehensive loss. At December 31, 2001, the fair value of the swap
was a liability of approximately $1.4 million.

12. INCOME TAXES:

The (provision) benefit for federal and state income taxes for the three
years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):

F-21

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax assets and deferred tax liabilities reflect the tax effect of
differences between financial statement carrying amounts and tax bases of assets
and liabilities as follows (in thousands):

The reconciliation of income tax provision (benefit) computed at the U.S.
federal statutory tax rate, to the provision (benefit) for income taxes is as
follows (in thousands):

The Company has recorded a valuation allowance for its net deferred tax
assets at December 31, 2001 and 2000, as it believes it is more likely than not
that it will be unable to utilize its net deferred tax assets. During the year
ended December 31, 1999, the Company recognized a deferred tax benefit to the
extent that the Company had offsetting deferred tax liabilities.

The Company has net operating loss carryforwards for income tax purposes
subject to certain carryforward limitations of approximately $640 million at
December 31, 2001 expiring through 2021. A portion of the net operating losses,
amounting to approximately $7.9 million, are limited to annual utilization as a
result of a change in ownership occurring when the Company acquired the
subsidiary. Additionally, further limitations on the utilization of the
Company's net operating tax loss carryforwards could result in the event of
certain changes in the Company's ownership.

13. STOCK INCENTIVE PLANS:

The Company has established various stock incentive plans to provide
incentives to officers, employees and others who perform services for the
Company through awards of options and shares of restricted stock. Awards granted
under the plans are at the discretion of the Company's Compensation Committee
and may be in the form of either incentive or nonqualified stock options or
awards of restricted stock. Options granted under the plans generally vest over
a four to five year period and expire ten years after the date of grant. At
December 31, 2001, 693,978 shares of Class A common stock were available for
additional awards under the plans.

F-22

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

When options are granted to employees, a non-cash charge representing the
difference between the exercise price and the fair market value of the common
stock underlying the vested options on the date of grant is recorded as
stock-based compensation expense with the balance deferred and amortized over
the remaining vesting period. For the years ended December 31, 2001, 2000 and
1999, the Company recognized approximately $10.2 million, $13.9 million and
$16.8 million, respectively, of stock-based compensation expense related to
options and warrants and expects to recognize an additional expense of
approximately $6.5 million over the next four years as such outstanding options
vest.

In May 2000, the Compensation Committee of the Board of Directors approved
certain amendments to the terms of the stock options previously granted under
the Company's stock option plans. The amendments were as follows: (1) to extend
the exercise period in the event of an involuntary termination other than for
cause to three years from the date of termination (or the original expiration,
if earlier); (2) to extend the exercise period in the event of a voluntary
termination to one year from the date of termination (or the original
expiration, if earlier); and (3) to retroactively revise the vesting schedule
for those options which included a deferred vesting schedule over a five year
period at the rates of 10%, 15%, 20%, 25% and 30% per year to a vesting schedule
at the rate of 20% per year over a five year period. These modifications
resulted in a new measurement date for purposes of measuring compensation
expense for stock options outstanding at the date of the modification. However,
no additional compensation expense was recognized as the intrinsic value at the
modification date did not exceed the intrinsic value at the original measurement
date.

During 1999, the Company modified the terms of certain stock options in
connection with the termination of employment of the holders. Included in
stock-based compensation expense is $2.1 million reflecting the additional
intrinsic value of those awards at the date of modification. Also in 1999, the
Compensation Committee of the Board of Directors reduced the per share exercise
price of 840,000 unvested stock options held by the Company's CEO to $.01 and
360,000 vested stock options held by the Company's CEO to $1.00. The Company
recognized stock based compensation of approximately $2.3 million, $5.7 million
and $9.1 million for the years ended December 31, 2001, 2000 and 1999,
respectively, related to these options.

In October 1999, the Company amended the terms of substantially all of its
outstanding employee stock options to provide for certain accelerated vesting of
the options in the event of termination of employment with the Company as a
result of the consolidation of Company operations or functions with those of NBC
or within six months preceding or three years following a change in control of
the Company. Were such events to occur, the Company could be required to
recognize stock-based compensation expense at earlier dates than currently
expected.

A summary of the Company's 1994, 1996 and 1998 stock option plans as of
December 31, 2001, 2000 and 1999 and changes during the three years ending
December 31, 2001 is presented below:

F-23

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The majority of the Company's option grants have been at exercise prices of
$7.25 and $3.42, prices which have historically been below the fair market value
of the underlying common stock at the date of grant.

The following table summarizes information about employee and director
stock options outstanding and exercisable at December 31, 2001:

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

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model assuming a dividend yield of 0.0%,
expected volatility range of 50% to 73%, and risk free interest rates of 4.3% to
6.9% and weighted average expected option terms of .5 to 7.5 years.

In addition to the options granted under its stock incentive plans, the
Company has granted nonqualified options to purchase 3,200,000 (3,100,000 in
1999) shares of Class A common stock to members of senior management and others.
These grants consist primarily of options granted in 1999 to purchase 1,000,000
shares of Class A common stock, which vest over three years and expire in ten
years, and options to purchase 2,000,000 shares which vest over four years and
expire in ten years. The exercise price for options vesting on the first
anniversary is $10. The exercise prices for options vesting on the second
anniversary are $12.03 (options to purchase 333,333 shares) and $11.68 (options
to purchase 500,000 shares). The exercise prices for options vesting on the
third anniversary are $9.03 (options to purchase 333,334 shares) and $10.85
(options to purchase 500,000 shares). The exercise price for options vesting on
the final anniversary (500,000 shares) will be the lower of $21, or the fair
market value of the common stock on the prior anniversary date. The Company
recognized stock-based compensation related to these grants of approximately
$929,000, $2.3 million and $873,000 for the years ended December 2001, 2000 and
1999, respectively. The options granted which vest on the final anniversary are
being accounted for as variable plans and the ultimate compensation expense for
such options cannot be determined until their vesting date.

F-24

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. MANDATORILY REDEEMABLE PREFERRED STOCK:

The following represents a summary of the changes in the Company's
mandatorily redeemable preferred stock during the three years ended December 31,
2001 and the aggregate liquidation preference as of December 31, 2001 (in
thousands):

JUNIOR PREFERRED STOCK 12%

In July 2001, the Company redeemed all 33,000 shares issued and outstanding
of its $0.001 par value Junior Preferred Stock (the "Junior Preferred Stock").
Prior to redemption, the Company paid cash dividends of approximately $3.8
million and $7.1 million in 2001 and 2000, respectively.

CUMULATIVE EXCHANGEABLE PREFERRED STOCK 12 1/2%

At December 31, 2001, the Company had authorized 440,000 shares of $0.001
par value Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred
Stock") of which 277,380 and 245,706 shares were issued and outstanding as of
December 31, 2001 and 2000, respectively. As discussed in Note 18, in January
2002 the Company redeemed all issued and outstanding shares of Exchangeable
Preferred Stock for approximately $298.7 million, including accumulated but
unpaid dividends and the redemption premium.

During 2001, 2000 and 1999, the Company paid dividends of approximately
$31.7 million, $28.1 million, $24.9 million, respectively, by the issuance of
additional shares of Exchangeable Preferred Stock. Accrued Exchangeable
Preferred Stock dividends since the last dividend payment date aggregated
approximately $5.8 million and $5.1 million at December 31, 2001 and 2000,
respectively.

JUNIOR EXCHANGEABLE PREFERRED STOCK 13 1/4%

During 1998, the Company issued 20,000 shares of Cumulative Junior
Exchangeable Preferred Stock (the "Junior Exchangeable Preferred Stock") with an
aggregate $200 million liquidation preference for gross

F-25

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

proceeds of an equivalent amount. At December 31, 2001 and 2000, the Company had
authorized 72,000 shares of $0.001 par value Junior Exchangeable Preferred Stock
of which 31,076 and 27,335 shares were issued and outstanding, respectively.
Holders of the Junior Exchangeable Preferred Stock are entitled to cumulative
dividends at an annual rate of 13 1/4% of the liquidation preference, payable
semi-annually in cash or additional shares beginning November 15, 1998 and
accumulating from the issue date. If dividends for any period ending after May
15, 2003 are paid in additional shares of Junior Exchangeable Preferred Stock,
the dividend rate will increase by 1% per annum for such dividend payment
period.

The Company is required to redeem all of the then outstanding Junior
Exchangeable Preferred Stock on November 15, 2006, at a price equal to the
aggregate liquidation preference thereof plus accumulated and unpaid dividends
to the date of redemption. The Junior Exchangeable Preferred Stock is redeemable
at the Company's option at any time on or after May 15, 2003, at the redemption
prices set forth below (expressed as a percentage of liquidation preference)
plus accumulated and unpaid dividends to the date of redemption:

Upon a change of control, the Company is required to offer to purchase the
Junior Exchangeable Preferred Stock at a price equal to 101% of the liquidation
preference thereof plus accumulated and unpaid dividends.

The Company may, provided it is not contractually prohibited from doing so,
exchange the outstanding Junior Exchangeable Preferred Stock on any dividend
payment date for 13 1/4% Exchange Debentures due 2006. The Exchange Debentures
have redemption features similar to those of the Junior Exchangeable Preferred
Stock.

During 2001, 2000 and 1999, the Company paid dividends of approximately
$37.4 million, $32.9 million and $28.9 million, respectively, by the issuance of
additional shares of Junior Exchangeable Preferred Stock. Accrued Junior
Exchangeable Preferred Stock dividends since the last dividend payment date
aggregated approximately $5.1 million and $4.5 million at December 31, 2001 and
2000, respectively.

CONVERTIBLE PREFERRED STOCK 9 3/4%

During 1998, the Company issued 7,500 shares of Series A Convertible
Preferred Stock ("Convertible Preferred Stock") with an aggregate liquidation
preference of $75 million, and warrants to purchase 240,000 shares of Class A
common stock. Of the gross proceeds of $75 million, approximately $960,000 was
allocated to the value of the warrants, which are exercisable at a price of $16
per share through June 2003. At December 31, 2001 and 2000, the Company had
authorized 17,500 shares of $0.001 par value Convertible Preferred Stock of
which 10,566 and 9,595 shares were issued and outstanding, respectively. Holders
of the Convertible Preferred Stock are entitled to receive cumulative dividends
at an annual rate of 9 3/4%, payable quarterly beginning September 30, 1998 and
accumulating from the issue date. The Company may pay dividends either in cash,
in additional shares of Convertible Preferred Stock, or (subject to an increased
dividend rate) by the issuance of shares of Class A common stock equal in value
to the amount of such dividends.

During 2001, 2000 and 1999, the Company paid dividends of approximately
$9.7 million, $8.8 million and $8.0 million, respectively, by the issuance of
additional shares of Convertible Preferred Stock. At December 31, 2001 and 2000,
there were no accrued and unpaid dividends on the Convertible Preferred Stock.

F-26

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company is required to redeem the Convertible Preferred Stock on
December 31, 2006, at a price equal to the aggregate liquidation preference
thereof plus accumulated and unpaid dividends to the date of redemption. The
Convertible Preferred Stock is redeemable at the Company's option at any time on
or after June 30, 2003, at the redemption prices set forth below (expressed as a
percentage of liquidation preference) plus accumulated and unpaid dividends to
the date of redemption:

Upon a change of control, the Company is required to offer to purchase the
Convertible Preferred Stock at a price equal to the liquidation preference
thereof plus accumulated and unpaid dividends. The Convertible Preferred Stock
contains restrictions, primarily based on the trading price of the common stock,
on the issuance of additional preferred stock ranking senior to the Convertible
Preferred Stock.

Each share of Convertible Preferred Stock is convertible into shares of
Class A common stock at an initial conversion price of $16 per share. If the
Convertible Preferred Stock is called for redemption, the conversion right will
terminate at the close of business on the date fixed for redemption.

Holders of the Convertible Preferred Stock have voting rights on all
matters submitted for a vote to the Company's common stockholders and are
entitled to one vote for each share of Class A common stock into which their
Convertible Preferred Stock is convertible.

SERIES B CONVERTIBLE PREFERRED STOCK 8%

Pursuant to the Investment Agreement, NBC acquired $415 million aggregate
liquidation preference of a new series of the Company's convertible exchangeable
preferred stock which accrues cumulative dividends from the Issue Date at an
annual rate of 8% and is convertible (subject to adjustment under the terms of
the Certificate of Designation relating to the Series B Convertible Preferred
Stock) into 31,896,032 shares of the Company's Class A common stock at an
initial conversion price of $13.01 per share, which increases at a rate equal to
the dividend rate.

NBC has the right to demand that the Company redeem the Series B
Convertible Preferred Stock in September 2002 or annually thereafter through
September 2009. NBC also has the right to demand redemption of the Series B
Convertible Preferred Stock prior to September 2002 under certain circumstances
related to the attribution to NBC of its investment in the Company under rules
established by the FCC. The Company's redemption obligation in respect of the
Series B Convertible Preferred Stock is subject to the Company's compliance with
the terms of its existing debt and preferred stock instruments as well as the
existence of funds on hand to consummate such redemption.

The Series B Convertible Preferred Stock is exchangeable, at the option of
the holder, subject to the Company's debt and preferred stock covenants limiting
additional indebtedness but in any event not later than January 1, 2007, into
convertible debentures of the Company ranking on a parity with the Company's
other subordinated indebtedness. Should NBC determine that the rules and
regulations of the FCC prohibit it from holding shares of Class A common stock,
NBC may convert the Series B Convertible Preferred Stock held by it into an
equal number of shares of non-voting common stock of the Company, which
non-voting common stock shall be immediately convertible into Class A common
stock upon transfer by NBC.

Series B Convertible Preferred Stock dividends in arrears aggregated
approximately $76.1 million and $42.9 million at December 31, 2001 and 2000,
respectively.

F-27

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REDEMPTION FEATURES OF PREFERRED STOCK

The following table presents the redemption value of the four classes of
preferred stock outstanding at December 31, 2001 should the Company elect to
redeem the preferred stock in the indicated year, assuming no dividends are paid
in cash prior to redemption (in thousands):

- ---------------

(1) Redeemed in January 2002. See Note 18.
(2) Mandatorily redeemable on November 15, 2006; redeemable by the Company on or
after May 15, 2003.
(3) Mandatorily redeemable on December 31, 2006; redeemable by the Company on or
after June 30, 2003.
(4) NBC has the right to demand redemption in September 2002 and annually
thereafter through September 2009, and prior to such dates under certain
circumstances related to the attribution of NBC's investment in the Company
under rules established by the FCC. The Company has the right to redeem the
Series B Convertible Preferred Stock in whole or in part commencing in
September 2004 at the redemption value of such shares plus accrued and
unpaid dividends.

COVENANTS UNDER PREFERRED STOCK TERMS

The certificates of designation of the preferred stock contain certain
covenants which, among other things, restrict additional indebtedness, payment
of dividends, transactions with related parties, certain investments and
transfers or sales of assets.

15. COMMON STOCK AND COMMON STOCK WARRANTS:

On May 1, 2000, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase the total number of
authorized shares of common stock from 197,500,000 shares to 327,500,000 shares,
the number of authorized shares of Class A common stock from 150,000,000 shares
to 215,000,000 shares and the number of authorized shares of Class C non-voting
common stock, par value $0.001 per share, from 12,500,000 shares to 77,500,000
shares. No shares of the Company's Class C common stock were issued or
outstanding at December 31, 2001 or 2000.

Class A common stock and Class B common stock will vote as a single class
on all matters submitted to a vote of the stockholders, with each share of Class
A common stock entitled to one vote and each share of Class B common stock
entitled to ten votes; Class C common stock is non-voting. Each share of Class B
common stock is convertible, at the option of its holder, into one share of
Class A common stock at any time. Under certain circumstances, Class C common
stock may be converted, at the option of the holder, into Class A common stock.

During December 1996, the Company approved a program under which it
extended loans to certain members of management for the purchase of Company
common stock in the open market by those individuals. The loans are full
recourse promissory notes bearing interest at 5.75% per annum and are
collateralized by the shares of stock purchased with the loan proceeds. The
Company extended the maturity of all outstanding loans under this program until
March 31, 2003. The outstanding principal balance on such

F-28

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

loans was approximately $1.1 million and $1.3 million at December 31, 2001 and
2000, respectively and is reflected as stock subscription notes receivable in
the accompanying balance sheets.

In connection with the NBC transaction discussed elsewhere herein, NBC
acquired a warrant to purchase up to 13,065,507 shares of Class A Common stock
at an exercise price of $12.60 per share ("Warrant A") and a warrant to purchase
up to 18,966,620 shares of Class A Common Stock ("Warrant B") at an exercise
price equal to the average of the closing sale prices of the Class A Common
Stock for the 45 consecutive trading days ending on the trading day immediately
preceding the warrant exercise date (provided that such price shall not be more
than 17.5% higher or 17.5% lower than the six month trailing average closing
sale price) subject to a minimum exercise price during the first three years
after the Issue Date of $22.50 per share. The Warrants are exercisable for ten
years from the Issue Date, subject to certain conditions and limitations.

In connection with the Series A Convertible Preferred Stock sale in June
1998, the Company issued warrants to purchase 240,000 shares of Class A common
stock at an exercise price of $16. The warrants were valued at $960,000.

In June 1998, the Company issued to an affiliate of a former member of its
Board of Directors five year warrants entitling the holder to purchase 155,500
shares of Class A common stock at an exercise price of $16.00 per share. In
March 2000, the Company reduced the exercise price of warrants held by the
affiliate from $16.00 per share to $12.60 per share resulting in compensation
expense of $139,000.

16. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of December 31,
2001. Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate such value:

Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses. The fair values approximate the carrying values due to their
short term nature.

Investments in broadcast properties. The fair value of investments in
broadcast properties is estimated based on recent market sale prices for
comparable stations and/or markets. The fair value approximates the carrying
value.

Long-term debt. The fair value of the Company's long-term debt is
estimated based on current market rates and instruments with the same risk and
maturities. The fair value of the Company's senior credit facility borrowings
approximates its carrying value. The fair market value of the Company's senior
subordinated notes is estimated based on year end quoted market prices for such
securities. At December 31, 2001, the estimated fair value of the Company's
senior subordinated notes was approximately $208.0 million.

F-29

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mandatorily redeemable securities. The fair value of the Company's
mandatorily redeemable preferred stock is estimated based on quoted market
prices plus accumulated but unpaid dividends except for the Series B Convertible
Preferred Stock which is estimated at the December 31, 2001 aggregate
liquidation preference as no quoted market prices are available for these
securities. The estimated fair value of the Company's mandatorily redeemable
preferred stock is as follows (in thousands):

Exchangeable Preferred 12 1/2%.............................. $ 264,046
Junior Exchangeable Preferred 13 1/4%....................... 268,521
Convertible Preferred 9 3/4%................................ 91,924
Series B Convertible Preferred 8%........................... 491,083
----------
$1,115,574
==========

17. COMMITMENTS AND CONTINGENCIES:

Future minimum annual payments under non-cancelable operating leases for
broadcasting facilities and equipment and employment agreements, as of December
31, 2001, are as follows (in thousands):

2002........................................................ $ 17,772
2003........................................................ 15,750
2004........................................................ 12,267
2005........................................................ 11,230
2006........................................................ 11,625
Thereafter.................................................. 104,933
--------
$173,577
========

The Company incurred total operating expenses of approximately $17.4
million, $17.7 million and $15.2 million for the years ended December 31, 2001,
2000 and 1999, respectively, under these agreements.

In December 2001, the Company completed the sale and leaseback of certain
of its tower assets for aggregate proceeds of $34.0 million. This transaction
resulted in a gain of approximately $5.2 million which has been deferred and
will be recognized over the lease term as a reduction of rent expense. As part
of the transaction, the Company entered into operating leases related to both
its analog and digital antennas at these facilities for terms of up to 20 years.
Annual rent expense over the lease term will be approximately $4.0 million. For
certain tower assets with a net book value of approximately $9.1 million, the
Company was temporarily unable to transfer title or assign leases to the buyer
at closing. The Company expects to complete such transfers in 2002. In the
interim, at closing the Company entered into management agreements with the
buyer on terms consistent with the operating leases. Included in the $34.0
million proceeds was approximately $12.1 million of deferred consideration for
the managed sites which is included in other liabilities.

INVESTMENT COMMITMENTS

The Company has an option to purchase the assets of two television stations
serving the Memphis, TN and New Orleans, LA markets for an aggregate purchase
price of $40.0 million of which $4.0 million has been deposited into escrow. The
owners of these stations also have the right to require the Company to purchase
these stations at any time after January 1, 2003 through December 31, 2005.
These stations are currently operating under time brokerage agreements with the
Company. The purchase of these assets is subject to various conditions,
including the receipt of regulatory approvals. The completion of these
investments is also subject to a variety of factors and to the satisfaction of
various conditions, and there can be no assurance that these investments will be
completed.

F-30

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LEGAL PROCEEDINGS

The Company is involved in litigation from time to time in the ordinary
course of its business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's consolidated
financial position or results of operations and cash flows.

In October, November and December 1999, complaints were filed in the 15th
Judicial Circuit Court in Palm Beach County, Florida, in the Court of Chancery
of the State of Delaware and in Superior Court of the State of California
against certain of the Company's officers and directors by alleged stockholders
of the Company alleging breach of fiduciary duty by the directors in approving
the September 1999 transactions with NBC. The complaints asserted nearly
identical purported class and derivative claims and generally alleged that the
directors rejected a takeover offer and instead completed the NBC transactions,
thereby precluding the plaintiffs from obtaining a premium price for their
shares. The complaints sought to rescind the NBC transactions, to require the
Company to pursue other acquisition offers and to recover damages. In July 2001,
the four actions in Delaware were dismissed by the court. In August 2001, the
Florida action was voluntarily dismissed. In January 2002, the California action
was voluntarily dismissed.

In December 2001, the Company commenced a binding arbitration proceeding
against NBC in which the Company asserted that NBC has breached its agreements
with the Company and has breached its fiduciary duty to the Company and to its
shareholders. The Company has asserted that NBC's proposed acquisition of the
Telemundo Group violates the terms of the agreements governing the investment
and partnership between the Company and NBC. The Company also made two filings
with the FCC, one of which requests a declaratory ruling as to whether conduct
by NBC, including NBC's influence and apparent control over certain members of
the Company's board of directors selected by NBC (all of whom have since
resigned from the Company's board), has caused NBC to have an attributable
interest in the Company in violation of FCC rules or has infringed upon our
rights as an FCC license holder. The second FCC filing seeks to deny FCC
approval of NBC's acquisition of the Telemundo Group's television stations. In
addition, in January 2002, the Company filed a petition to deny with the FCC
arguing that NBC was ineligible under FCC regulations to acquire control of
television station KNTV-TV, San Jose, California from Granite Broadcasting Corp.
due to NBC's attributable interest in the Company.

The initiation of these proceedings by the Company casts significant
uncertainty over the future direction of the Company's relationship with NBC.
The hearing in the arbitration proceeding is currently scheduled to occur in
April 2002, and the Company expects that, under the applicable arbitration
rules, the arbitrator will render a decision by the end of May 2002. If the
Company does not prevail in the arbitration proceeding, and the Company's
position expressed in the FCC filings is not accepted by the FCC, NBC could
consummate the acquisition of the Telemundo Group and thereby render it highly
unlikely that NBC would be able to acquire control of the Company, while at the
same time retaining its investment in the Company and its ability to exercise a
significant influence over the Company's operations.

OTHER

See also Notes 8, 9 and 14.

18. SUBSEQUENT EVENT:

In January 2002, the Company completed an offering of senior subordinated
discount notes due in 2009. Gross proceeds of the offering totaled approximately
$308.3 million and were used to refinance the Company's 12 1/2% exchange
debentures due 2006, which were issued in exchange for the outstanding shares of
the Company's 12 1/2% exchangeable preferred stock on January 14, 2002, and to
pay costs related to the offering. The notes were sold at a discount of 62.132%,
which represents a yield to maturity of 12 1/4%. Interest on the notes will be
payable semi-annually beginning on July 15, 2006. The senior subordinated
discount notes are

F-31

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

guaranteed by the Company's subsidiaries. In the first quarter of 2002, the
Company will recognize an extraordinary loss totaling approximately $18 million
resulting primarily from the redemption premium associated with the repayment of
the 12 1/2% exchange debentures.

19. SUPPLEMENTAL CASH FLOW INFORMATION:

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

20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

Seasonal revenue fluctuations are common within the television broadcasting
industry and result primarily from fluctuations in advertising expenditures. The
Company believes that television advertisers generally spend relatively more for
commercial advertising time in the second and fourth calendar quarters and spend
relatively less during the first calendar quarter of each year.

Operating loss in the third quarter of 2001 and the first quarter of 2000
includes adjustments of programming to net realizable value of approximately
$67.0 million and $24.4 million, respectively as described in Note 8.

Operating loss in the fourth quarters of 2001 and 2000 include
restructuring charges (credits) of ($1.2) million and $5.8 million, respectively
as described in Note 3.

Net loss attributable to common stockholders in the third quarter of 2001
includes an extraordinary charge of $9.9 million related to the early
extinguishment of debt as described in Note 10.

F-32

PAXSON COMMUNICATIONS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(1) The Company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.

- ---------------

(1) The company's Class A common stock is listed on the American Stock Exchange
under the symbol PAX.

F-33

SCHEDULE II

PAXSON COMMUNICATIONS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
(IN THOUSANDS)

- ---------------

(1) Write off of uncollectible receivables.
(2) Valuation allowance for net deferred tax assets due to uncertainty
surrounding the Company's utilization of future tax benefits.
(3) Cash payments of termination benefits and lease payments.

F-34