SecProbe.io

CORRESP
1
filename1.htm

PAXSON COMMUNICATIONS CORPORATION

VIA EDGAR AND FACSIMILE

June 15, 2005

Securities and Exchange Commission

Division of Corporation Finance

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Larry Spirgel, Assistant Director

    Re:

    Paxson Communications Corporation

    Form 10-K/A for the fiscal year ended December 31, 2004

    Filed on April 29, 2005

    Form 10-Q for the fiscal quarter ended March 31, 2005

    Filed on May 10, 2005

    File No. 1-13452

Dear Mr. Spirgel:

          On behalf of Paxson Communications Corporation (the “Company”), I am writing in response to
the comments set forth in your letter addressed to the Company dated June 2, 2005 (the “Comment
Letter”), regarding the Company’s Annual Report on Form 10-K/A for the fiscal year ended December
31, 2004 (the “Form 10-K”) and Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2005 (the “Form 10-Q”). For the convenience of the Staff of the Division of Corporation Finance,
the Staff’s comments are repeated below in italics, with the Company’s response to each comment set
forth immediately following each comment.

     Form 10-K for the Fiscal Year Ended December 31, 2004

     Selected Financial Data, page 39

    1.

    Please revise to comply with Item 301(2) of Regulation S-K and briefly describe or
cross-reference to a discussion thereof, factors that materially affect comparability of
the information reflected in selected financial data.

    The Company will revise future filings to include a description of factors that materially
affect comparability of the information reflected in the selected financial data, similar to
the information contained on page F-45 of Note 17 “Quarterly Results of Operations”
(Unaudited).

1

     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies and Estimates,
     page 43

    2.

    Tell us specifically what judgments and estimates you have made to conclude certain
leases should be accounted for as operating leases instead of capital leases. Cite the
appropriate accounting literature you have used as the basis for your conclusions in your
response.

    The Company has used its best judgment and estimates in determining the estimated useful
life and fair market value used in determining whether certain leases, primarily for
broadcast tower facilities, should be treated as an operating or capital lease arrangement.
The Company has entered into various lease arrangements for broadcast tower facilities with
terms that range from five years to 20 years. The Company believes that broadcast towers
generally have useful lives that are equal to or greater than 30 years, and presently
depreciates owned broadcast towers over a 30 year period. The Company has determined that,
at the inception of each of these leases, the lease terms do not exceed 75% of the estimated
economic life of the broadcast tower facilities. Additionally, the Company estimated the
fair value of certain leased broadcast tower facilities and concluded that the lease payment
stream does not exceed 90% of the fair value of the broadcast tower facility at the
inception of the lease. The Company accounts for these lease arrangements using the
guidance in Statement of Financial Accounting Standard (“SFAS”) No. 13 “Accounting for
Leases” and related interpretations.

    3.

    Revise your disclosure to quantify the potential impact the industry migration from
analog to digital broadcasting could have on your long-lived assets. Disclose the current
timeline required by the Federal Communications Commission for broadcasters to transition
from analog to digital broadcasting.

    The Company will revise its disclosure in future filings to quantify the potential impact
the industry migration from analog to digital broadcasting could have on the Company’s
long-lived assets including the current timeline required by the Federal Communications
Commission for broadcasters to transition from analog to digital broadcasting. As discussed
in the Company’s Form 10-K, a federal statute requires that, after December 31, 2006, or the
date on which 85% of television households in a television market are capable of receiving
an over-the-air digital signal, whichever is last to occur, the Company must surrender each
of its stations’ analog broadcast licenses and such stations must broadcast only on their
allotted digital frequencies. Although the Company and broadcast industry experts do not
believe that the condition to the analog to digital migration will be met in any of the
Company’s station markets by December 31, 2006, the Company is not in a position to predict
when this condition will be met. As of December 31, 2004, the aggregate book value of the
Company’s assets which may have limited or no use as a result of the future migration from
analog to digital amounted to approximately $19.4 million.

    4.

    Disclose what line item in your statement of operations is impacted by the liability
you record for shortfalls in ratings guarantees. Also, quantify the impact these estimates
can

2

    have on your financial results and tell us specifically what analysis is done in using your
judgment and best estimates.

    As discussed on page 44 of the Company’s Form 10-K, net revenues as presented on the
Company’s Consolidated Statements of Operations on page F-8 reflect the impact of shortfalls
in ratings guarantees. The Company will revise its disclosure in future filings to clarify
this fact.

    Based on ratings information, the Company determines the extent to which ratings guarantees
have been achieved. For each individual advertising contract for which the Company has
provided a ratings guarantee, the Company compares the ratings delivered to the ratings
guaranteed in determining the liability for shortfalls. Since ratings guarantees are
contractual and the advertising industry relies on the same third-party source to verify
ratings, this process does not require a significant amount of judgment on the part of the
Company. While disputes could arise as to whether a contract has been fulfilled, the
Company’s past experience has shown very limited exposure relating to the estimated
liability. Approximately 21% of the Company’s total revenues is subject to ratings
guarantees. In future filings, the Company will disclose the impact to its results of
operations of increases or decreases in the liability for ratings shortfalls for all periods
presented.

    5.

    Disclose specifically what analysis is done in using your judgment and best estimates
in determining your uncollectible accounts receivable, and quantify the impact a change in
estimates could have on your financial results.

    The analysis done in determining uncollectible accounts receivable includes an analysis of
historical bad debt experience, review of aged accounts receivable and review of customer
credit worthiness. The Company will revise its disclosure in future filings to include
this information and will quantify the impact a change in estimate could have on the
Company’s financial statements by providing a sensitivity range.

     Years ended December 31, 2004 and 2003, page 46

    6.

    Tell us why the $3.3 million in insurance proceeds was offset against expenses incurred
in 2004 in connection with the litigation.

    The Company’s antenna, transmitter and other broadcast equipment from its New York
television station were destroyed upon the collapse of the World Trade Center on September
11, 2001. The Company had property and business interruption coverage to mitigate losses
sustained and therefore submitted claims relating to lost revenues, additional operating
expenses, loss of property, costs to litigate and other costs anticipated ultimately to be
incurred to replace the signal the Company once enjoyed atop the World Trade Center. In
2004, the Company received $3.3 million from the insurer in connection with the Company’s
claims. The Company had incurred legal and other direct expenses that were included as part
of selling, general and administrative expenses and exceeded the proceeds received from the
insurer for the year ended December 31, 2004.

3

    According to Emerging Issues Task Force (“EITF”) No. 01-10 “Accounting for the Impact of the
Terrorist Attacks of September 11, 2001” paragraph 16 “...any insurance recoveries of losses
and costs incurred as a result of the September 11 events should be classified in a manner
consistent with the related losses.” Additionally, EITF 01-13 “Income Statement Display of
Business Interruption Insurance Proceeds” paragraph 3, refers to Statement of Position
(“SOP”) 96-1 “Environmental Remediation Liabilities” in providing guidance on income
statement presentation. Paragraph 3 specifically refers to the guidance in SOP 96-1, which
states that “credits arising from recoveries of environmental losses from other parties
should be reflected in the same income statement line item”.

    Accordingly, the Company recorded these proceeds in the same line item in which the expense
was recorded. The Company believes that this treatment is consistent with the guidance
discussed above and is more appropriate than including amounts received in net revenues.
The Company also notes that this treatment was discussed in its Form 10-K at page 46. In
the second quarter of 2005, the Company reached a settlement with the insurer in which the
Company received an additional $16.8 million. Similar to its presentation in 2002, the
Company intends to reflect these amounts received as a separate line item (insurance
recoveries) as part of operating expenses. The Company believes this treatment is more
appropriate than including the proceeds in net revenues as the Company’s claim to the
insurer was comprised of various items as discussed above.

    7.

    Tell us why the $2.2 million settlement was offset against your selling, general and
administrative expenses and if this treatment was consistent with the accounting for the
original losses.

    From time to time, the Company incurs expenses, included in selling, general and
administrative expense, associated with protecting or defending its FCC licenses from signal
interference. The Company’s policy generally has been to record all legal settlements as
part of income from operations within selling, general and administrative expenses and then
properly disclose any such material items therein. In 2003, the Company realized a benefit
from a legal settlement when it agreed to allow a third party to interfere with the digital
signal of one of the Company’s television stations. Consistent with its historical
accounting practice for losses from legal settlements, the Company recorded the benefit as a
reduction of selling, general and administrative expenses.

     Contractual Obligations and Commitments, page 54

    8.

    Please disclose your future commitments for interest payments on your debt as a
footnote to your commitment table or discuss elsewhere within the liquidity section for the
same periods presented in the table.

    The Company will augment in future filings the disclosure in its liquidity section to
include current and future cash interest requirements.

4

     Consolidated Statements of Operations, page F-8

    9.

    Revise to comply with SAB 11:B.

    The Company will revise its future filings to clearly indicate on its Consolidated
Statements of Operations on page F-8 that programming and broadcast operations expense and
selling, general and administrative expense are exclusive of depreciation and amortization
of property and equipment.

     Consolidated Statements of Cash Flows, page F-10

    10.

    Tell us why your deposits for programming letters of credit are included in cash flows
from investing activities.

    Deposits for programming letters of credit represent amounts held by a financial institution
in the Company’s name in an interest bearing account with an original settlement date in
excess of 90 days (i.e. not a cash equivalent but similar to a short-term investment). SFAS
No. 95 “Statement of Cash Flows” paragraph 17 indicates that cash outflows for investing
activities includes “...payments to acquire debt instruments of other entities (other than
cash equivalents)”. Based on this guidance, the Company reflects “deposits for programming
letters of credit” in cash flows from investing activities. In the first quarter of 2005,
the Company settled all its obligations to pay for programming subject to letters of credit
and, subsequent to settling those liabilities, was refunded its “deposits for programming
letters of credit”. The payment of obligations for program rights is reflected in “cash
flows from operating activities” on the statements of cash flows.

     Note 1. Nature of the Business and Summary of Significant Accounting Policies-Intangible
Assets, page F-12

    11.

    Tell us the impact of the adoption of EITF D-108 in your financial statements.

    The Company, on an annual basis, obtains an appraisal of the value of its television station
licenses and related property and equipment. The appraisal report estimates the fair value
of the television stations in asset sales as “start-up entities” (also referred to in the
industry as “stick values”). Under the direct method, it is assumed that rather than
acquiring a television station as a going concern business, the buyer hypothetically obtains
an FCC license and builds a new station or operation with similar attributes from scratch.
Thus, the buyer incurs start-up costs during the build-up phase which are normally
associated with going concern value. Initial capital costs are deducted from the stick
value which results in a value that is directly attributable to the FCC license. The
aggregate appraised fair market values of the FCC licenses significantly exceed the
aggregate carrying value of each station and, as a result, the adoption of EITF D-108 did
not have any impact on the Company’s financial statements.

    12.

    Tell us in more detail how you over-amortized $6.9 million in intangible assets and how
you determined the remaining useful life of the assets.

5

    In 1998, the Company began entering into cable and satellite distribution agreements for
periods generally up to ten years. In exchange for distribution pursuant to these
agreements, the Company paid a fee to the distributors based on the number of subscribers
reached (“Carriage Fee”). In consideration of the Carriage Fee, the Company obtained both
distribution and some level of promotional advertising. The promotional advertising
consisted of spots to be aired at the discretion of the distributor to promote the launch of
the PAX TV network and was substantially consumed during the first few years of the
agreements. In amortizing its rights under these agreements, the Company used a shorter
life of seven years instead of the contractual life of ten years. Upon review, considering
the two components included as part of the Carriage Fee, the Company concluded that it had
over-amortized certain of these assets and recorded a $6.9 million reduction of its
amortization expense. The remaining unamortized costs are being amortized over the
remaining contractual life of the agreements.

     New Accounting Pronouncements, page F-17

    13.

    Disclose the impact of the adoption of SFAS 143 in your
financial statements. Specifically, we note that in connection with the termination of the joint sales
agreements (JSA) you will have to either relocate up to 22 of your station master
controls located in JSA partner’s facility or lease space from its JSA partner in order
to keep the station master control located in the JSA partner’s facility. In this regard,
tell us if you evaluated the guidance in paragraph 17 of SFAS 143 in determining
whether you have a legal retirement obligation with regar