<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
--------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (IRS Employer
incorporation or organization) Identification No.)
601 CLEARWATER PARK ROAD
WEST PALM BEACH, FLORIDA 33401
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 659-4122
--------------
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 Act of 1934
during the proceeding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1998:
CLASS OF STOCK NUMBER OF SHARES
- - ---------------------------- ----------------
COMMON STOCK-CLASS A,
PAR VALUE PER SHARE $0.001 52,487,645
-----------------------
COMMON STOCK-CLASS B,
PAR VALUE PER SHARE $0.001 8,311,639
-----------------------
<PAGE> 2
PAXSON COMMUNICATIONS CORPORATION
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in
Common Stockholders' Equity 6
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signatures 20
2
<PAGE> 3
PAXSON COMMUNICATIONS CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 123,941,843 $ 82,641,444
Restricted cash 20,082,513 17,000,000
Accounts receivable, less allowance for doubtful
accounts of $1,816,788 and $911,941 respectively 11,008,995 4,813,524
Current program rights 91,179,529 --
Prepaid expenses and other current assets 5,538,312 2,765,984
--------------- ---------------
Total current assets 251,751,192 107,220,952
Cash held by qualified intermediary -- 418,949,550
Property and equipment, net 168,788,528 105,896,873
Intangible assets, net 804,694,091 205,400,029
Investments in broadcast properties 106,815,597 72,762,195
Program rights, net 221,929,120 --
Investment in cable network 47,632,972 58,974,491
Other assets, net 29,489,476 87,908,884
--------------- ---------------
Total assets $ 1,631,100,976 $ 1,057,112,974
=============== ===============
LIABILITIES, REDEEMABLE SECURITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 31,207,178 $ 11,305,782
Accrued interest 14,969,998 8,475,686
Current portion of cable distribution rights payable 46,023,921 --
Current portion of program rights payable 88,210,150 --
Current income taxes payable 1,924,500 --
Current portion of long-term debt 520,550 496,378
--------------- ---------------
Total current liabilities 182,856,297 20,277,846
Deferred gain 12,100,000 12,100,000
Deferred income taxes 76,491,208 95,747,156
Cable distribution rights payable 13,800,975 --
Program rights payable 167,831,945 --
Long-term debt 124,207,484 122,299,025
Senior subordinated notes, net 228,213,489 227,958,736
Redeemable Cumulative Compounding Junior preferred
stock, $0.001 par value; 12% dividend rate per annum,
33,000 shares authorized, issued and outstanding 47,431,661 42,610,662
Redeemable Exchangeable preferred stock, $0.001 par value;
12.5% dividend rate per annum, 440,000 shares authorized,
181,456 and 170,782 shares issued and outstanding 185,443,871 168,375,990
Redeemable Cumulative Junior Exchangeable preferred stock,
$0.001 par value; 13 1/4% dividend rate per annum, 72,000 shares
authorized, 20,000 shares issued and outstanding 198,560,643 --
Redeemable Convertible preferred stock, $0.001 par value;
9 3/4% dividend rate per annum, Series A, 17,500 shares
authorized, 7,725 shares issued and outstanding 72,959,844 --
Class A common stock, $0.001 par value; one vote per share;
150,000,000 shares authorized, 52,483,645 and 50,701,600
shares issued and outstanding 52,484 50,702
Class B common stock, $0.001 par value; ten votes per share,
35,000,000 shares authorized, 8,311,639 shares
issued and outstanding 8,312 8,312
Class A & B common stock warrants 1,582,000 2,316,225
Stock subscription notes receivable (2,813,250) (2,813,250)
Additional paid-in capital 319,593,693 285,795,787
Deferred option plan compensation (20,238,552) (2,205,240)
Retained earnings 23,018,872 84,591,023
Commitments and contingencies -- --
--------------- ---------------
Total liabilities, redeemable securities and
common stockholders' equity $ 1,631,100,976 $ 1,057,112,974
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
3
<PAGE> 4
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Revenue:
Local and national advertising $ 90,985,551 $ 60,667,087
Other 207,557 471,161
Trade and barter 249,542 114,935
--------------- ---------------
Total revenues 91,442,650 61,253,183
Operating expenses:
Direct 14,561,099 10,184,929
Programming 7,543,042 2,860,906
Sales 18,416,854 2,480,829
Promotion 20,780,290 728,977
Technical 9,839,087 6,475,845
General and administrative 33,300,453 17,902,283
Trade and barter 169,773 214,719
Time brokerage and affiliation agreement fees 12,487,509 8,279,699
Program rights amortization 7,650,351 --
Stock based compensation 7,989,054 2,154,003
Depreciation and amortization 28,455,661 14,787,998
--------------- ---------------
Total operating expenses 161,193,173 66,070,188
--------------- ---------------
Operating loss (69,750,523) (4,817,005)
Other income (expense):
Interest expense (30,939,187) (27,695,908)
Interest income 13,333,666 3,316,238
Other expenses, net (817,427) (3,127,364)
Gain on sale of television stations 51,602,972 --
Equity in loss of unconsolidated investment (8,178,671) --
--------------- ---------------
Loss from continuing operations before income tax provision (44,749,170) (32,324,039)
Income tax benefit 16,046,386 --
--------------- ---------------
Loss from continuing operations (28,702,784) (32,324,039)
--------------- ---------------
Discontinued operations:
Loss from discontinued operations, net of applicable income taxes -- (63,224)
Gain on sale, net of applicable income taxes -- 66,190,291
--------------- ---------------
-- 66,127,067
--------------- ---------------
Net (loss) income (28,702,784) 33,803,028
Dividends and accretion on preferred stock (32,869,367) (19,423,655)
--------------- ---------------
Net (loss) income attributable to common stock $ (61,572,151) $ 14,379,373
=============== ===============
Basic and diluted loss per common share:
Loss from continuing operations $ (1.02) $ (0.99)
Income from discontinued operations -- 1.27
--------------- ---------------
Net (loss) income $ (1.02) $ 0.28
--------------- ---------------
Weighted average shares outstanding 60,197,234 52,065,681
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
4
<PAGE> 5
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
----------------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Revenue:
Local and national advertising $ 29,176,187 $ 23,655,719
Other 110,038 59,105
Trade and barter 115,642 64,020
--------------- ---------------
Total revenues 29,401,867 23,778,844
Operating expenses:
Direct 4,579,272 3,468,352
Programming 3,555,222 898,714
Sales 11,287,330 1,237,999
Promotion 16,946,270 375,901
Technical 3,579,348 2,410,400
General and administrative 12,713,482 5,931,697
Trade and barter 39,972 162,976
Time brokerage and affiliation agreement fees 2,831,208 5,879,004
Program rights amortization 7,650,351 --
Stock based compensation 2,902,083 722,166
Depreciation and amortization 10,097,653 5,854,249
--------------- ---------------
Total operating expenses 76,182,191 26,941,458
--------------- ---------------
Operating loss (46,780,324) (3,162,614)
Other income (expense):
Interest expense (10,053,212) (9,764,884)
Interest income 4,694,052 622,964
Other expenses, net (318,005) (2,505,537)
Equity in loss of unconsolidated investment (4,982,611) --
--------------- ---------------
Loss from continuing operations before income tax provision (57,440,100) (14,810,071)
Income tax benefit 20,869,386 --
--------------- ---------------
Loss from continuing operations (36,570,714) (14,810,071)
--------------- ---------------
Discontinued operations:
Income from discontinued operations, net of applicable income taxes -- 567,962
Gain on sale, net of applicable income taxes -- 13,985,511
--------------- ---------------
-- 14,553,473
--------------- ---------------
Net loss (36,570,714) (256,598)
Dividends and accretion on preferred stock (16,440,535) (6,726,032)
--------------- ---------------
Net loss attributable to common stock $ (53,011,249) $ (6,982,630)
=============== ===============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.87) $ (0.38)
Income from discontinued operations -- 0.26
--------------- ---------------
Net loss $ (0.87) $ (0.12)
=============== ===============
Weighted average shares outstanding 60,740,230 56,835,119
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
5
<PAGE> 6
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statement of Changes in Common Stockholders' Equity
<TABLE>
<CAPTION>
Class A&B
Common Stock Common Class C
------------------------------ Stock Common Stock
Class A Class B Warrants Warrants
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 40,442 $ 8,312 $ 6,862,647 $ 2,335,528
Stock issued for acquisition 6,069
Exercise of Class A,B and C common
stock warrants 3,923 (4,546,422) (2,335,528)
Deferred option plan compensation
Option plan compensation
Stock options exercised 268
Increase in stock subscription notes
receivable
Dividends on redeemable preferred
stock
Accretion on Junior preferred stock
Accretion on Redeemable Exchangeable
preferred stock
Net income
------------- ------------- ------------- -------------
Balance at December 31, 1997 50,702 8,312 2,316,225 --
Stock issued for acquisitions
(unaudited) 600
Issuance of common stock warrants
(unaudited) 1,582,000
Exercise of Class A and B common
stock warrants (unaudited) 917 (2,316,225)
Deferred option plan compensation
(unaudited)
Option plan compensation (unaudited)
Stock options exercised (unaudited) 265
Dividends on redeemable and convertible
preferred stock (unaudited)
Accretion on cumulative Junior preferred
stock (unaudited)
Accretion on Redeemable Exchangeable
preferred stock (unaudited)
Accretion on Junior Exchangeable preferred
stock (audited)
Accretion on Convertible preferred stock
(unaudited)
Net income (unaudited)
------------- ------------- ------------- -------------
Balance at September 30, 1998 (Unaudited) $ 52,484 $ 8,312 $ 1,582,000 $ --
============= ============= ============= =============
Stock
Subscription Additional Deferred Option Retained Earnings
Notes Paid-in Plan (Accumulated
Receivable Capital Compensation Deficit)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (1,873,139) $ 209,621,241 $ (6,397,916) $(103,821,878)
Stock issued for acquisition 66,118,931
Exercise of Class A,B and C common
stock warrants 6,878,028
Deferred option plan compensation 2,263,167 (2,263,167)
Option plan compensation 6,455,843
Stock options exercised 914,420
Increase in stock subscription notes
receivable (940,111)
Dividends on redeemable preferred
stock (24,942,740)
Accretion on Junior preferred stock (665,540)
Accretion on Redeemable Exchangeable
preferred stock (668,726)
Net income 214,689,907
------------- ------------- ------------- -------------
Balance at December 31, 1997 (2,813,250) 285,795,787 (2,205,240) 84,591,023
Stock issued for acquisitions
(unaudited) 5,249,400
Issuance of common stock warrants
(unaudited)
Exercise of Class A and B common
stock warrants (unaudited) 2,315,308
Deferred option plan compensation
(unaudited) 25,400,366 (25,400,366)
Option plan compensation (unaudited) 7,367,054
Stock options exercised (unaudited) 832,832
Dividends on redeemable and convertible
preferred stock (unaudited) (31,343,546)
Accretion on cumulative Junior preferred
stock (unaudited) (511,020)
Accretion on Redeemable Exchangeable
preferred stock (unaudited) (502,293)
Accretion on Junior Exchangeable preferred
stock (audited) (356,534)
Accretion on Convertible preferred stock
(unaudited) (155,974)
Net income (unaudited) (28,702,784)
------------- ------------- ------------- -------------
Balance at September 30, 1998 (Unaudited) $ (2,813,250) $ 319,593,693 $(20,238,552) $ 23,018,872
============= ============= ============= =============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
6
<PAGE> 7
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (28,702,784) $ 33,803,028
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 28,455,661 28,237,081
Stock based compensation 7,989,054 3,143,193
Program rights amortization 7,650,351 703,789
Provision for doubtful accounts 1,776,705 1,272,526
Deferred income tax benefit (19,255,948) --
Loss on sale or disposal of assets 353,043 1,296,768
Equity in loss of unconsolidated investment 8,178,671 --
Gain on sale of television stations (51,602,972) --
Gain on disposal of discontinued operations, net -- (66,190,291)
Changes in assets and liabilities:
Increase in restricted cash (3,082,513) --
(Increase) decrease in accounts receivable (7,972,176) 4,793,385
Increase in prepaid expenses and other current
assets (2,779,643) (1,079,112)
Decrease (increase) in other assets 4,192,855 (8,692,047)
Increase in accounts payable and accrued liabilities 19,782,257 (1,453,020)
(Decrease) increase in accrued interest 6,494,312 8,266,322
Increase in current income taxes payable 1,924,500 --
Payments for cable distribution rights (11,435,431) --
Program rights payments and deposits (37,747,405) (802,684)
--------------- ---------------
Net cash (used in) provided by operating
activities (75,781,463) 3,298,938
--------------- ---------------
Cash flows from investing activities:
Acquisitions of broadcasting properties (568,895,880) (196,936,733)
Increase in investments in broadcast properties (35,692,159) (14,696,441)
Decrease (increase) in deposits on broadcast properties 30,544,345 (24,216,000)
Decrease in cash held by qualified intermediary 418,949,550 --
Purchases of property and equipment (61,871,705) (35,820,084)
Distribution received from (made to) unconsolidated
investment 3,162,848 (1,462,882)
Proceeds from sales of discontinued operations -- 100,504,687
Proceeds from sales of broadcast properties 66,619,135 12,233,790
--------------- ---------------
Net cash provided by (used in) investing
activities (147,183,866) (160,393,663)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of exchangeable and convertible
preferred stock, net 261,500,000 --
Proceeds from issuance of long-term debt 2,313,013 120,000,000
Payments of long-term debt (380,382) (694,464)
Proceeds from exercise of common stock options 833,097 697,177
Increase in stock subscription notes receivable -- (940,111)
--------------- ---------------
Net cash provided by financing activities 264,265,728 119,062,602
--------------- ---------------
Increase (decrease) in cash and cash equivalents 41,300,399 (38,032,123)
Cash and cash equivalents at beginning of period 82,641,444 61,748,788
--------------- ---------------
Cash and cash equivalents at end of period $ 123,941,843 $ 23,716,665
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
7
<PAGE> 8
PAXSON COMMUNICATIONS CORPORATION
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------------------
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 22,552,339 $ 17,909,952
=============== ===============
Cash paid for income taxes $ 1,615,197 $ --
=============== ===============
Non-cash operating and financing activities:
Accretion of discount on senior subordinated notes $ 254,753 $ 222,818
=============== ===============
Issuance of common stock for acquisition $ 5,250,000 $ 66,125,000
=============== ===============
Dividends accrued on redeemable preferred stock $ 31,343,546 $ 18,422,373
=============== ===============
Accretion on redeemable securities $ 1,525,821 $ 1,001,282
=============== ===============
Trade and barter revenue $ 249,542 $ 3,549,877
=============== ===============
Trade and barter expense $ 169,773 $ 3,680,232
=============== ===============
Sale of broadcast property for note receivable $ -- $ 15,000,000
=============== ===============
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of the consolidated financial statements.
8
<PAGE> 9
PAXSON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Paxson Communications Corporation's (the "Company") financial information
contained in the financial statements and notes thereto as of September 30,
1998 and for the nine and three month periods ended September 30, 1998 and
1997, is unaudited. In the opinion of management, all adjustments necessary for
the fair presentation of such financial information have been included. These
adjustments are of a normal recurring nature. There have been no changes in
accounting policies since the period ended December 31, 1997. The composition
of accounts has changed since December 31, 1997 to reflect acquisitions,
divestitures, the increase in assets and liabilities relating to syndicated
programming and cable distribution rights and the Company's sale of Cumulative
Junior Exchangeable preferred stock and Convertible preferred stock all of
which are discussed elsewhere herein.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Certain reclassifications have been made to the
prior year's financial statements to conform with the 1998 presentation. These
financial statements, footnotes, and discussions should be read in conjunction
with the financial statements and related footnotes and discussions contained
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998, the definitive proxy statement for the annual meeting of
stockholders held April 17, 1998, the Form 8-K dated March 6, 1998, the Form
8-K dated June 5, 1998 and the Form S-4, as amended, dated July 23, 1998, all
of which were filed with the United States Securities and Exchange Commission.
2. DISCONTINUED OPERATIONS
During 1997, the Company sold its interests in WTVX-TV and WPBF-TV and
substantially all of its Paxson Radio segment assets and thus discontinued the
operations of the Paxson Network-Affiliated Television and Paxson Radio
segments. The results of operations for the Paxson Network-Affiliated
Television and Paxson Radio segments for the nine and three months ended
September 30, 1997, net of applicable income taxes, have been presented as
discontinued operations in the accompanying Consolidated Statements of
Operations. The Paxson Network Affiliated Television operations generated
revenues of approximately $12,319,000 and $1,540,000 for the nine and three
month periods ended September 30, 1997, respectively. The Paxson Radio
operations generated revenues of approximately $78,190,000 and $26,978,000 for
the nine and three month periods ended September 30, 1997, respectively.
The net assets of discontinued operations totaled approximately $2 million at
September 30, 1998 consisting of the assets of one remaining radio station
which is subject to an option agreement to be sold for aggregate consideration
of $2 million. At December 31, 1997, the net assets of discontinued operations
consisted of two radio stations which were under contract or subject to an
option agreement to be sold for aggregate consideration of $3 million. In July
1998, the Company sold its interest in radio station WHNZ-AM, serving the
Tampa, Florida market, for approximately $1 million.
3. CASH HELD BY QUALIFIED INTERMEDIARY
At December 31, 1997, the Company had placed a portion of the proceeds received
from the Paxson Radio segment sale with a qualified intermediary in order to
reinvest such proceeds and, to the extent reinvested, qualify for tax deferred
exchange treatment in connection with such sale. All but approximately $66
million of these funds were reinvested in broadcast property acquisitions
during the first quarter of 1998. The funds not reinvested in like kind
broadcasting properties were returned to the Company and placed in its
operating cash accounts. The Company does not anticipate paying current income
taxes on the non-deferred gain as it has sufficient net operating loss
carryforwards to offset such gain.
Current taxes payable of $1.9 million at September 30, 1998 relates to state
income taxes resulting from the gain on sale of the Company's interests in
WNGM-TV and WOAC-TV.
4. PROGRAM RIGHTS
The Company obtains licenses for program rights which will allow the Company to
broadcast program material in accordance with contractual agreements. An asset
is recorded for the program rights acquired and a liability is recorded for the
obligation incurred, at the gross amount of the liability when the program is
available to air. Program rights are amortized over the licensing agreement
term on a method that approximates the straight line per run method. Program
rights which will not be aired are charged to expense. Current program rights
represent programs which will be amortized over the next year; current program
liabilities represent program rights obligations which will be paid within the
next year in accordance with the licenses.
9
<PAGE> 10
5. INVESTMENT IN CABLE NETWORK
The Company's investment in cable network represents a 30% interest in The
Travel Channel, L.L.C., a joint venture with Discovery Communications, Inc. The
results of operations of The Travel Channel, L.L.C. have been included in the
Company's September 30, 1998 consolidated statement of operations using the
equity method of accounting.
6. CABLE DISTRIBUTION RIGHTS
The Company has entered into agreements with multiple cable system operators
("MSO's"), whereby the Company will receive cable carriage of its PAX TV
programming on certain cable systems in markets not currently served by the
Company's broadcast television station group. These agreements provide
additional cable carriage in certain existing markets and advance carriage in
markets where the Company will acquire and/or construct a television station
pursuant to a construction permit. The Company will pay certain fees based on
the number of cable television subscribers actually reached and in certain
instances, will provide the MSO's certain amounts of local advertising airtime
during PAX TV programming. An asset is recorded for the cable distribution
rights acquired and a liability is recorded for the obligation incurred, at the
present value of the Company's future obligation when the MSO's deliver
affidavits of subscribers actually delivered. At September 30, 1998, the
Company has recorded approximately $71.3 million as an intangible asset in
connection with these cable distribution rights. Cable distribution rights are
amortized over the cable distribution agreement term, generally ten years, on a
method that approximates the straight line method.
7. LONG-TERM DEBT
In August 1998, the Company entered into a $50 million equipment credit
facility which matures the first business day of October 2003 (the "Equipment
Facility"). The drawdown period of the Equipment Facility expires in August
1999. All borrowings under this facility are secured by the equipment purchased
with proceeds drawn under this facility and bear interest at the Index Rate
plus 2.0% per annum, the LIBOR Rate plus 3.0% per annum or the C.P. Rate plus
3.0% per annum, at the Company's option. Interest on outstanding borrowings is
payable monthly in arrears. At September 30, 1998, the Company had borrowings
of approximately $300,000 outstanding under the Equipment Facility bearing
interest at a rate of 8.22%. Subsequent to September 30, 1998, the Company has
borrowed an additional $13.0 million. The Equipment Facility requires the
Company to maintain compliance with certain financial ratios and make equal
quarterly principal payments of one-sixteenth of the aggregate unpaid principal
balance commencing on the first business day of January 2000 and continuing on
the first business day of each succeeding calendar quarter thereafter up to and
through the maturity date, except that the final payment due shall be in an
amount equal to the entire remaining unpaid balance. The Company intends to use
the Equipment Facility to fund the majority of its capital expenditure needs
through August 1999.
In conjunction with the Company's $122 million senior credit facility maturing
June 2002, the Company had prepaid interest of $20.5 million (which includes
interest income earned) remaining in escrow as of September 30, 1998 ($17
million at December 31, 1997). In March 1998, the Company placed approximately
$22.4 million in escrow in order to prefund approximately eighteen months of
interest under this facility. In August 1998, approximately $2.6 million of
these funds were used to make the quarterly interest payment due. Subsequent to
September 30, 1998, another quarterly interest payment of approximately $2.6
million was made in November 1998 from these funds.
8. REDEEMABLE PREFERRED STOCK
On July 23, 1998, the Company filed a Registration Statement on Form S-4 to
publicly register 20,000 shares ($200 million aggregate liquidation preference)
of Cumulative Junior Exchangeable Preferred Stock ("Junior Preferred Stock")
issuable in exchange for shares of Cumulative Junior Exchangeable Preferred
Stock which the Company sold on June 10, 1998 in a private placement. The terms
of the publicly registered Junior Preferred Stock were substantially the same
as those of the Junior Preferred Stock sold by the Company in the June 1998
private placement.
9. COMMON STOCK WARRANTS
In July 1998, the holders of the Company's remaining Class A and B common stock
warrants exercised 16.5035 warrants for 456,861 shares of Class A common stock.
Currently, no Class A and B warrants issued in connection with the 1993
Redeemable Senior preferred stock issuance remain outstanding. At September 30,
1998, the Class A common stock warrants outstanding were issued in connection
with the preferred stock sales in June 1998.
10. PER SHARE DATA
Basic and diluted loss per share from continuing operations was computed by
dividing the loss from continuing operations less dividends and accretion on
redeemable preferred stock by the weighted average number of common shares
outstanding during the period. Because of per share losses from continuing
operations, the Company's presentation of diluted earnings per share is the same
as that of basic earnings per share.
10
<PAGE> 11
At September 30, 1998 and 1997, respectively, there were outstanding 9,725,777
and 3,606,740 stock options, 395,500 and 917,749 Class A and B common stock
warrants, and 4,828,125 shares of Class A common stock reserved for possible
future issuance in connection with the Series A Convertible Preferred Stock sale
in June 1998. These securities that could potentially dilute basic 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.
11
<PAGE> 12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On August 31, 1998, the Company launched PAX TV. PAX TV is the brand name for
the programming that the Company provides to its owned, operated and affiliated
television stations, as well as to certain cable system affiliates. PAX TV
programming consists of family-friendly traditional entertainment television
programs that have had or are having successful first runs on television, as
well as original programs. Prior to August 31, 1998, the Company operated a
nationwide group of owned, operated or affiliated television stations which
carried its proprietary network of long form paid programming which consisted
primarily of infomercials. The Company will continue to carry infomercials on
PAX TV at significantly reduced inventory levels. Certain of the Company's PAX
TV stations were and continue to be operated pursuant to time brokerage and
affiliation agreements. The Company's consolidated operating revenues and
expenses include the operating results of time brokered stations and the
advertising revenue, related sales costs and affiliation fees of affiliated
stations. The Company also owns a 30% interest in The Travel Channel, L.L.C., a
cable television network joint venture with Discovery Communications, Inc.
("DCI"). The Company's interest in the operating results of The Travel Channel,
L.L.C. has been included in the consolidated financial statements using the
equity method of accounting.
The Company's operating data throughout the periods discussed have been impacted
significantly by the timing and mix of television station acquisitions
throughout such periods and the costs incurred to launch and support PAX TV. The
Company expects its costs to decrease somewhat from present levels but to remain
significantly higher than prior to the launch of PAX TV. The Company's primary
operating costs include commissions on revenues, employee salaries,
administrative expenses, and payments in respect of syndicated program rights,
cable distribution, ratings services and promotional advertising.
The Company's business is subject to various risks and uncertainties which may
significantly reduce revenues and increase operating expenses. For example, a
reduction in expenditures by television advertisers in the Company's markets
may result in lower revenues. The Company may be unable to reduce expenses,
including syndicated program rights fees and certain variable expenses, in an
amount sufficient in the short term to offset lost revenues caused by poor
market conditions. The broadcasting industry continues to undergo rapid
technological change which may increase competition within the Company's
markets as new delivery systems, such as direct broadcast satellite and
computer networks, attract customers. The changing nature of audience tastes
and viewing habits may affect the continued attractiveness of the Company's
broadcasting stations to advertisers, upon whom the Company is dependent for
its revenue.
The Company has evaluated its exposure to year 2000 risks and does not expect
that the cost of addressing year 2000 concerns will be material to the future
operating results or financial condition of the Company. The Company's primary
revenue system ("Traffic System") has been recently implemented and is year
2000 compliant. The Company's financial systems (general ledger, accounts
payable and fixed assets) are not presently year 2000 compliant and are
scheduled to be replaced during the second quarter of 1999. The Company is
completing its evaluation of new year 2000 compliant financial systems and is
in the process of pricing and final selection of a package. To date, the
Company has paid approximately $719,000 in costs associated with the Traffic
System and selecting the new financial package. The Company expects that
efforts on the part of current employees and senior management of the Company
will be required to continue to monitor year 2000 projects. The Company
believes that, with the implementation of the new traffic and financial systems
as scheduled, the possibility of significant interruptions of normal operations
should be minimal and that it will be prepared for the year 2000 issues when
the year 2000 arrives. The Company has not identified any other third party
systems that it uses that will not be year 2000 compliant. The Company has
received assurances as to year 2000 compliance from identified third party
vendors that the Company utilizes.
The Company believes that its group of television stations comprises a valuable
national broadcasting distribution infrastructure. Including all pending
station acquisitions, construction projects, divestitures and other
transactions, the Company will broadcast via a total of 95 owned, operated or
affiliated stations in markets reaching more than 76 million U.S. television
households, including stations in each of the nation's top 20 markets as well
as 44 of the nation's top 50 markets. Additionally, the Company has entered
into agreements with multiple cable system operators ("MSO's"), whereby the
Company will receive cable carriage of its PAX TV programming on certain cable
systems in markets not currently served by the Company's broadcast television
station group. These agreements provide additional cable carriage in certain
existing markets and advance carriage in certain markets where the Company will
acquire and/or construct a television station pursuant to a construction
permit. The Company will pay certain fees based on the number of cable
television subscribers actually reached and in certain instances, will
12
<PAGE> 13
provide the MSO's certain amounts of local advertising airtime during PAX TV
programming. This additional cable distribution will provide PAX TV with
incremental coverage to achieve a presence in every one of the top 75 U.S.
television markets.
This report contains forward-looking statements which are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995.
Statements as to what the Company "believes", "intends", "expects" or
"anticipates", and other similarly anticipatory expressions, are generally
forward-looking and are made only as of the date of this Report. Readers of
this Report are cautioned not to place undue reliance on such forward-looking
statements, as they are subject to risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. Among the risks and
uncertainties which could cause such a difference are those relating to the
Company's high level of indebtedness and the restrictions placed on the
Company's business and operations by the terms of its indebtedness and its
outstanding preferred stock, the risks relating to the comprehensive
governmental regulation of the Company's businesses, including the restrictions
on multiple broadcast property ownership, the broadcast licensing renewal
requirements, the risks of industry and economic conditions which could
adversely affect the Company's business operations, and the other factors
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The Company's launch of PAX TV entails certain additional
risks and uncertainties, including those risks associated with the launch of a
new programming service, the ability to obtain desirable programming at a
financially feasible cost and the ability to profitably sell advertising spots
during such programming.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount (contingent or otherwise) of assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. The fair values of the
Company's investments in broadcast properties are estimated based on recent
market sale prices for comparable stations and markets and approximates their
carrying value as of September 30, 1998. The fair values of the Company's
existing long-term debt and the senior subordinated notes (the "Notes") were
estimated based on market rates of instruments with similar risks and
maturities, and approximates the carrying value as of September 30, 1998. As a
result of the foregoing, the estimates presented in the Company's financial
statements are not necessarily indicative of the amounts that the Company could
realize in a current market exchange and have not been comprehensively revalued
for purposes of the Company's financial statements.
PURCHASES OF BROADCAST PROPERTIES:
During August 1998, the Company completed the purchase of WCPX-TV (formerly
WCFC-TV) serving the Chicago, Illinois market for $120 million cash, the
Company's interests in KWOK-TV serving the San Francisco, California market and
up to $15 million of contingent payments to be determined based upon the
seller's ability to deliver its programming to the Chicago market via cable
carriage post closing. Pending FCC regulatory approval of the Company's
transfer of its interest in KWOK-TV, the sellers of WCPX-TV are programming
KWOK-TV pursuant to a time brokerage agreement. The Company anticipates closing
on the transfer of its interests in KWOK-TV during the first quarter of 1999.
The Company will account for the transfer of its interest in KWOK-TV at fair
market value which will result in a pre-tax gain of approximately $20-24
million upon closing.
During September 1998, the Company completed the acquisition of WQPX-TV
(formerly WSWB-TV) serving the Wilkes-Barre, Scranton, Pennsylvania market for
approximately $6.2 million, the acquisition of KPXO-TV (formerly KAPA-TV)
serving the Honolulu, Hawaii market for $5 million and the acquisition of
WAQF-TV serving the Buffalo, New York market for $3 million.
During October 1998, the Company completed the acquisition of WPXK-TV (formerly
WPMC-TV) serving the Knoxville, Tennessee market for approximately $5 million.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected financial
information as a percentage of revenues.
Statements of Operations
<TABLE>
<CAPTION>
For the nine months For the three months
ended September 30, ended September 30,
----------------- -----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Direct 15.9 16.6 15.6 14.6
Programming 8.3 4.6 12.1 3.8
Sales 20.1 4.1 38.4 5.2
Promotion 22.7 1.2 57.6 1.6
Technical 10.8 10.6 12.2 10.1
General and administrative 36.4 29.2 43.2 25.0
Trade and barter 0.2 0.4 0.1 0.7
Time brokerage and affiliation agreement fees 13.7 13.5 9.6 24.7
Program rights amortization 8.4 -- 26.0 --
Stock based compensation 8.7 3.5 9.9 3.0
Depreciation and amortization 31.1 24.1 34.4 24.6
----- ----- ----- -----
Total operating expenses 176.3 107.8 259.1 113.3
----- ----- ----- -----
Operating loss (76.3) (7.8) (159.1) (13.3)
Other income (expense):
Interest expense (33.8) (45.2) (34.2) (41.1)
Interest income 14.6 5.4 16.0 2.6
Other expense, net (0.9) (5.1) (1.1) (10.5)
Gain on sale of television station 56.4 -- -- --
Equity in loss of unconsolidated investment (8.9) -- (17.0) --
----- ----- ----- -----
Loss from continuing operations before
income tax provision (48.9) (52.7) (195.4) (62.3)
Income tax benefit 17.6 -- 71.0 --
----- ----- ----- -----
Loss from continuing operations (31.3) (52.7) (124.4) (62.3)
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Consolidated revenues for the nine months ended September 30, 1998 increased
49% (or $30.2 million) to $91.4 million. This increase was primarily due to
television station acquisitions and new time brokerage operations. WPXN-TV in
New York has been operated by the Company since June 30, 1997 (acquired in
February 1998) and accounted for $12.4 million of the increase. Same station
television revenues increased $5.9 million or 12%.
Operating expenses for the nine months ended September 30, 1998 increased 144%
(or $95.1 million) to $161.2 million. The increase was primarily due to higher
direct expenses such as commissions which rise in proportion to revenues ($4.4
million), increased promotion costs of $20.0 million to advertise the launch of
PAX TV, other costs, such as programming, sales, technical and general and
administration costs which were higher primarily due to additional employees
hired and regional sales offices added, the majority of which were incurred in
connection with the launch of PAX TV and costs associated with operating new
television stations ($39.4 million), increased time brokerage and affiliation
agreement fees, primarily related to new time brokerage operations ($4.2
million), increased stock based compensation ($5.8 million), program rights
amortization incurred in connection with the launch of PAX TV ($7.6 Million)
and higher depreciation and amortization, primarily related to assets acquired
($13.7 million). The Company expects its operating expenses to decrease
somewhat from present levels but to remain significantly higher than prior to
the launch of PAX TV.
Interest expense for the nine months ended September 30, 1998 increased to
$30.9 million or 12%, primarily due to a greater level of senior debt
throughout the period and higher interest rates. At September 30, 1998, total
long-term debt and senior subordinated notes were $352.9 million, compared with
the balance of $351.2 million outstanding a year prior.
Interest income for the nine months ended September 30, 1998 increased to $13.3
million or 302%, primarily due to higher levels of cash and cash equivalents
and cash held by qualified intermediary resulting from segment asset sales and
the preferred stock sales, invested throughout the period.
14
<PAGE> 15
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Consolidated revenues for the three months ended September 30, 1998 increased
24% (or $5.6 million) to $29.4 million. This increase was primarily due to
television station acquisitions and new time brokerage operations.
Same station television revenues increased $508,000 or 2%.
Operating expenses for the three months ended September 30, 1998 increased 183%
(or $49.2 million) to $76.2 million. The increase was primarily due to higher
direct expenses such as commissions which rise in proportion to revenues ($1.1
million), increased promotion costs of $16.6 million to advertise the launch of
PAX TV, other costs, such as programming, sales, technical and general and
administration costs which were higher primarily due to additional employees
hired and regional sales offices added, the majority of which were incurred in
connection with the launch of PAX TV and costs associated with operating new
television stations ( $20.6 million), partially offset by decreased time
brokerage and affiliation agreement fees attributable to WPXN-TV being acquired
by the Company in March 1998 ($3.0 million), increased stock based compensation
($2.2 million), program rights amortization incurred in connection with the
launch of PAX TV ($7.6 Million) and higher depreciation and amortization,
primarily related to assets acquired ($4.2 million).The Company expects its
operating expenses to decrease somewhat from present levels but to remain
significantly higher than prior to the launch of PAX TV.
Interest expense for the three months ended September 30, 1998 increased to
$10.1 million or 3%, primarily due to a greater level of senior debt throughout
the period and higher interest rates. At September 30, 1998, total long-term
debt and senior subordinated notes were $352.9 million, compared with the
balance of $351.2 million outstanding a year prior.
Interest income for the three months ended September 30, 1998 increased to $4.7
million or 653%, primarily due to higher levels of cash and cash equivalents
resulting from the preferred stock sales invested throughout the period.
DISCONTINUED OPERATIONS
During 1997, the Company sold its interest in its Paxson Network-Affiliated
Television and Paxson Radio segments. Income and (losses) from these segments in
the nine and three month periods ended September 30, 1997, net of tax, were
$(63,000) and $568,000, respectively. Paxson Network-Affiliated Television
incurred net losses of approximately $(877,000) and $(467,000) and Paxson Radio
generated net income of approximately $814,000 and $1,035,000 in the nine and
three month periods ended June 30, 1997, respectively. The losses in 1997
reflect the sale of Paxson Network-Affiliated Television on July 31, 1997.
Paxson Network-Affiliated Television and Paxson Radio generally experienced
their lowest revenue in respectively, the first and third quarters of the year.
Income from operations of these segments in the nine and three month periods
ended September 30, 1997 was approximately $1,057,000 and $985,000,
respectively. Paxson Network-Affiliated Television incurred a loss from
operations of approximately $(851,000) and $(467,000) and Paxson Radio
generated income from operations of $1,908,000 and $1,452,000 in the nine and
three month periods ended September 30, 1997, respectively.
In connection with the disposal of its Network Affiliated Television segment in
1997, the company recorded gains of $66.2 million, net of applicable income
taxes in the nine months ended September 30, 1997. Net proceeds from the sale
of this segment were approximately $119 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1998 and December 31, 1997 was
$68.9 million and $86.9 million, respectively, and the ratio of current assets
to current liabilities was 1.38:1 and 5.29:1 on such dates, respectively.
Working capital decreased primarily due to the cable distribution and broadcast
rights incurred in connection with the launch of PAX TV.
Cash (used in) provided by operations of approximately ($75.8) million and $3.3
million for the nine months ended September 30, 1998 and 1997, respectively,
primarily reflects the increase in operating costs incurred in connection with
the launch of PAX TV and the increase in related cable distribution rights and
programming rights payments. Cash provided by investing activities primarily
reflects the use of the cash held by qualified intermediary and proceeds from
sales of broadcast properties, the use of cash in investing activities for the
acquisitions and investments discussed above, and purchases of equipment for
these and existing properties. Cash provided by financing activities primarily
reflects the proceeds from the preferred stock sales, the refinancing of the
Company's senior credit facility and the exercise of common stock options net
of debt repayments. Non-cash activity relates to option plan compensation,
stock issued for the acquisition of KPXR-TV, reciprocal trade and barter
advertising revenue and expense and accretion of discount on senior
subordinated notes, as well as dividends and accretion on the redeemable
preferred stock.
15
<PAGE> 16
The Company's primary capital requirements are for the funds required to
complete announced acquisitions of broadcasting properties, capital
expenditures on existing and acquired properties, syndicated programming rights
payments, cable carriage and promotion payments, interest and debt service
payments on indebtedness and the Company's working capital requirements. The
Notes require semi-annual interest payments at a fixed rate.
In August 1998, the Company entered into a $50 million Equipment Facility which
matures the first business day of October 2003. The drawdown period of the
Equipment Facility expires in August 1999. All borrowings under this facility
are secured by the equipment purchased with proceeds drawn under this facility
and bear interest at the Index Rate plus 2.0% per annum, the LIBOR Rate plus
3.0% per annum or the C.P. Rate plus 3.0% per annum, at the Company's option.
Interest on outstanding borrowings is payable monthly in arrears. At September
30, 1998, the Company had borrowings of approximately $300,000 outstanding
under the Equipment Facility bearing interest at a rate of 8.22%. Subsequent to
September 30, 1998, the Company has borrowed an additional $13.0 million. The
Equipment Facility requires the Company to maintain compliance with certain
financial ratios and make equal quarterly principal payments of one-sixteenth
of the aggregate unpaid principal balance commencing on the first business day
of January 2000 and continuing on the first business day of each succeeding
calendar quarter thereafter up to and through the maturity date, except that
the final payment due shall be in an amount equal to the entire remaining
unpaid balance. The Company intends to use the Equipment Facility to fund the
majority of its capital expenditure needs through August 1999.
In conjunction with the Company's $122 million senior credit facility maturing
June 2002, the Company had prepaid interest of $20.5 million (which includes
interest income earned) remaining in escrow as of September 30, 1998 ($17
million at December 31, 1997). In March 1998, the Company had placed
approximately $22.4 million in escrow in order to prefund approximately
eighteen months of interest under this facility. In August 1998, approximately
$2.6 million of these funds were used to make the quarterly interest payment
due. Subsequent to September 30, 1998, another quarterly interest payment of
approximately $2.6 million was made in November 1998 from these funds.
The ratings for the Company's programming since the launch of PAX TV on August
31, 1998, have generally equaled or exceeded the Company's preliminary
estimates. The Company's initial advertising revenues have been lower than
operating expenses and as a result, the Company has experienced an operating
deficit for this period. The Company believes that demand for television
advertising was generally weak for this period and adversely affected revenues.
The Company has implemented improvements to its sales and marketing strategies
and procedures in order to address what management believes to be initial
reluctance of certain advertisers to purchasing advertising time on PAX TV,
which the Company believes is attributable in part to unfamiliarity with PAX TV
and a lack of historical ratings and demographic data for PAX TV programming
which many advertisers utilize in making their advertising purchases.
Furthermore, a significant number of advertisers make commitments for their
advertising expenditures on quarterly and calendar year cycles, and the Company
believes that due to the recent launch of PAX TV and the other factors described
above, many advertisers have not yet included PAX TV in making their advertising
commitments. The Company believes initial reluctance by advertisers to purchase
advertising in PAX TV will further decrease over time as more historical ratings
data for PAX TV becomes available, advertisers become more familiar with PAX TV
and PAX TV more fully participates in quarterly and annual cyclical advertising
expenditure cycles. The Company has also implemented improvements to its newly
developed proprietary sales and billing software system to address certain
initial software system difficulties experienced since the launch of PAX TV
which should improve the Company's ability to assess and respond to the
marketplace and PAX TV's operations and to more effectively manage its
advertising sales efforts. The Company believes that these measures should
improve the effectiveness of its advertising sales efforts and should allow the
Company to generate higher revenues over time that are more reflective of PAX
TV's ratings performance to date.
In addition to operating performance, the Company's liquidity position is
affected by its commitments to increase distribution through television station
acquisitions and cable carriage agreements as well as the Company's ability to
liquidate certain investments in broadcast properties and dispose of certain
non-core assets. The Company is pursuing measures to improve its liquidity
position during the next twelve months in order to continue to pursue its
business strategy and to fund its operations and debt service. The measures the
Company is pursuing include the sale of non-core assets (including several
broadcasting stations and the Company's minority interest in The Travel
Channel), deferring or abandoning non-essential capital expenditures for
improvements of existing properties, deferring or restructuring payments under
cable carriage agreements, and continuing efforts to reduce operating expenses.
The Company will also continue to explore the liquidation of certain investments
in broadcast properties which the Company did not complete during the third
quarter as previously expected. The Company believes that by implementing a
combination of the foregoing measures, it should be able to preserve sufficient
liquidity to address its working capital needs during the next twelve months.
Should the Company's revenues during such period fall short of its current
expectations, or should the Company fail to successfully implement one or more
of the measures discussed above, the Company would likely be required to take
other measures to address its liquidity position, including additional asset
sales and operating expense reductions. In addition, the Company continually
evaluates opportunities for raising additional capital through offerings of
debt, equity and preferred stock. A continuation of the volatile conditions
experienced by the financial markets in recent months would have a negative
effect on the Company's ability to raise such additional capital. The Company
cannot be sure that it will be able to successfully implement any such measures
or that it will have sufficient liquidity to meet its needs during the next
twelve months in the event its advertising revenues fall significantly short of
its current expectations.
The Company will likely require additional financing to pursue its business
strategy and fund its capital requirements in the fourth quarter of 1999 and
thereafter. The amount of additional financing needed could be increased to the
extent that the Company pursues additional acquisitions or requires additional
working capital as a result of higher than expected operating costs, lower than
expected advertising revenues, additional programming rights obligations and
payments under additional cable carriage agreements. The Company cannot be sure
that it will be able to obtain additional financing on terms acceptable to it.
If the Company fails to maintain sufficient liquidity to finance its future cash
requirements, the Company's ability to pursue its business strategy of expanding
its broadcast distribution system during the fourth quarter of 1999 and
thereafter could be adversely affected.
16
<PAGE> 17
PROGRAMMING COMMITMENTS
In connection with the launch of PAX TV and in addition to the $256.0 million
of program rights payable included in the consolidated financial statements,
the Company has entered into programming contracts to air syndicated television
shows as well as theatrical and made-for-television movies from 1998 to 2005
that are not currently available for broadcast and therefore not included in
the consolidated financial statements. As of September 30, 1998, the
programming rights payable included in the Company's consolidated financial
statements and the additional programming contracts require collective payments
by the Company of approximately $333.7 million over such periods as follows:
Program Program Total
Rights Rights Program
Payable Commitments Rights
------------ ----------- -------------
1998 (October - December) $ 19,243,000 $ 3,582,000 $ 22,825,000
1999 82,988,000 10,905,000 93,893,000
2000 69,608,000 8,578,000 78,186,000
2001 58,803,000 7,686,000 66,489,000
2002 23,528,000 9,380,000 32,908,000
Thereafter 1,873,000 37,547,000 39,420,000
------------ ----------- ------------
$256,043,000 $77,678,000 $333,721,000
============ =========== ============
The Company had $9,713,000 and $36,682,500 of prepaid broadcast rights recorded
in Other Assets as of September 30, 1998 and December 31, 1997, respectively,
relating to the above programming rights and commitments. The Company has also
committed to purchase at similar terms additional future episodes of these
programs should they be made available. The Company continues to evaluate
additional programming purchases.
CABLE MULTIPLE SYSTEM OPERATORS COMMITMENTS
In connection with the launch of PAX TV and in addition to the $59.8 million of
cable distribution rights payable included in the consolidated financial
statements, the Company has entered into agreements with MSO's whereby the
Company will receive cable carriage of its PAX TV programming on certain cable
systems in markets not currently served by the Company's broadcast television
station group. These agreements provide additional cable carriage in certain
existing markets and advance carriage in certain markets where the Company will
acquire and/or construct a television station pursuant to a construction
permit. The Company will pay certain fees based on the number of cable
television subscribers actually reached and in certain instances, will provide
the MSO's certain amounts of local advertising airtime during PAX TV
programming. This additional cable distribution will provide PAX TV with
incremental coverage to achieve a presence in every one of the top 75 U.S.
television markets. As of September 30, 1998, the cable rights payable included
in the Company's consolidated financial statements and the additional cable
distribution agreements require collective payments by the Company of
approximately $84.7 million over such periods as follows:
<TABLE>
<CAPTION>
Cable Rights Cable Rights Total Cable
Payable Commitments Rights
----------- ----------- -----------
<S> <C> <C> <C>
1998 (October - December) $19,673,000 $ 3,930,000 $23,603,000
1999 26,351,000 4,924,000 31,275,000
2000 13,081,000 6,377,000 19,458,000
2001 4,580,000 3,799,000 8,379,000
2002 -- 1,952,000 1,952,000
----------- ----------- -----------
63,685,000 $20,982,000 $84,667,000
=========== ===========
Less: Amount representing interest (3,860,000)
-----------
Present value of cable
rights payable $59,825,000
===========
</TABLE>
17
<PAGE> 18
INVESTMENT COMMITMENTS
The Company has agreements to purchase significant assets of, or to enter into
time brokerage and financing arrangements with respect to, the following
properties, which are subject to various conditions, including the receipt of
regulatory approvals. The completion of each of the investments discussed below
is subject to a variety of factors and to the satisfaction of various
conditions, and there can be no assurance that any of such investments will be
completed.
STATION MARKET SERVED * PURCHASE PRICE
- - --------------------------------------------------------------------------------
WPXK-TV Knoxville, TN (1) $5,000,000
Less: advances and escrow deposits (1,428,000)
----------
INVESTMENT COMMITMENTS ANTICIPATED ON OR BEFORE DECEMBER 1998 $3,572,000
==========
WCPX-TV Chicago, IL (2) $15,000,000
KPXL-TV San Antonio, TX 13,500,000
WKRP-TV Charleston, WV (3) 8,970,000
WSPX-TV Syracuse, NY (3) 6,750,000
Channel 14 Albuquerque, NM 4,650,000
Less: advances and escrow deposits (12,721,000)
-----------
INVESTMENT COMMITMENTS ANTICIPATED ON OR BEFORE JUNE 1999 $36,149,000
===========
KSPX-TV Sacramento, CA (4) $17,000,000
KPPX-TV Phoenix, AZ (3) 12,111,000
Channel 61 Mobile, AL 6,750,000
Channel 67 Davenport, IA 3,900,000
WEPX-TV Greenville, NC 3,550,000
KYPX-TV Little Rock, AR (3) 2,500,000
Channel 51 Jackson, MS 2,250,000
Less: advances and escrow deposits (22,870,000)
-----------
INVESTMENT COMMITMENTS ANTICIPATED ON OR BEFORE DECEMBER 1999 $25,191,000
===========
WPXX/WPXL Memphis, TN/New Orleans, (5) $40,000,000
Less: advances and escrow deposits (14,000,000)
-----------
INVESTMENT COMMITMENTS ANTICIPATED ON OR BEFORE DECEMBER 2000 $26,000,000
===========
- - ----------
In addition to the above purchase commitments, the Company is obligated to make
an additional $10 million payment upon the broadcast signal improvement of
KWPX-TV in connection with the acquisition of that station in February 1998.
KWPX-TV serves the Seattle, Washington market. The Company expects to complete
the improvement of this station's signal in February 1999. Furthermore, the
Company is no longer certain of the likelihood of closing the following station
acquisitions, involving purchase price commitments in the aggregate amount of
$43,572,000 (net of advances and escrow deposits of approximately $5,428,000),
because of various contingencies involved in such acquisitions, including the
likelihood of the timely receipt of the FCC approval of the respective license
transfer: WKPX-TV, Pittsburgh, PA ($35,000,000), WAOM-TV, Lexington, KY
($8,000,000), KXGR-TV, Tucson, AZ ($4,000,000), WAZW-TV, Wausau, WI
($2,000,000).
* Each station is licensed by the FCC to serve a specific community,
which is included in the listed market.
(1) The Company completed the purchase of this station in October 1998.
(2) The Company acquired this station for $120 million, the Company's
interests in KWOK-TV and up to $15 million of contingent payments to
be determined based upon the seller's ability to deliver its
programming to the Chicago market via cable carriage post closing. As
of September 30, 1998, the Company has funded approximately $5.3
million of this cable carriage commitment. Pending FCC regulatory
approval of the Company's transfer of its interest in KWOK-TV, the
sellers of WCPX-TV are programming KWOK-TV pursuant to a time
brokerage agreement. The Company anticipates closing on the transfer
of its interest in KWOK-TV during the first quarter of 1999.
(3) The Company has acquired a 49% interest in this station.
(4) The Company has loaned an aggregate of $8,500,000 to the station owner
and began operating the station pursuant to a time brokerage agreement
on October 1, 1996, pending completion of the acquisition of the
station. The loan will be applied to the purchase price at the date of
closing.
(5) The Company has a $4 million escrow deposit on this station. The
remaining $36 million of the purchase price will be paid no sooner
than the year 2000.
18
<PAGE> 19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In May 1998, a complaint was filed against certain of the Company's officers by
a purported shareholder of the Company alleging breach of fiduciary duty by the
directors in approving payment of certain bonuses to members of the Company's
management in connection with the 1997 sale of the Company's Paxson Radio
Segment and seeking damages on behalf of the Company. The Company believes the
suit to be without merit and believes that the suit will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits:
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
3.1.1 Certificate of Incorporation of the Company (1)
3.1.2 Bylaws of the Company (2)
3.1.3 Certificate of Designation of the Company's Junior Cumulative
Compounding Redeemable Preferred Stock (1)
3.1.4 Certificate of Designations of the Company's 12 1/2%
Cumulative Exchangeable Preferred Stock (3)
3.1.6 Certificate of Designation of the Company's 9 3/4% Series A
Convertible Preferred Stock (4)
3.1.7 Certificate of Designation of the Company's new 13 1/4%
Cumulative Junior Exchangeable Preferred Stock (4)
27 Financial Data Schedule (for SEC use only)
- - ---------
(1) Filed with the Company's Annual Report on Form 10-K, for the
year ended December 31, 1994 and incorporated herein by
reference.
(2) 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.
(3) Filed with the Company's Registration Statement on Form S-3,
as amended, filed August 15, 1996, Registration No. 333-10267
and incorporated herein by reference.
(4) 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.
(b) Reports on Form 8-K.
None.
19
<PAGE> 20
PAXSON COMMUNICATIONS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAXSON COMMUNICATIONS CORPORATION
Date: November 16, 1998 By: /s/ Jeffrey Sagansky
--------------------------------------
Jeffrey Sagansky
Chief Executive Officer, President
and Director (Principal Executive Officer)
Date: November 16, 1998 By: /s/ Arthur D. Tek
--------------------------------------
Arthur D. Tek
Vice President, Chief Financial Officer
and Director (Principal Financial Officer)
20
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